SC (Pty) Ltd (SCL) received remuneration for activities performed for SIL, a related party resident in Mauritius. According to the company, SIL was responsible for trademarks, know-how, and related intangibles, as outlined in the franchise agreements with the non-RSA subsidiaries. Following a transfer pricing audit, the South African Revenue Service (SARS) concluded that it was evident from the conduct of both SIL and SCL, their respective employees and boards, and the general correspondence provided to SARS, that SCL had in fact determined the strategies with respect to the group’s expansion into the African market. SCL set the standard with regard to the development of marketing intangibles in non-RSA jurisdictions. SIL was only responsible for entering into the franchise agreements after they had been drafted and vetted by SCL employees. SARS therefore concluded that the remuneration received by SCL fell below the arm’s length range determined using the CUP method, and adjusted SCL’s taxable income accordingly. SCL objected to the assessment and subsequently appealed against it. They contended that the arrangements did not give rise to non-arm’s length revenue streams, and that the CUP method adopted by SARS was defective and inapplicable. The first issue that the Tax Court had to decide was whether SARS could submit an expert report in support of their assessment order. This was contested by SCL in their appeal. Decision The Tax Court dismissed the appeal of SCL and ruled in favour of SARS. Click here for other translation

“Dairy Distributor S.A.” produces a variety of dairy products and sells to consumers in the Greek market products produced in its own factory or by other Group companies. For the rights to use the trademarks and know-how for its production and sales activities, “Dairy Distributor S.A.” had entered into a trademark licence agreement and a know-how licence agreement with a related party in the Netherlands and until 2017 paid a royalty for the use of trademarks of 2% on net sales and a royalty for the use of know-how of 2% on net sales of locally produced products. In 2018, “Dairy Distributor S.A.” was changed from a limited risk distributor to a full risk distributor and was now also required to pay royalties for know-how on net sales of products that it did not produce itself. Following an audit for FY2018 – FY2022, the tax authorities disallowed deductions for these additional royalty payments, concluding that these did not comply with the arm’s length principle or qualify as payments for genuine know-how rights. The authorities also disallowed the deductions for these payments as intra-group services, as they found no evidence that these services conferred a distinct, additional benefit to the local entity – particularly as it already possessed the expertise needed to sell the products. “Dairy Distributor S.A.” appealed to the Directorate of Dispute Settlement. Decision The Directorate rejected the appeal and confirmed the tax assessment issued by the tax authorities. Click here for English translation Click here for other translation

Accenture A/S had been issued a tax assessment on two types of intra-group transactions – loan of employees (IAA) and royalty payments for access to and use of intangible assets. The loan of employees (IAA) were temporary intra-group loans of “idle” employees who were not in the process of or were about to perform specific tasks for the operating company in which they were employed. To a large extent, these were cross-border loans of employees. In the loan of employees, the borrowing operating company provided a consultancy service to a customer, and it was also the borrowing operating company that bore the business risk. The royalty payments related to Accenture A/S’ use of the Group’s intangible assets, which were reportedly owned by a Swiss company. In the case, it was stated that the Accenture Group’s operating companies’ intangible assets and future development and improvements of the same had been transferred to the Swiss company, and the other operating companies’ access to the use of the Group’s intangible assets was regulated in licence agreements entered into between the Swiss company and the operating companies. In a judgment issued in August 2023, the Court of Appeal ruled in favour of the tax authorities. An appeal was then filed by Accenture A/S with the Supreme Court. Judgment of the Supreme Court The Supreme Court overturned the decision of the Court of Appeal and decided in favour of Accenture A/S. According to the court the Ministry of Taxation had not demonstrated that Accenture’s global transfer pricing documentation for the income years 2005-2011 was deficient to such a significant extent that it could be equated with missing documentation. The Supreme Court noted that the transfer pricing documentation was based on the OECD’s transfer pricing guidelines and that it contained, among other things, a reasoned choice of method (the Cost Plus method), a functional and risk analysis and a comparability analysis made on an informed data basis. The fact that the Ministry of Taxation disagreed with the pricing method or the comparability analysis did not in itself render the documentation deficient. The Supreme Court found that Accenture A/S’ income regarding the costs of hiring employees under the IAA agreement for the income years 2005-2011 could not be assessed on a discretionary basis and that the Ministry of Taxation had not demonstrated that the profit margin was not at arm’s length. Regarding the royalty rate, the Supreme Court found that the Ministry of Taxation had not demonstrated that Accenture’s global transfer pricing documentation for the income year 2007 was deficient to such a significant extent that it could be equated with missing documentation. The Supreme Court noted that the transfer pricing documentation was based on the OECD’s transfer pricing guidelines and that it contained, among other things, a justified choice of method (the Residual Profit Split method), a functional and risk analysis and a comparability analysis made on an informed data basis. The fact that the Ministry of Taxation believed that insufficient consideration had been given to the fact that Accenture A/S’ contributed to the value of the intangible assets did not in itself render the transfer pricing documentation deficient. Accenture’s deductions regarding royalty payments could therefore not be assessed on a discretionary basis. Furthermore, the Ministry of Taxation had not demonstrated that the fixed royalty rate was not at arm’s length. Click here for English translation Click here for other translation

Kamenitza AD had acquired the Kamenitza trademark from a related party, StarBev Netherlands B.V., in 2014 for €40.1 million. The tax authorities challenged the pricing of the transaction, arguing that the trademark’s market value was significantly lower. Relying on a 2009 sale price of €12.75 million, the the tax authorities priced the transaction using the CUP method and concluded that Kamenitza AD had overvalued the trademark. This reassessment resulted in additional corporate tax liabilities for the years 2014-2016, along with interest charges. Kamenitza AD filed an appeal with the administrative court, asserting that the 2014 purchase price was based on an Ernst & Young valuation using the relief-from-royalty method, a widely accepted approach in transfer pricing. The company further argued that the 2009 sale price was not a valid comparable due to changes in economic conditions. It also objected to the tax authorities application of the 2017 OECD Guidelines, specifically the guidance on DEMPE functions for intangibles, which were introduced after the transaction took place. The company maintained that these guidelines should not be retroactively applied to assess a 2014 transaction. The administrative court upheld the tax authorities’ decision, largely reproducing the reasoning provided by the tax authorities. Kamenitza AD appealed to the Supreme Administrative Court, arguing that the lower court had failed to conduct its own independent assessment. Judgment The Supreme Administrative Court overturned the decision of the administrative court and ruled parcially in favour of Kamenitza AD and remanded the case. According to the Supreme Administrative Court, the administrative court had not justified its reliance on the 2009 valuation over a 2012 valuation of the same trademark. It also ruled that the administrative court had failed to address the applicability of the 2017 OECD Guidelines and had disregarded expert reports that contradicted the tax authorities conclusions. Due to these procedural violations, the Supreme Administrative Court annulled the corporate tax reassessment and remanded the case for reconsideration by a different panel of the Administrative Court. However, it upheld the tax authorities’ decision regarding withholding tax liabilities on payments made to foreign service providers, confirming that the company had failed to apply the correct withholding tax rules. The ruling is final and not subject to further appeal. Excerpts in English “First of all, it is rightly pointed out by the appellant that the court did not set out its own reasoning, but reproduced in full the reasoning and legal conclusions set out by the Director of the Directorate of the ETRS Sofia in the decision confirming the RA. In the contested judgment there is no ruling on issues of substance, as the administrative court referred to the ruling of the decision-making body on the appellant’s objections, which, however, cannot properly replace the need for the court to set out its own reasons and legal conclusions. The failure to state reasons constitutes an infringement of the procedural rules of the substantive kind, since, in addition to constituting a failure by the judge to fulfil the imperative duty imposed on him to state reasons for his decision, it infringes the rights and the opportunity of the parties to defend themselves, precludes the possibility of cassation review and infringes the principle of the two-instance nature of judicial review. In addition, the judgment does not rule at all on the objection of Kamenitza AD in relation to the valuation of the trademark used by the revenue administration as a market analogue in 2009 instead of the valuation of the same asset in 2012. Since it has been categorically established in the case that the conclusion of the auditing authorities on the non-market nature of the price of the 2014 transaction was formed after comparison with the valuation of the 2012 transaction, the question why the latter was not used as a comparable uncontrolled transaction in this case, but the 2009 one, is essential for the proper resolution of the dispute. In this regard, the court did not provide any reasoning, i.e. it did not decide whether the 2012 valuation of the intangible asset, prepared by the same valuer as that of the 2014 transaction at issue, should be taken into account in determining the market value under the comparable uncontrolled price method applied by the revenue authorities. As the sole ground for not applying the 2012 valuation, the court referred to the absence of a forensic accounting expert engaged by the appellant, for which, however, no instructions were given to the party in accordance with the requirement of Article 171(5) of the Code of Civil Procedure, read in conjunction with Article 171(5) of the Code of Criminal Procedure. § 2 of the RPC and in violation of the principle of enhanced ex officio principle in the administrative process (Article 9(3) of the APC in conjunction with § 2 of the RPC). In its ruling on the merits, the court was first of all obliged to answer the disputed question referred to above – whether there are grounds for applying the 2012 valuation of the asset in the transaction between independent traders when determining the market value of the asset in the 2014 transaction. Instead, the administrative court only discussed the legality and reasonableness of the market value determined on the basis of the 2009 valuation of the mark, without providing its own reasoning on another of the company’s main complaints – the application of the OECD Guide, as revised in 2017, in assessing the terms of the 2014 transaction at issue. In this respect, the general reasoning of the tax director is reproduced in full, but no definitive conclusion is formed by the court as to whether the depreciation method – the DEMPE functions, which were introduced by the OECD Guide in its 2017 edition – was correctly applied by the auditing authorities in determining the market price of the asset.” Click here for English Translation Click here for other translation

The case concerns the legality of a diverted profits tax (DPT) assessment issued by the tax authorities against three UK-based companies in the Thomson Reuters group. The total amount assessed was in excess of £167 million, with Refinitiv Limited receiving the largest assessment. The issue is whether the tax assessments for FY 2015-2018 under UK diverted profit tax-provisions were inconsistent with an Advance Pricing Agreement (APA) previously agreed between the companies and the tax authorities in January 2013. The APA, which covered the period from October 1, 2008 to December 31, 2014, established a transfer pricing method (TNMM/Cost Plus Method) for the pricing of certain intercompany services between UK companies and a Swiss company of the Thomson Reuters group. The UK companies (TRUK) provided intellectual property (“IP”) services to a Swiss group company (TRGR) which held the group’s main IP assets. According to the tax authorities, these services increased the value of the IP held by the Swiss company and resulted in high profits being allocated to the Swiss company, which was taxed at much lower rates than the UK companies. According to the tax authorities, the UK companies did not receive the compensation for providing those services that they would have done if the services had been provided at arm’s length. In broad terms, this remained the position until the IP was sold by the Swiss company in 2018 for a very substantial gain, as part of a disposal by the Thomson Reuters group of its “Financial & Risk” (“F&R”) business unit to a new joint venture company, Refinitiv Holdings Limited. It was also part of the tax authorities’ case that the services supplied by the UK companies to the Swiss company throughout the period from 2008 to 2018 contributed (a) to the generation of annual profits by the Swiss company in future years (as well as in the year of supply) and (b) to the value of the IP sold in 2018, and thus to the capital profits made on the sale by the Swiss company in 2018. Following the expiry of the APA the tax authorities formed the view that in later accounting periods (FY 2015 and onwards) it was no longer appropriate to use a cost-plus methodology in relation to the IP-related DEMPE-services supplied by UK companies to the Swiss company, but a profit-split methodology should be used instead. “TRUK, through its value-adding services, makes a significant contribution to the value of TRGR’s intangibles and, therefore, it is appropriate that it is compensated by reference to a share of the returns earned by TRGR from the exploitation of the intangibles in two ways: first, by using the intangibles to sell products and services as part of its commercial operations; and second, by selling the intangibles as part of the disposal of the F&R business. Therefore, it is in line with the arm’s length principle for TRUK to be rewarded by reference to a share of the profits generated by TRGR from both the use of intangibles to sell products and services to customers and the IP value crystallised on the sale of the F&R business in 2018.” The companies appealed, arguing that the tax authorities were bound by the transfer pricing method agreed and applied under the APA. The Upper Tribunal dismissed the companies’ judicial review claim and the companies then appealed to the Court of Appeal. Judgment The Court of Appeal considered the statutory framework for corporation tax and DPT, the terms of the APA and the arguments put forward by both parties. The court concluded that the 2018 accounting period falls outside the temporal limits and effective scope of the APA. Therefore, the APA does not apply to the 2018 period and there is no public law objection to the DPT assessments made by the tax authorities for that period. The appeal was dismissed. Excerpts “Neither party, in my judgment, could reasonably have contemplated that, if (as happened) the APA was not renewed, the methodology used and applied for the years covered by the APA should have a continuing and constraining effect on HMRC’s approach to transfer pricing in future accounting periods from 1 January 2015 onwards. Those future periods lay outside the temporal scope of the APA, so in the absence of further agreement each succeeding accounting period must be examined separately for corporation tax purposes unaffected by the APA. Still less, in my judgment, could the parties reasonably have contemplated that the time-limited methodology of the APA should somehow constrain the extent or nature of any charges to DPT that HMRC might later seek to impose on TR UK under legislation that did not yet exist, and had only very recently been announced, when the five-year term of the APA came to an end on 31 December 2014.” “I am willing to accept that one of the functions of clause 3.1 is to stipulate the temporal limits of the Covered Transactions to the extent that the limits are not made clear in the relevant definitions, but that alone does not begin to explain how the agreed treatment of the transactions could continue to have effect and bind HMRC after the end of the term of the APA. There is, of course, no dispute that HMRC were bound by the APA throughout its term. They have never sought to argue otherwise, or to re-open the transfer pricing treatment agreed for those chargeable periods. But for the reasons I have already given, I can find nothing in the language of the APA to support the notion that the agreed treatment should enjoy a potentially indefinite afterlife in future accounting periods once the term of the APA had come to an end. In truth, the words which I have italicised in Mr Peacock’s submissions on this point are no more than bare assertions, and they do nothing to advance the debate.” “To conclude, therefore, I am satisfied that the 2018 accounting period of TR UK falls outside the temporal limits and the effective scope of

“Agri B.V.” is a Dutch subsidiary of an international group active in the processing of agricultural products. Following a restructuring in 2009, Agri B.V. had declared taxable profits of €35 million, including €2 million in exit profits. This amount was adjusted to more than €350 million. According to the tax authority an ongoing business had effectively been transfered to a Swiss affiliated company as a result of the restructuring of the group, and profits from the transfer had not been declared by “Agri B.V.” for tax purposes. “Agri B.V.” then filed an appeal and in 2022, the District Court ruled largely in favour of the tax authorities. But the Court significantly reduced the value on the basis of an expert valuation report. An appeal was then filed with the Court of Appeal. Judgment The Court of Appeal largely upheld the judgment of the District Court. The Court ruled that the tax authority had made it plausible that something of additional value had been transferred to the Swiss affiliated company for which they had wrongly not stipulated any remuneration that the inspector (also in view of the minimum value calculated by an expert of what was transferred in total) was right for that reason to make a transfer price adjustment, and that he had also made it plausible that the interested party had not filed the required return as referred to in Section 27e AWR, so that the burden of proof should be reversed and increased. Click here for English translation Click here for other translation

CINTAC Chile S.A. had reported an operating loss for FY2018, but later received an assessment of additional taxable income from the tax authorities. In the assessment, a royalty rate of 2% determined by CINTAC Chile for the provision of know-how to a related party was instead set at 5% by the tax authorities. The royalty in question was received by CINTAC Chile S.A. from a related party under a know-how agreement. CINTAC Chile S.A. appealed, arguing that the tax authorities had not explained how they had determined the 5% royalty rate or why they had rejected the 2% rate determined by the parties to the transaction, and that the tax authorities had confused the provision of services with a know-how contract. Judgment of the Court of Appeal The court rejected CINTAC Chile S.A.’s claim regarding the arm’s length royalty rate under the know-how contract. “10°) That the sentence in its twenty-sixth to thirty-ninth recitals analyses this Item 1, examining in particular the know-how contract with TUPEMESA (Peru) accompanied by the claimant, which shows that 2% of the annual net sales were agreed; and also the transfer pricing report carried out by Hill Consultores Ltda, which used information from 10 comparable contracts selected with qualitative and quantitative filters, i.e., type of industry and markets in which it is developed, object of the contract, royalty calculation basis, functions, assets and risks, concluding that some of them (5) did not meet the sufficient conditions of independence and comparability, with the Service correctly establishing a new market rate, according to the mathematical calculation that has not been objected to. 11°) That, in particular, regarding the associated cost structure, which given its non-existence would imply the lower percentage of 2% and which would make the most important difference, the truth is that the taxpayer does not explain how it would have accredited this aspect to be considered, especially because the accompanying contract -and its addendum- clearly state in clause one, point 1.3 that ‘[…] the LICENSEE has implemented the contract with the LICENSEE and the LICENSEE, in the first clause, point 1.2. the LICENSEE has successfully implemented various manufacturing processes for the production of cold-rolled, hot-rolled and galvanised pipes, as well as different types of profiles used in the most varied sectors of the economy […] that the LICENSEE is interested in using and applying in its production process in order to obtain greater efficiency and quality in its products. In the second stipulation, point 3.1 that ‘[t]he LICENSEE undertakes to provide the LICENSEE with the KNOW HOW and all information on the above mentioned processes and to communicate to the LICENSEE its experiences, as well as the methods it applies, including manufacturing secrets’. It is specified in points 3.2, 3.3, 3.4 and 3.5 that these obligations of the licensor include the delivery of manuals, catalogues and internal standards, timely communication of all complementary information, supervising the correct application and use of know-how until the manufacturing processes are implemented, instructing and training the licensee’s workers in its own facilities or from its offices, which is carried out by employees or other natural persons for up to 183 days in a period of twelve months. 12°) That from this description it follows that it is not only a question of the delivery of manuals or documents relating to the processes, but that, in effect, there is a direct supervision and through specialised personnel at the place of manufacture, with which the claimant’s thesis that minimises the execution of this contract must be refuted. Therefore, the appeal lodged by the complainant must be dismissed. Click here for English translation Click here for other translation

Avago Technologies Trading Ltd is active in the semiconductor industry and licenses intellectual property under a licence agreement with GEN IP, a related party in Singapore. This agreement allows Avago to sublicense the manufacture of Avago products to both related and unrelated parties. The issue was whether the royalty payments made by Avago to GEN IP were at arm’s length. The tax authorities determined that the payments were not at arm’s length and issued an assessment of additional taxable income. In order to determine the arm’s length royalty payments, the tax authorities disregarded the TNMM method used by Avago and instead used the CUP method. Avago filed an appeal with the Assessment Review Committee. Decision. The Assessment Review Committee upheld the tax assessment and dismissed Avago’s complaint. Click here for other translation

In 2014, Sandisk Israel Ltd sold its intangible assets to Sandisk US for 35 million US dollars. “Sale by SDIL to SDUS of all intellectual property (IP) related to Error Correction Code Technology (hereinafter ‘ECC Technology’), including any associated trademarks and the related know how and patents in the ECC Technology … that was developed prior to December 31, 2007.” An audit was conducted by the tax authorities. This resulted in a valuation of 136 million US dollars and an assessment of additional taxable income for the difference. Sandisk Israel then appealed to the District Court. Judgment The court set the value at $62 million. Click her for English translation

The Revenue raised an additional assessment on gain received from the transfer of technical know-how by Keysight Technologies to Agilent Technologies International for the amount of RM821,615,000.00 being income under section 4(f) of the Income Tax Act 1967 (ITA 1967) together with the penalty under section 113(2) ITA 1967. The Revenue contended that subsection 91(3) of the ITA 1967 provided that the Revenue may issue an assessment after the expiration of the time period of 5 years on grounds of fraud or willful default or negligence. The findings of negligence on the part of Keysight Technologies include failure to support the claim that the gain from the transfer of technical knowhow (i.e. the marketing and manufacturing intangibles) by Keysight Technologies to Agilent Technologies International was an outright sale and failure to furnish the document and information as requested by the Revenue in the audit letter on the valuation of the marketing and manufacturing intangibles. The Revenue found that there was no proof of outright sale of the technical know-how as the Intellectual Property (IP) Agreement and Manufacturing Services (MS) Agreement showed no evidence that the legal rights had been transferred to ATIS since the agreements merely stated of the transfer of beneficial rights. Further, facts have shown that the technical know-how was still used by Keysight Technologies in a similar manner prior to and post the IP Agreement and MS Agreement. Instead, the gain of RM821,615,000.00 million was proven to represent the future income that would have been received by Keysight Technologies for the years 2008-2015 should Keysight Technologies continue to carry out its function as a full-fledged manufacturing company of which the function had subsequently changed to being a contract manufacturing company due to the group’s global restructuring exercise. As such, the gain was taxed as other income under section 4(f) ITA 1967. Keysight Technologies argued that the Revenue was time-barred under section 91(1) ITA 1967 from issuing the Notice of Additional Assessment for YA 2008. Keysight Technologies also argued that the sale of marketing and manufacturing intangibles by Keysight Technologies to Agilent Technologies International was capital in nature and therefore should not subject to tax under section 4(f) ITA 1967. The “badges of trade test” would be applicable in determining whether the income was revenue or capital in nature. Judgment The Court of Appeal overturned the SCIT and the High Court dicisions and allowed Keysight Technologies’ appeal. The Court of Appeal affirmed the application of the “badges of trade” test as argued by Keysight Technologies in determining whether the income was capital or revenue in nature and the test was not confined to disposal of land. The “Badges of Trade test” considers several factors; Subject matter of the transaction, Period of ownership, Frequency of transactions, Alteration of property to render it more saleable, Methods employed in disposing of property, Circumstances responsible for sale. The Court of Appeal held that Keysight Technologies was not in the business of buy and sell of IP and the IP was not its stock in trade. No special effort had been made by Keysight Technologies to attract purchasers. The transfer of technical know-how was due to global restructuring of the group of the company. The Court of Appeal further held that there had been an actual sale by way of agreement. The title to technical know-how was not registrable due to protection of confidential information. The outright sale test thus was not a proper test and the valuation report as requested by the Revenue was irrelevant. There was no failure on the part of Keysight Technologies to adduce valuation report as it was not requested during audit. Thus, there was no negligence and hence the additional assessment was time-barred. Keysight Technologies’ appeal was allowed with cost of RM20,000 to be paid by the Revenue to Keysight Technologies. Click here for translation

“No Royalty Corp” had a trademark registered in its own name. The trademark was used by other companies in the group, but no royalties or licence payments were received. Following an audit, the tax authorities issued a notice of assessment in which royalties had been added to the taxable income of the company in accordance with the arm’s length principle. “No Royalty Corp” filed an appeal claiming that the trademark was developed and owned by all companies in the group and therefore no payments should be made for there use of the trademark. Decision The Court upheld the assessment issued by the tax authorities. According to the court, it lacked economic rationality for the owner of the trademark to allow other companies to use its trademark without receiving any compensation. Click here for English translation Click here for other translation

A tax assessment had been issued to J – G Retalho, SGPS, S.A., regarding an arrangement whereby ownership to intangibles had been transferred to an related party in Switzerland and subsequent royalty payments for use of the intangibles had been deducted in the taxable income. “With regard to the costs of royalties paid by the controlled companies F… and P… to the Swiss entity – J… – with which they are in a situation of special relations, as defined in article 58.4 of the IRC Code, it was found that the costs of royalties were not recognised. In the course of the general external inspections carried out on the accounts of each of these companies, it was concluded that the costs in question derive respectively from a contract for the use of the F… brand, sold to that entity for a period of no less than 30 years, and from a contract for the use of the P… brand, also sold to the same Swiss entity. brand, also sold to the same Swiss entity, for a period of no less than 30 years, with F… and P… continuing to deduct from their income, costs directly related to the management, promotion and development of the brands they transferred, as well as holding all the risks inherent to them. Given that F… and P… have transferred their brands, through an operation that could not be carried out between independent entities, and that they continue to bear the costs associated with managing and developing them, as well as all the risks inherent to them, while additionally bearing a royalty for the use of an asset that in practice remains theirs, we proceed under the terms of article 58 of the CIRC and Portaria do Brasil. Under the terms of article 58 of the CIRC and Ministerial Order 1446-C/2001 of 21 December, a positive adjustment is made to the taxable profit of the controlled company F… in the amount of €4,219,631.00 and a positive adjustment to the taxable profit of the controlled company P… in the amount of €5,383,761.00 (…)’.” The company filed an appeal with the Supreme Administrative Court against a 2023 decision of the Administrative Court of Appeal which upheld the assessment. This appeal was referred to the Administrative Court of Appeal. Judgment The appeal was dismissed by the court. The court first addressed the company’s claim that the judgment was invalid due to a lack of reasoning, concluding that mere insufficient justification does not constitute nullity; instead, an absolute lack of reasoning would be necessary to void the judgment. The court upheld the Tax Authority’s use of the profit split method to analyze the royalty payments, as it deemed this the appropriate method for calculating arm’s-length pricing when dealing with intangible assets. The court agreed with the Tax Authority that these payments were inconsistent with conditions that would have existed between independent parties and thus warranted corrections. Excerpt in English “With regard to determining the price that would be charged between non-bound entities for an operation with the exact contours of the one that was found, the inspection report stated (see page 801 of the instructor’s appendix): ‘The remuneration due by the user of an intangible asset to its holder, in order to ensure that values are obtained that safeguard the legitimate interests of both parties, in compliance with the Principle of Full Competition, is usually calculated using the Profit Split Method (MFL). This is considered the appropriate method whenever there are intangible assets whose value and specificity make it impossible to establish comparability with unrelated operations, as is the case here’. And after explaining the applicability of the method, the tax inspectorate concludes that ‘If the method described had been used in the situation in question, as would have been the case between independent entities, due to the lack of any other suitable method, there would never have been any royalty payable by P… to J…’. And it adjusted its profits accordingly. The profit splitting method is one of the methods for determining transfer prices in accordance with the arm’s length principle – which determines that the terms and conditions contracted in operations between related entities must be identical to those that would normally be practised between independent entities, thus reflecting market conditions – provided for in Ministerial Order no. 1446-C/2001, of 21 December, article 9.1 of which states: ‘The profit splitting method is used to apportion the overall profit derived from complex operations or series of linked operations carried out in an integrated manner between the intervening entities.’ And, in line with what the judgment under appeal states, as the AT rightly understood, in the case of intangible assets, the other methods provided for do not make it possible to obtain the most reliable measure of the terms and conditions that independent entities would normally agree to, accept or practise, as stipulated in the last part of paragraph b) of no. 3 of article 58 of the CIRC, considering the value and specificity of these assets, which make it impossible to establish comparability with linked operations. As stated in the Supreme Administrative Court judgment of 05/12/2021 in case 0766/11.2BEAVR, ‘The determination of the situation of special conditions, different from those that would normally be agreed between independent companies, may be made by the AT with a certain margin of technical discretion provided that it adopts a legitimate and duly substantiated method, and that such a situation falls within the concept of special relationships provided for in article 9(1)(b) of the OECD Model Convention’. To this extent, the choice of transfer pricing method in accordance with the arm’s length principle cannot be validly questioned, unless it is proven to be unreliable or that the method chosen by the taxable person is weak, which was not achieved in the case file by the appellant. Lastly, it should be noted that there is no inconsistency between the above statement that the circumstances of the business described as anomalous by the tax authorities

“X-IP AB” was part of an international group. In 2012 and 2013, a major restructuring was carried out within the group, including a decision to centralise and streamline the group’s management and development of intangible assets in Luxembourg. In 2012, the company registered a branch in Luxembourg, which was given responsibility for managing and developing the intangible assets held by the company. The branch employed staff with expertise in the field and the intangible assets were allocated to the branch at a book value of EUR 1. In the second half of 2013, a company was incorporated in Luxembourg (hereafter LUX). In September 2013, the branch transferred the intangible assets to LUX through a business disposal for a market consideration in the form of shares in LUX. In its tax return for 2013, “X-IP AB” claimed a deduction of notional tax in Luxembourg of just over SEK 660 million, i.e. tax that would have been paid in Luxembourg if there had been no legislation there as referred to in the Merger Directive 2009/113/EC (cf. Chapter 38, Section 19 and Chapter 37, Section 30 of the Income Tax Act). The notional tax was calculated on the basis of the difference between the market value at the time of the sale to LUX and the book value, i.e. on the basis that Luxembourg would tax the entire profit. The Swedish tax authorities decided not to allow a credit for the notional tax. They considered that the intangible assets were allocated to the permanent establishment in Luxembourg and that the conditions for allowing a deduction for fictitious tax existed to the extent that tax would have been payable in Luxembourg if the Merger Directive had not been implemented. However, the tax authorities were of the opinion that the company was not entitled to a credit for fictitious Luxembourg tax because there was no Luxembourg tax to credit. They considered that guidance should be taken from the OECD’s 2008 profit allocation report when interpreting the tax treaty between Sweden and Luxembourg. Since the intangible assets had been transferred from the company’s head office in Sweden to the branch office in Luxembourg and the branch office performed the relevant key functions regarding the intangible assets after the transfer, they considered that an internal transaction, a so-called dealing, corresponding to a sale of the assets had taken place from the company to the branch office. Accordingly, such a sale should have been made at market value to be arm’s length. The same market value should be used both at the time of allocation in December 2012 and at the time of transfer in September 2013, since no increase in value had occurred during the time the branch was the economic owner of the assets. The calculation of the capital gain on the branch’s sale of the assets was then SEK 0. The notional tax that would have been payable in Luxembourg if the provisions of the Merger Directive had not been implemented thus amounted to SEK 0. An appeal was filed by “X-IP AB” that ended up in the Administrative Court of Appeal. Judgment The Court of Appeal found in favour of “X-IP AB”. It held that legal guidance in the interpretation of the tax treaty between Sweden and Luxembourg could be obtained from the OECD’s 2008 profit allocation report. The branch would thus be deemed to have acquired the intangible assets from the company at arm’s length through the allocation. The Administrative Court found that the arm’s length price was the same at the time of the allocation in December 2012 as at the time of the disposal in September 2013. According to the Administrative Court, there was thus no value for Luxembourg to tax and the company was consequently not entitled to a deduction of notional foreign tax. According to the court internal Luxembourg law would have meant that a gain from the divestment would have been taxable in Luxembourg (but for legislation introduced as a result of the provisions of the Merger Directive) and that the internal taxing right was not limited by the tax treaty between Sweden and Luxembourg. The Administrative Court of Appeal held that what was known about the history and impact of the profit allocation report did not, in any event, mean that there were sufficient reasons to depart from the application of the tax treaty that followed from the tax assessment notice from the Luxembourg authority. According to the Court of Appeal, this meant that the tax treaty between Sweden and Luxembourg in this case should be applied in such a way that the input value of the intangible assets should be considered to be taxable values and that a profit thereby arose in Luxembourg at the time of the sale of the business in September 2013. The taxation of the profit was deemed to have been deferred in accordance with the Merger Directive. According to the Court of Appeal, there were thus conditions for applying Chapter 38, Section 19 and Chapter 37, Section 30 of the Income Tax Act and allowing a deduction for fictitious tax in the amount claimed by the company. Click here for English translation Click here for other translation

“Fiber Corp” was established on November 3, 1966, and engages in the manufacture, processing, sales, import, export, and agency services of chemical fiber products. The tax authoritieis conducted a comprehensive corporate tax audit from May 29, 2013, to October 10, 2013, and determined that: “Fiber Corb” did not collect royalties for use of its trademarks from domestic and overseas related parties for the fiscal years 2008 to 2012. “Fiber Corb” also did not collect royalties for technology/knowhow used by its overseas subsidiary in China for the fiscal years 2010 to 2012. Based on these findings, the tax authorities issued a tax assessments for the fiscal years 2003 to 2012 where an arm’s length royalty had been added to the taxable income of “Fiber Corp”. A complaint was filed that ended up in court. Decision The Court upheld the assessment issued by the tax authorities. According to the court, the affiliated companies benefited from using the trademarks, leading to increased revenue and profit and the claimant corporation did not present sufficient evidence to justify the non-collection of royalties. Click here for English translation Click here for other translation

Meda AB, the parent company of a Swedish pharmaceutical group, had established a subsidiary in Luxembourg. The subsidiary was the contractual owner of intangible assets that was acquired from external parties following its establishment. Licensing and distribution agreements had then been entered into, according to which the subsidiary would receive the residual profit from the ownership of the intangible assets, while Meda AB and other group companies would only receive routine compensation for services rendered in connection with the intangible assets. The tax authorities found that the contractual terms of the agreements did not reflect the actual transactions. According to the tax authorities, Meda AB had been the actual decision maker and had controlled the significant risk related to the intangible assets. On this basis, it was concluded that the subsidiary in Luxembourg should only be compensated on a cost-plus basis for providing administrative services, while the remaining profits should be allocated 60% to Meda AB and 40% to other group companies. Meda AB appealed to the Administrative Court, arguing that an arm’s length assessment could only be based on the contractual terms and that the consideration of risk control and the delineation of actual transaction was contrary to the Swedish arm’s length provisions and the version of the OECD Transfer Pricing Guidelines in force for the tax years in question. The Administrative Court agreed with Meda AB and annulled the assessment. The tax authorities then appealed to the Court of Appeal. Judgment The Court of Appeal overturned the decision of the Administrative Court and upheld the assessment of the tax authorities. The Court found that the agreed terms between the related parties had not been at arm’s length. Therefore, there was a basis for adjusting Meda AB’s results under the Swedish arm’s length provisions. On the issue of the OECD transfer pricing guidelines, the Court clarified that later versions of the guidelines could be applied. The Court also stressed the importance of taking into account all relevant circumstances when examining transactions between related parties. The Court found that the Luxembourg subsidiary had only been the formal owner of the intangible assets, while Meda AB and other group companies had performed all the valuable functions and controlled the main risk related to the intangibles. Meda AB subsequently applied to the Supreme Administrative Court for permission to appeal, which was denied. Excerpts in English “The Supreme Administrative Court has stated that the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide a good and well-balanced explanation of the problems surrounding transfer pricing issues and that the guidelines can serve as a guide in the application of the correction rule, even if they are not binding (RÅ 1991 ref. 107 and HFD 2016 ref. 45). In the opinion of the Administrative Court of Appeal, the guidelines can also be used as guidance for tax years before they were issued, provided that they do not change what applied according to previous versions and do not conflict with the Swedish correction rule. The Administrative Court of Appeal notes that there are differences between the 2017 version and previous versions. However, using the 2017 version in a case such as the present one does not mean that what is to be assessed is changed or expanded in relation to what would have applied if guidance had instead been taken from the previous guidelines. There is therefore no obstacle to using the 2017 Guidelines as guidance in the Court of Appeal’s assessment.” “The Administrative Court of Appeal notes that a review under the correction rule is about assessing what independent parties would have agreed if they were in a similar situation. It is thus a matter of assessing how independent parties would have acted if they had had the same contractual relationship as the related parties have. In order to identify what constitutes an equivalent situation, i.e. a comparable transaction under comparable circumstances, it is necessary, in the Court of Appeal’s opinion, to take into account all the related parties’ dealings and actual behaviour, as well as other economically relevant circumstances associated with their contractual relationship. This means that circumstances other than the actual contractual terms also need to be taken into account in the assessment under the correction rule (HFD 2016 ref. 45 and OECD Guidelines, paragraphs 1.33, 1.36, 1.43 and 1.45). In transactions between independent parties, compensation is normally paid that reflects the functions performed by each party, the assets used and the risks borne (OECD Guidelines, paragraph 1.51). The Swedish Tax Agency argues that it is the allocation of the functions and risks in the acquisition of the product rights that must be analysed in order to identify and map the transactions actually undertaken between the company and the subsidiary. It is therefore these questions that the Administrative Court of Appeal will examine in the following. According to the Court of Appeal, this examination is not about the actual meaning of the legal acts.” “According to the OECD guidelines, the right of return belongs to the party that performs or controls the more important functions and risks associated with intangible assets. Mere legal ownership does not give the right to compensation (cf. paragraphs 6.42, 6.47-6.49 and 6.54). The Administrative Court of Appeal is of the opinion that the Swedish Tax Agency’s investigation shows that the most value-creating and risky function of the product rights has been the acquisitions themselves. Since the purchases have amounted to very large amounts, the acquisition risks have been significant. The return for having controlled these risks should therefore, in the Court of Appeal’s opinion, have accrued to the company, which has not been reflected in the terms of the agreement between the company and the subsidiary.” “The Administrative Court of Appeal then makes the following assessment regarding the compensation that, according to the Tax Agency’s decision, is to accrue to the subsidiary. As regards the risk-free return on the subsidiary’s investments, the Administrative Court of Appeal makes no other assessment than that the investment is risk-free

For tax purposes, “Lux Leasing” considered itself the owner of certain intangible assets (trademarks) that it had licensed from a related party in the US under a 25-year renewable agreement and applied the IP exemption regime in Luxembourg. The tax authorities disagreed that “Lux Leasing” was the legal owner of the intangibles and therefore disagreed that the conditions for the application of the IP exemption regime were met. “Lux Leasing” appealed to the Administrative Tribunal, which dismissed the appeal and ruled in favour of the tax authorities. An appeal was then lodged with the Administrative Court. Judgment The Administrative Court upheld the decision of the Administrative Tribunal and ruled in favour of the tax authorities. The court held that “Lux Leasing” had not provided sufficient evidence to prove that economic ownership of the intangibles was transferred under the disputed licence agreement. The court pointed out that the disputed licence agreement clearly stated that the US licensor was the sole owner of the rights to the trademarks. The court considered that the related parties’ intention was clear and unequivocal from the terms of the agreement and that there was no reason to believe that the economic reality should differ from the legal form chosen. Excerpt in English “Consequently, the alleged transfer of economic ownership of the intellectual property rights at issue had not been sufficiently established, so that the Director rightly upheld the tax office’s finding that the conditions for the application of Article 50bis LIR had not been met on the grounds that company (A) was not to be considered the legal or economic owner of the intellectual property rights at issue, with the resulting consequences for the taxation of the assets of company (A) pursuant to paragraph 60bis BewG and for the taxation of the income earned by company (A) as a result of the sub-licence agreements and as a result of the assignment of its rights under the licence agreement, There is no need to consider the appellants’ alternative argument that the Court should find that economic ownership of the Trademarks had been transferred to the beneficiaries of the sub-licence agreements, as this analysis is superfluous. Contrary to what is argued by the appellants in the alternative, the finding that company (A) is not the owner of the economic property in the Trademarks does not imply that Luxembourg loses its right to tax the income declared by it, but only has the consequence that such income does not qualify for the exemption provided for by Article 50bis LIR, the appellants’ related argument being based on the erroneous premise that only the owner of the Trademarks could generate taxable income. For the rest, the Court agrees with the reasoning of the first judges in relation to this plea, which it accepts in its entirety. The related plea must therefore be rejected, in the absence of any further details provided by the appellants. It follows from all of the foregoing that the appeal must be dismissed and the judgment a quo confirmed.” Click here for English translation Click here for other translation

Toyota Kirloskar Motor Pvt. Ltd., challenged an assessment made by the tax authorities for FY 2018-19 regarding the separate benchmarking of royalty payments to its Associated Enterprises (AEs). The main issue related to whether royalty payments should be benchmarked separately or subsumed within the TNMM applied at the entity level. Toyota Kirloskar Motor Pvt. Ltd. argued that it had used TNMM at the entity level, which already took into account all international transactions, including royalty. It contended that royalty was part of integrated business operations and could not be evaluated in isolation. The tax authorities, however, rejected this approach, held that royalty was a separate transaction with a separate agreement, and adopted the CUP method instead. They benchmarked royalty by comparing it to similar expenses (royalty + R&D) incurred by comparable companies, concluding that the royalty paid by Toyota Kirloskar Motor Pvt. Ltd. exceeded the arm’s length standard, leading to a TP adjustment of Rs. 279.84 crores. The Commissioner of Income Tax upheld the tax authoritie’s decision, ruling that the Technical Assistance Agreement and the nature of the expenses demonstrated that the royalty was not so integrated with other transactions as to justify aggregation. He also found that some R&D and technical fees were directly linked to the know-how received from the AE and therefore appropriately included in the royalty benchmarking. However, the Commissioner of Income Tax directed exclusion of unrelated software and miscellaneous training/travel costs from the royalty computation. Judgment The Income Tax Appellate Tribunal overturned the the Commissioner of Income Tax’s approach, relying on its own prior rulings in Toyota Kirloskar Motor Pvt. Ltd.’s cases for earlier years (AY 2007-08, 2012-13, 2014-15, 2015-16, 2016-17), where it had consistently held that once TNMM at the entity level was accepted, separate benchmarking of royalty was unwarranted. The Tribunal reiterated that the overall margins of Toyota Kirloskar Motor Pvt. Ltd. were above those of comparables even after including royalty, and that benchmarking royalty separately was not required. Thus, the royalty-related grounds were allowed, and the adjustment was deleted. Other grounds concerning the method of benchmarking, choice of comparables (including the exclusion of Tata Motors and Mahindra & Mahindra), and inclusion of technical fees and R&D expenses became academic and were not adjudicated. On the separate issue of Dividend Distribution Tax (DDT), Toyota Kirloskar Motor Pvt. Ltd. claimed that under the India-Japan DTAA, the applicable rate should be 10%, and the excess DDT paid should be refunded. This was rejected based on the Special Bench decision in Total Oil India Pvt. Ltd., which held that the DDT rate under section 115-O applies regardless of the DTAA provisions. The Tribunal followed this and dismissed the ground. Finally, the ground regarding interest under sections 234B and 234C was held to be consequential in nature and thus not separately adjudicated. The appeal was partly allowed in favour of Toyota Kirloskar Motor Pvt. Ltd. Click here for other translation

Since 2012, the French company SASU Alchimedics has been owned by Sinomed Holding Ltd, the holding company of a group of the same name set up by a Chinese resident domiciled in the British Virgin Islands. SASU Alchimedics was engaged in the manufacture and marketing of products using electro-grafting technology for biomedical applications and the licensing and assignment of patents in the field of electro-grafting technologies. SASU Alchimedics was subject to an audit for the financial years 2014 and 2015, as a result of which the tax authorities increased its income for the financial years ended 31 December 2013, 2014 and 2015 by the price of services not invoiced to Sinomed Holding Ltd. In addition, the non-invoicing of these services was considered to be a transfer of profits abroad within the meaning of Article 57 of the French General Tax Code and the amounts were therefore also subject to withholding tax. The tax authorities considered that SASU Alchimedics had committed an abnormal act of management by not re-invoicing to its parent company the services provided in connection with the “development and defence of patents”. The price of the services reintegrated as an indirect transfer of profits was determined by applying to the amount of the expenses recorded a cost plus 5%, considered to be a normal margin. These amounts were used as the basis for calculating the withholding tax, which is the only issue in this case. SASU Alchimedics appealed against the assessment and, by judgment of 2 December 2002, the Administrative Court rejected its application for a refund of the withholding tax. An appeal was then lodged with the Administrative Court of Appeal. Judgment of the Court The Administratibe Court of Appeal set aside the decision of the Administrative Court and decided in favor of SASU Alchimedics. Excerpts in English “… 6. In order to justify the existence of an advantage to the company, constituting an indirect transfer of profits, granted to Sinomed Holding Ltd, the tax authorities note that SASU Alchimedics is the owner of patents attached to a business acquired in 2007, and of an exclusive licence on patents and other intangible rights acquired, the same year, from the French Atomic Energy Commission (CEA) and that it entered into an agreement, on 1 June 2007, with Sinomed Holding Ltd, which will become its parent company, and Beijing Sun Technologie Inc, a company incorporated under Chinese law, owned by Sinomed Holding Ltd, which will become its sister company, a patent licence and sub-licence agreement granting them a perpetual licence for the techniques developed by Sinomed Holding Ltd in return for a one-off payment of 9,530,000 euros. The French tax authorities argued that it was not normal for SASU Alchimedics, following the technology transfer agreement of 1 April 2007, to bear the cost of registering and maintaining the patents and licences alone, without any “financial guarantee in the event of successful marketing of the related products, particularly on the European and American markets”, whereas Sinomed Holding Ltd, which now controls the strategy of the companies it owns, stands to benefit from any future successes and is in a position to prevent it from transferring its assets to a third party. It deduced that by not re-invoicing its parent company, Sinomed Holding Ltd, for services provided in relation to “the development and defence of patents”, despite the fact that it had always been in a loss-making position, SASU Alchimedics had granted an undue advantage to its parent company, constituting an abnormal management practice and an indirect transfer of profits abroad. 7. However, the tax authorities do not dispute that, as SASU Alchimedics points out on appeal, the costs of maintaining and protecting the patents, which were expensed, were its responsibility under the terms of the contract entered into in 2007, which it does not claim was no longer in force. Nor does it dispute that the research expenses invoiced by Beyond and Université Paris-Diderot, and the overheads deducted as expenses, were incurred in the interests of SASU Alchimedics. The fact that this company has a chronic deficit does not, in itself, justify the increase in operating income, nor does the fact that an asset is insufficiently profitable constitute, in itself, an abnormal act of management. The tax authorities have failed to identify the “patent valuation and defence” service that they claim to have identified for the benefit of Sinomed Holding Ltd and the exact nature of the advantage that they intend to impose, and have failed to demonstrate under what obligation SASU Alchimedics should have re-invoiced this company for these expenses. The fact that SASU Alchimedics does not have control over its strategy is not, in itself, a decisive argument proving the reality of services provided for the benefit of Sinomed Holding Ltd. Moreover, the contract concluded with this company and with the company that was to become its sister company was signed in 2007 at a time when it is not alleged that SASU Alchimedics was dependent on Sinomed Holding Ltd, and the investigation shows that SASU Alchimedics did in fact benefit from the patent concessions and sub-concessions, which were remunerated in the form of a single payment in 2007. Lastly, although the French tax authorities invoke the prospect of marketing in Europe and the United States the products already developed by the Sinomed group, and in particular by the Chinese company Sino Medical, under the contract concluded in 2007, during the period in dispute there was nothing to require SASU Alchimedics to have signed a contract with its parent company to have the latter bear the costs of maintaining, registering and defending the patents and licences of which it remained the owner and which are not yet used on its continents, where they were not registered. 8. In these circumstances, the French tax authorities have not established the existence of an advantage granted by SASU Alchimedics to Sinomed Holding Ltd and, consequently, of a practice falling within the scope of Article 57 of the French General Tax Code.

S. spółka z o.o. had deducted licence fees paid for the use of a trademark owned by a related party. Following an audit, the tax authority issued an assessment where these deductions had been disallowed. An appeal was filed with the Administrative Court which later upheld the tax assessment, and S. spółka z o.o. then filed an appeal with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Court ruled in favour of S. spółka z o.o. and set aside the decision of the Administrative Court and the tax assessment. Excerpt “In the present case, it should have been considered that the tax authorities created their own clause, assessing the case on the basis of the entirety of the acts performed between the applicant and its controlled companies – going beyond the scope of Article 11(1)-(4) of the u.p.d.o.p. Indeed, in the legal state of affairs in 2015, there was no legal basis for assessing legal acts and deriving negative tax consequences for the applicant. Therefore, the view of the Court of First Instance indicating the broad application of Article 11 of the u.p.d.o.p., allowing the reclassification of legal actions, is incorrect. In view of the obvious personal links between the parties to the transaction, the authority could only question the amount of the price of that transaction, i.e. the amount of the fee for granting the licence, and to that extent apply a price adjustment using the appropriate method. On the other hand, on the basis of Article 11(1) of the u.p.d.o.p., it was not competent to recognise that in fact the parties had entered into a completely different contract, i.e. a contract for the administration of intangible assets, and to make an adjustment to the Company’s income based on the valuation of this contract. Consequently, the Supreme Administrative Court considered as legitimate the charges of the cassation appeal which concern the infringement of substantive law – Article 11(1)-(4) u.p.d.o.p. in conjunction with Article 2a O.p. The remaining allegations raised in the cassation appeal are unfounded or are of secondary nature only and may be considered legitimate as a consequence of the infringement of Article 11(1)-(4) of the A.p.d.o.p. found. It should be emphasised that Article 11(1) of the A.p.d.o.p. could not constitute a self-contained basis for “redefining” the disputed transaction. Challenging the scheme of operation applied by the applicant must have a clear legal basis. The tax authorities may not apply other provisions as a solution equivalent to an anti-circumvention clause, and therefore could not apply the referenced regulation of the Minister of Finance on transfer pricing in the case. In view of the inclusion of the most significant allegation concerning the violation of substantive law, it is necessary to refer to the allegations of procedural law only to the extent necessary for the consideration of the dispute. First and foremost, the allegation of infringement by the Court of First Instance of Article 141(4) p.p.s.a. is unfounded. The statement of reasons of the contested judgment fulfils the essential formal requirements resulting from this provision, makes it possible to reconstruct the motives for the decision and to carry out an instance control, and thus there are no grounds for holding that this provision was infringed by the Court to a degree which could have a significant impact on the outcome of the case. In view of the multiplicity of allegations in the complaint, the Court referred to them to the extent necessary to carry out a review of the appealed decision. The Supreme Administrative Court also found no grounds to declare the proceedings null and void in connection with hearing the case in closed session under the simplified procedure, in a situation where the Court of First Instance was obliged to hear the case at a hearing, which resulted in a flagrant breach of the principle of the right to a court and a fair trial and the principle of openness of court proceedings. In this regard, it should be emphasised that the applicant was notified of the authority’s request to hear the case in closed session by being served with the response to the complaint, which included the request. Within 14 days of the notification, the applicant did not take a position by requesting an oral hearing, nor did she object to the hearing of the case in closed session. Therefore, if the applicant did not object to the absence of an oral hearing, as requested by the authority in the response to the application served on the applicant, the Tribunal considered the case in closed session under the simplified procedure. On the other hand, it should have been inferred from the wording of the authority’s request that the authority was seeking a hearing on the merits of the case and not a consideration of formal issues. The plea in law of the cassation appeal concerning the infringement by the Court of First Instance of Article 145 § 1(2) and § 2 of p.p.s.a. is also unfounded, because, in the absence of the reasons set out in Article 247 § 1 item 3 O.p., it had no grounds to apply the control measure provided for in that provision, i.e. the annulment of the decision, due to the violation of Art. 127 in connection with Article 122 in connection with Article 187 § 1 in connection with Article 191 in connection with Article 220 § 1 in connection with Article 235 in connection with Article 233 § 1 point 1 of the P.C. in connection with Article 94 para. 2 of the KAS Act in connection with Article 221a § 1 of the P.C. It should be recalled that in accordance with the principle of two-instance proceedings, the appellate body is obliged to re-examine and resolve the case settled by the decision of the body of first instance. Therefore, it cannot limit itself to reviewing the decision of the first instance body. Because of this principle, as soon as the proceedings before the second instance authority are

P.B. had deducted licence fees paid for the use of the trademark “B” which was owned by a related party. Following an audit, the tax authority issued an assessment where deductions for the fees had been disallowed. The tax authority stated that the transactions carried out by the P.B. in 2015 concerning the trademark, both in terms of the disposal of this asset and in terms of the subsequent acquisition of the right to use it, escape the notion of rational management and that these activities occurred under conditions that were clearly different from market conditions. According to the authority, their undoubted result was an unjustified transfer of income to the related entity B. sp. z o.o. An appeal was filed with the Administrative Court which later upheld the tax assessment, and P.B. then filed an appeal with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Court ruled in favour of P.B. by setting aside the decision of the administrative Court and the tax assessment. Excerpt “It follows from the case file that the authority did not question the effectiveness of the concluded agreements related to the right to use the trademark, but only questioned their tax consequences. There is no doubt that the Company used the trademarks and the expenses incurred in the form of licence fees were necessary to obtain revenue. Since the transaction of disposal of the right to the “B.” trademark was legally effective (the validity of these agreements was not challenged), it means that there was a transfer of ownership of these rights to another entity. The trademark licence agreement concluded between the Company and B. sp. z o.o. should be assessed similarly. In such circumstances, the licence fee documented by the invoice of […] December 2015 was charged to deductible costs and understated the Company’s income and thus the complainant’s tax base in 2015. It is undisputed that, in light of the accepted facts, the exclusive holder of the rights to use the trademark “B.” was the trademark company, and under the undisputed licence agreement, the Company was obliged to pay royalties. Moreover, it is undisputed that it used the right to the trademark in its operations, even in the form of a licence, and therefore the prerequisites for including this expense as a deductible cost were met. The provision of Article 25(1) u.p.d.o.p. authorised the authorities to determine only the conditions (prices) of these activities differently – and thus to replace the prices specified in the parties’ agreements (transactions) with prices that would correspond to hypothetical conditions (prices) agreed by unrelated parties. The occurrence of the prerequisites referred to in Article 25(1) of the u.p.d.o.p. provided the basis for estimating the Company’s income by possibly reducing the amount of its tax costs. However, this provision cannot be used to disregard the tax consequences of the legal actions performed between related parties in 2015, the effectiveness of which was not questioned by the tax authority. In this provision, the legislator exposed the arm’s length principle, which requires that prices in transactions between related parties be determined as if the companies were operating as independent entities, operating at arm’s length. However, in the facts of the case under consideration, the tax authorities and, following him, also the Court of First Instance, relying on the content of Article 25(1) of the u.p.d.o.p., critically assessed the legal transactions performed by related entities, undermining not only their economic sense (with which the Supreme Administrative Court agrees), but also, in essence, reclassified the legal transaction performed, in the form of a valid licence agreement, into an agreement for the provision of low-value services . In the opinion of the Supreme Administrative Court, Article 25(1) of the u.p.d.o.p. could not constitute a self-contained basis for “redefining” the disputed transaction. Challenging the scheme of operation applied by related parties must have a clear legal basis. Tax authorities may not use other provisions as a solution equivalent to a circumvention clause (cf. the NSA judgment of 8 May 2019, ref. II FSK 2711/18). The tax authorities, as well as the Court of first instance, did not present argumentation from which it would follow, by applying what rules of interpretation, they came to the conclusion that such a manner of application of Article 25(1) u.p.d.o.p. is legally possible and justified in the case under consideration. This provision, in fine, provides for the determination of income and tax due without ‘(…) taking into account the conditions resulting from these connections’, and does not allow for the substitution of one legal transaction (trademark licence agreement) for another transaction (provision of low-value services) and deriving from this second transaction legal consequences in terms of determining the amount of tax liability. It should be emphasised that the statutory determination of the subject of taxation, resulting from Article 217 of the Constitution of the Republic of Poland, is unquestionable. Therefore, the provisions from which the powers of tax authorities to change (reclassify) the subject of taxation are derived should be approached with great caution. The transfer pricing regulations (chapter 4b of the u.p.d.o.p.), introduced by the amending act of 23 October 2018 and effective as of 1 January 2019, constitute in some aspects a significant novelty. Although the content of Article 25(1) corresponds to the content of Article 23o(2), the regulations contained in Article 23o(4) u.p.d.o.p. do not find their counterpart in the previous provisions. The provision of Article 23o Paragraph 4 contains the wording “(…) without taking into account the controlled transaction, and where justified, determines the income (loss) of the taxpayer from the transaction relevant to the controlled transaction”. This is the explicitly expressed competence of the tax authorities to carry out the so-called recharacterisation (reclassification), i.e. reclassification of the transaction, which is what the tax authorities actually did in the present case. Even more so, such powers were not granted to the authorities by the Transfer Pricing Ordinance. Pursuant to Paragraph 9(2) of this regulation, the terms and conditions of the agreement

On 1 February 2010, E.K. and its subsidiary, E. S.A, concluded an agreement on the transfer of E.K.’s trade marks to E. S.A. Following the transfer (on the same day), E.K. concluded with E. S.A. an agreement to grant a licence for the use of the marks in return for payment to the licensor (E. S.A.) of a monthly remuneration. In 2011, E.K. recognised as a deductible expense the royalties paid to E. S.A. According to the tax authorities this resulted in E.K. understating its corporate income tax liability for 2011. According to the tax authorities, E. S.A. did not participate in any way in the creation of revenue, with the result that the profits generated by E.K. were ‘passed on’ in the form of royalties to a related company – E. S.A. The remuneration payable to the legal owner of the trademarks did not take into account the very limited functions performed by that entity in creating the value of the trademarks. The only function performed by E. S.A. in 2011 was to manage the legal protection of the trade marks, for which it would be entitled to a limited remuneration appropriate to its function. After receiving the resulting assessment of additional taxable income, a complaint was then filed by E.K. with the Director of the Tax Chamber which was later dismissed. An appeal was then filed by E.K. with the Administrative Court. Judgment of the Administrative Court. The Administrative Court set aside the Decision of the Tax Chamber and referred the case back to the Tax Chamber. Excerpts “… In the Court’s view, the faulty application of Article 11(1) and (4) of the u.p.d.o.p. affected the manner in which the applicant’s income was estimated and the estimation method adopted by the authorities, based on the erroneous assumption that the transaction analysed by the authorities consisted in the provision of trade mark administration services on behalf of the economic owner of those trade marks. In making that assumption, the authorities applied the net transaction margin method in order to determine the market level of the remuneration payable to the company for its trade mark administration functions. Meanwhile, the applicant provided the tax authority with the data that formed the basis for the calculation of the royalties, as well as the licence agreement. In view of the repetitive nature of such transactions on the market, the applicant used the comparable uncontrolled price method as the correct approach. The Court notes that the estimation of income by the methods indicated in Article 11(2) of the u.p.d.o.p. (comparable uncontrolled price method, reasonable margin method, selling price method) should be considered first, and only when it is not possible to apply these methods, the methods indicated in Article 11(3) of that Act (net transaction margin method, profit sharing method) will be applied. Furthermore, the applicant reasonably pointed out that in the comparability analysis the authorities should have taken into account the fact that intangible assets of significant value (trademarks) were involved in the examined transaction, being the only significant asset analysed by the parties to the examined transaction. As a result, the authorities incorrectly conducted the comparability analysis of the transaction involving the licence for the use of trademarks granted to the applicant by the limited partnership, which prejudges the validity of the allegation of a breach of Article 11(1)-(3) of the u.p.d.o.p. in conjunction with § 3, § 7, § 8, § 10 and § 11 of the MF Regulation. In the opinion of the Court, the basis for the decision in this case was not the provision of Article 11c(4) of the u.p.d.o.p. in the 2019 wording, hence the allegation of violation of this provision contained in the complaint does not merit consideration. In the opinion of the Court, the evidence gathered in the case allowed it to be resolved and, in this respect, the authorities did not fail to comply with Article 122 in conjunction with Article 187 § 1 of the Tax Ordinance. On the other hand, the allegation of a breach of Article 191 of the Tax Ordinance, consisting in the authorities’ faulty assessment of the market nature of the examined legal transactions, is justified. In the context of this allegation, however, it should be stipulated that the reclassification of a legal action by the authorities is not so much the result of a defective assessment of the evidence gathered, but results from the interpretation and manner of application of substantive law provisions adopted by the authorities (Article 11(1) and (4) of the u.p.d.o.p.). As aptly pointed out in the case law, in such a situation the state of facts was not so much established, but adopted by the tax authority. This is because the tax authority determines the factual state not on the basis of established circumstances, but reconstructs it, taking as a directional guideline the taxpayer’s intention to achieve the intended fiscal goal (unauthorised tax benefit). Thus, the state of facts adopted by the tax authorities does not so much result from the evidence gathered in the case, but from the assumption that if the taxpayer was guided only by economic and economic rationale and not by the intention to achieve an unauthorised tax benefit, it is precisely in the way the tax authority wants him to arrange his relations (judgment of the NSA of 8 May 2019, II FSK 2711/18). On the other hand, the consequence of the violation of substantive law is the legitimacy of the allegations of violation of Articles 120 and 121 § 1 of the Tax Ordinance by the authorities. On the other hand, due to the voluminous nature of the complaint, the Court referred to the allegations contained therein and their justification to the extent necessary to conduct a review of the appealed decisions (judgment of the Supreme Administrative Court of 26 May 2017, I FSK 1660/15). When re-examining the case, the authority will take into account the legal assessment presented above as to the interpretation and application, in the

K.P. is active in retail sale of computers, peripheral equipment and software. In December 2013 it had transfered valuable trademarks to its subsidiary and in the years following the transfer incurred costs in form of licence fees for using the trademarks. According to the tax authorities the arrangement was commercially irrationel and had therfore been recharacterised. Not satisfied with the assessment an appeal was filed. Judgment of the Provincial Administrative Court. The Court decided in favor of K.P.  According to the Court recharacterization of controlled transactions was not possible under the Polish arm’s length provisions in force until the end of 2018. Click here for English translation Click here for other translation

“IP-owner Corp” had subsidiaries which used its intangibles in their distribution and manufacturing activities. The subsidiaries did not paid royalty. The tax authorities considered that they should have paid for use of the intangibles and added an arm’s length royalty to the taxable income of “IP-owner Corp”. An appeal was filed with the Seoul Appeals Commission. Decision The Appeals Commission dismisse the appeal and upheld the tax assessment issued by the authorities. Excerpt in English “1) Issue 1 a) A trademark holder has the exclusive and unrestricted right to use a trademark, and therefore, unless the trademark is economically worthless, the use of another’s registered trademark is considered to be an economic benefit in itself. It is economically reasonable for a trademark holder to receive consideration for allowing the use of its trademark, and it is an abnormal trade practice that lacks reasonableness to allow the use of a trademark without consideration. b) The applicant corporation is 20○○.○. After applying and registering the trademark, it has been registered as the sole trademark holder of the trademark in question. However, although it was necessary to collect royalties for the use of the trademark, the applicant corporation refused to collect royalties without economic rationality, which is subject to adjustment of normal price taxation under Article 4(1) of the International Taxation Adjustment Act or denial of calculation of wrongful acts under Article 52(1) of the Corporate Tax Act. c) Accordingly, we find no error in the original decision of the HMRC to deny the applicant a corporate tax credit. 2) Regarding Issue 2 a) The applicant company argues that the technical fees at issue should not be disallowed to the applicant company. b) The manufacturing technology of ○○○○, which the Applicant has developed for a long period of time by establishing a research and development team, constitutes non-public technical information, and the head of the research and development team and then the factory manager of the Chinese subsidiary stated that the research and development team’s findings played an important role for the Chinese subsidiary. The internally drafted contract stipulates the provision of drawings, etc. as technical information, and the amount of royalties to be received from the PRC corporation was considered to be about 3 to 4 per cent of the PRC corporation’s sales. c)The fact that the applicant transferred technical information and technical know-how related to the ○○○○ product to the PRC corporation and did not receive royalties in return is subject to taxation adjustment under Article 4(1) of the Law on International Taxation Adjustment, and the arm’s length price was reasonably calculated in light of the substance and practice of the transaction. d) Accordingly, we find no error in the original decision of the tax authorities to deny the claim for corporate tax credit to the applicant.” Click here for English translation“ Click here for other translation

Maersk Oil and Gas A/S (later TotalEnergies EP Danmark A/S) continued to make operating losses, although the group’s combined oil and gas operations were highly profitable. Following an audit of Maersk Oil, the tax authorities considered that three items did not comply with the arm’s length principle. Maersk Oil incurred all the expenses for preliminary studies of where oil and gas could be found, but the results of these investigations and discoveries were handed over to the newly established subsidiaries free of charge. Licence agreements were signed with Qatar and Algeria for oil extraction. These agreements were entered into with the subsidiaries as contracting parties, but it was Maersk Oil that guaranteed that the subsidiaries could fulfil their obligations and committed to make the required technology and know-how available. Expert assistance (time writing) was provided to the subsidiaries, but these services were remunerated at cost with no profit to Maersk Oil. An assessment was issued where additional taxable income was determined on an aggregated basis as a share of profits from the activities – corresponding to a royalty of approximately 1,7 % of the turnover in the two subsidiaries. In 2018, the Tax Court upheld the decision and Maersk Oil and Gas A/S subsequently appealed to the High Court. In 2022, the High Court held that the subsidiaries in Algeria and Qatar owned the licences for oil extraction, both formally and in fact. In this regard, there was therefore no transaction. Furthermore the explorations studies in question were not completed until the 1990s and Maersk Oil and Gas A/S had not incurred any costs for the subsequent phases of the oil extraction. These studies therefore did not constitute controlled transactions. The Court therefore found no basis for an annual remuneration in the form of royalties or profit shares from the subsidiaries in Algeria and Qatar. On the other hand, the Regional Court found that Maersk Oil and Gas A/S’ so-called performance guarantees for the subsidiaries in Algeria and Qatar were controlled transactions and should therefore be priced at arm’s length. In addition, the Court found that technical and administrative assistance (so-called time writing) to the subsidiaries in Algeria and Qatar at cost was not in line with what could have been obtained if the transactions had been concluded between independent parties. These transactions should therefore also be priced at arm’s length. The High Court referred the cases back to the tax authorities for reconsideration. An appeal was then filed by the tax authorities with the Supreme Court. Judgment of the Supreme Court The Supreme Court decided in favour of the tax authorities and upheld the original assessment. The court stated that the preliminary exploration phases in connection with oil exploration and performance guarantees and the related know-how had an economic value for the subsidiaries, for which an independent party would require ongoing payment in the form of profit share, royalty or the like. They therefore constituted controlled transactions. Furthermore, the court stated that Maersk Oil and Gas A/S’ delivery of timewriting at cost price was outside the scope of what could have been achieved if the agreement had been entered into at arm’s length. Finally, the transactions were considered to be so closely related that they had to be assessed and priced on an aggregated basis and Maersk Oil and Gas A/S had not provided any basis for overturning the tax authorities’ assessment. Click here for English translation Click here for other translation

Tiger Flex was a fully fledged footwear manufacturer that was later restructured as a contract manufacturer for the Gucci Group. It had acquired goodwill which was written off for tax purposes, resulting in zero taxable income. The tax authorities disallowed the depreciation deduction. It found that the acquired goodwill had benefited the group as a whole and not just Tiger Flex. Tiger Flex filed an appeal with the Regional Tax Commission. The Regional Tax Commission decided in favour of Tiger Flex. The tax authorities then filed an appeal with the Supreme Court. Judgment of the Supreme Court The Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission in a different composition. Excerpt “It is not disputed that the Tiger and Bartoli factories were profitable assets, endowed with productive and earning capacity. What is disputed, however, is the recorded purchase value which, legally spread over the decade, anaesthetises any contributory capacity, resulting in repeatedly loss-making activities. Hence the various censures on the quantitative, qualitative and inherent deductibility of such costs.” (…) “In the present case, an asset in surplus and capable of producing income was transformed into a loss-making asset with the entry of a depreciation value capable of absorbing its profits; whence the repeated conduct of the loss-making activity legitimised the Office to recover taxation, disallowing a cost that it considered to be to the advantage of the group and not inherent (solely) to Tiger Flex, recalculating it in its amount, with reversal of the burden of proof to the taxpayer who was unable to give a different answer, re-proposing the payment value entered in the balance sheet. On the other hand, the board of appeal imposed the burden of proof of inherence and consistency on the Office, whereas it had long been held that the breach of the precept set forth in Article 2697 of the Civil Code It has long been held that a violation of the precept set forth in Article 2697 of the Italian Civil Code occurs when the judge has attributed the burden of proof to a party other than the one that was burdened by the application of said provision, whereas, where, following an incongruous assessment of the preliminary findings, he erroneously held that the party burdened had discharged such burden, since in this case there is an erroneous assessment of the outcome of the evidence, it can be reviewed in the court of legitimacy only for the defect referred to in Article. 360, no. 5, c.p.c. (Court of Cassation no. 17313 of 2020). And finally, with regard to the assessment of income taxes, the burden of proof of the assumptions of the deductible costs and charges competing in the determination of the business income, including their pertinence and their direct allocation to revenue-producing activities, both under the provisions of Presidential Decree No. 597 of 1973 and Presidential Decree No. 598 of 1973, and Presidential Decree No. 917 of 1986, lies with the taxpayer. Moreover, since the tax authorities’ powers of assessment include the assessment of the appropriateness of the costs and revenues shown in the financial statements and returns, with the denial of the deductibility of a part of a cost that is disproportionate to the revenues or to the object of the business, the burden of proof of the inherent nature of the costs, incumbent on the taxpayer, also relates to the appropriateness of the same (see Court of Cassation V, no. 4554/2010, followed, e plurimis, by no. 10269/2017). The judgment under examination did not comply with this principle, which, finally, in its last paragraph, performs a sort of “resistance test”, i.e. that even if the burden of proof is placed on the taxpayer, it remains undisputed that after a number of years commensurate with the economic effort made, the balance sheet profit was achieved. This is not the profile of the decision, since the Office disputes precisely that for many years there was repeated loss-making conduct, Tiger Flex having taken on burdens not (exclusively) its own, but for the benefit of the entire Gucci group, so that – if ritually distributed – they would have enabled correct profitable conduct, with the consequent discharge of tax burdens.” Click here for English Translation Click here for other translation

These cases concerned whether the tax authorities had been entitled to exercise an assessment of two types of intra-group transactions made between H1 A/S and a number of group companies. The cases also concerned whether, if so, the tax authorities’ estimated assessment could be set aside. The two types of controlled transactions were employee loans (IAA) and royalty payments for access to and use of intangible assets. The employee loans (IAA) were temporary intra-group loans of “idle” employees who were not in the process of or were about to perform specific tasks for the operating company in which they were employed. To a large extent, these were cross-border employee loans. In the employee loans, the borrowing operating company provided a consultancy service to a customer, and it was also the borrowing operating company that bore the business risk. The TP documentation stated that the lending operating company did not provide a consultancy service and that the earnings on a consultancy service were therefore too high in relation to the functions and risks assumed by the lending company in the internal lending of employees. Regardless of this, H1 A/S had, when valuing the employee loans, compared the lending service with services from other consultancy companies. It was also stated in the TP documentation that the valuation was based on accounting data from the 16 operating companies in the H1 group, which accounted for the majority of the income regarding intra-group employee loans. As it was reportedly not possible to isolate the specific costs and income associated with the employee loans, the valuation was based on the companies’ combined income statements. The royalty payments related to H1 A/S’ use of the Group’s intangible assets, which were reportedly owned by a Y1 country operating company, G1 company. In the case, it was stated that the H1 Group’s operating companies’ intangible assets and future development and improvements of the same had been transferred to the G1 company, and the other operating companies’ access to the use of the Group’s intangible assets was regulated in licence agreements entered into between the G1 company and the operating companies. The Y1-country company G1 company had 9-11 employees who primarily had administrative and coordinating functions, and they did not make unique contributions to the development of the intangible assets. The parties agreed that the development of the intangible assets took place in the group’s operating companies, and it was also agreed that H1 A/S, like the other operating companies in the group, possessed local intangible assets, e.g. in the form of customer relations, a highly specialised workforce and goodwill, which had an impact on the company’s results. Regarding the royalty payments, it appeared from the TP documentation that the valuation was based on a residual profit split method, and that it was G1 companies – as the owner of all economic rights to the group’s intangible rights – should receive the entire residual profit, while H1 A/S should only receive a routine remuneration. Judgment of the Court of Appeal The Court of Appeal found that the TP documentation for the employee loans (IAA) was deficient, including, among other things, that it did not contain a comparability analysis explaining how the adjusted accounting figures for the selected comparable consultancy companies should show the market price for the internal employee loans. The Court of Appeal found that the TP documentation was deficient to such an extent that it had to be equated with a lack of documentation. The tax authorities had therefore been entitled to assess H1 A/S’ taxable income on a discretionary basis in the income years in question. As regards the royalty payments, the Court of Appeal found it established that H1 A/S had not acted in accordance with what independent parties would have accepted (the arm’s length principle) when making the intra-group royalty payments. In its assessment, the Court of Appeal emphasised, among other things, that it had not been established that the 9-11 employees in the G1 company had the necessary functional and competence capacity to make significant decisions regarding the development work in the group, which is why it was not in accordance with the arm’s length principle that the G1 company should receive the entire residual profit according to the residual profit split method. The tax authorities were therefore entitled to assess H1 A/S’ deduction for royalty payments on a discretionary basis. The Court of Appeal found no basis to set aside the tax authorities’ estimate (neither for the employee loan nor for the royalty payments), as H1 A/S had not demonstrated that the estimate had been exercised on an incorrect or deficient basis or that the estimate had led to a manifestly unreasonable result. Click here for English translation Click here for other translation

In this case, “Fuel Injection Corp” had acquired a patent from its shareholder. The patent related to the manufacture of fuel injectors for marine engines. The tax authorities considered that the value placed on the patent by the related parties was unsubstantiated. On this basis, a tax assessment was issued in which “Fuel Injection Corp”‘s depreciation and taxable profits were adjusted accordingly. Furthermore, the amount paid to the shareholder was considered to be a non deductible “bonus”/distribution of profit. Judgment of the Court The District Court upheld the assessment issued by the tax authorities. Excerpt in English “a) Article 26(2) of the former Corporate Income Tax Act and Article 43(1) of the former Enforcement Decree of the Corporate Income Tax Act stipulate that ‘bonuses paid by a corporation to its officers or employees by disposing of profits shall not be counted as losses.Article 88(1) of the Enforcement Decree of the former Corporate Income Tax Act, which establishes the types of wrongful acts to be calculated pursuant to Article 52(4) of the former Corporate Income Tax Act, establishes individual and specific types of acts under items 1 to 7, item 7(2), item 8, and item 8(2) in cases where it is deemed that the burden of taxation has been unfairly reduced, and item 9 establishes a general type of act under item 1 to 7, item 7(2), item 8, and item 8(2) in cases where it is deemed that the profits of the corporation have been distributed. b) As mentioned above, A holds 82.15% of the shares of the Plaintiff, and the remaining shares of the Plaintiff are held by A’s family members; the Plaintiff has been producing fuel injection nozzles for marine engines using the invention at issue since before the patent application for the invention at issue was filed in the name of A; Article 10(1) of the former Invention Promotion Act provides that ‘When an employee or other person obtains a patent for an occupational invention, the employer shall have the right of ordinary practice for the patent right.’ In light of the fact that the Plaintiff is a small and medium-sized enterprise under Article 2 of the Basic Act on Small and Medium-sized Enterprises and is not subject to the provisions of Article 10(1) of the former Invention Promotion Act, which stipulates that the Plaintiff shall conclude a contract on the right to obtain a patent for an occupational invention, the succession of the patent right, and the establishment of an exclusive right of practice, or make a working regulation to that effect, it is difficult to see that there is any reasonable reason for the Plaintiff to transfer the patent rights in this case from A or to pay A the purchase price of KRW 945,000,000. Therefore, the Patent Transfer Agreement and the calculation of the amount of income thereunder should be disallowed in the calculation of the amount of income of the Plaintiff for fiscal year 2019 pursuant to Article 52(1) and (4) of the old Corporate Income Tax Act and Article 88(1) and (9) of the old Corporate Income Tax Act as a case of allocation of the Plaintiff’s interests to a related party under the guise of a patent transfer transaction, and the purchase price paid to A should be disallowed as a “bonus” pursuant to Article 67(2) of the old Corporate Income Tax Act and Article 106(1)(1) of the old Corporate Income Tax Act. C) Ultimately, Plaintiff’s argument, which rests on a different premise, cannot be accepted.     5) Whether the depreciation expense of the patent rights in this case can be added to the loss. a) As we have seen, the patent transfer agreement and the calculation of the amount of income in this case are subject to the denial of wrongful calculation, so the depreciation expense of the patent rights in this case cannot be deducted from the plaintiff’s assets on the premise that the patent rights in this case have been accounted for in the plaintiff’s assets. Therefore, the defendant’s imposition of corporate income tax on the patent rights in this case by deducting the depreciation expense of the patent rights in 2019 from the plaintiff’s assets is legitimate.” Click here for English translation Click here for other translation

Following an audit of Otis Servizi s.r.l. for FY 2007, 2008 and 2009 an assessment of additional taxable income was issued by the Italian tax authorities. The first part of the assessment related to interest received by OTIS in relation to the contract called “Cash management service for Group Treasury” (hereinafter “Cash Pooling Contract”) signed on 20 March 2001 between OTIS and the company United Technologies Intercompany Lending Ireland Limited (hereinafter “UTILI”) based in Ireland (hereinafter “Cash Pooling Relief”). In particular, the tax authorities reclassified the Cash Pooling Agreement as a financing contract and recalculated the rate of the interest income received by OTIS to be between 5.1 and 6.5 per cent (instead of the rate applied by the Company, which ranged between 3.5 and 4.8 per cent); The second part of the assessment related to of the royalty paid by OTIS to the American company Otis Elevator Company in relation to the “Licence Agreement relating to trademarks and company names” and the “Agreement for technical assistance and licence to use technical data, know-how and patents” signed on 1 January 2004 (hereinafter referred to as the “Royalty Relief”). In particular, the tax authorities had deemed the royalty agreed upon in the aforesaid contracts equal to 3.5% of the turnover as not congruous, recalculating it at 2% and disallowing its deductibility to the extent of the difference between the aforesaid rates. Not satisfied with the assessment an appeal was filed by OTIS. The Regional Tax Commission upheld the assessments and an appeal was then filed with the Supreme Court. Judgment of the Supreme Court The Court decided in favour of OTIS, set aside the assessment and refered the case back to the Regional Tax Commission in a different composition. Excerpt related to interest received by OTIS under the cash pooling contract “In the present case, the Agenzia delle Entrate redetermined the rate of the interest income received by the OTIS in relation to the contract between the same and UTILI (cash pooling contract) concerning the establishment of a current account relationship for the unitary management of the group treasury. UTILI, as pooler or group treasurer, had entered into a bank account agreement with a credit institution in its own name, but on behalf of the group companies. At the same time, OTIS had mandated that bank to carry out the various tasks in order to fully implement the cash pooling agreement. Under this contract, all participating companies undertook to transfer their bank account balances (assets or liabilities) daily to the pooling company, crediting or debiting these balances to the pool account. As a result of this transfer, the individual current account balances of each participating company are zeroed out (‘zero balance cash pooling’). Notwithstanding the fact that the tax authorities do not dispute that this is a case relating to “zero balance cash pooling” (a circumstance that is, moreover, confirmed by the documents attached to the appeal), it should be noted that the same practice documentation of the Revenue Agency leads to the exclusion that, in the hypothesis in question, the cause of the transaction can be assimilated to a loan. In particular, in Circular 21/E of 3 June 2015, it is stated (p. 32) that “with reference to the sums moved within the group on the basis of cash pooling contracts in the form of the so-called zero balance system, it is considered that a financing transaction cannot be configured, pursuant to Article 10 of the ACE Decree. This is because the characteristics of the contract – which provides for the daily zeroing of the asset and liability balances of the group companies and their automatic transfer to the centralised account of the parent company, with no obligation to repay the sums thus transferred and with accrual of interest income or expense exclusively on that account – do not allow the actual possibility of disposing of the sums in question in order to carry out potentially elusive transactions’. These conclusions are confirmed in the answer to Interpretation No. 396 of 29 July 2022 (p. 5) where it is specified that ‘cash pooling contracts in the form of the so-called zero balance stipulated between group companies are characterised by reciprocal credits and debits of sums of money that originate from the daily transfer of the bank balance of the subsidiary/subsidiary to the parent company. As a result of this contract, the balance of the bank account held by the subsidiary/subsidiary will always be zero, since it is always transferred to the parent company. The absence of the obligation to repay the remittances receivable, the reciprocity of those remittances and the fact that the balance of the current account is uncollectible and unavailable until the account is closed combine to qualify the negotiated agreement as having characteristics that are not attributable to a loan of money in the relationship between the companies of the group’. That being so, the reasoning of the judgment under appeal falls below the constitutional minimum in so far as the CTR qualified the cash pooling relationship as a loan on the basis of the mere assertion that “the obligation to repay each other by the closing date of the account is not found in the case”. In so doing, the Regional Commission identified a generic financing contract function in the cash pooling without distinguishing between “notional cash pooling” and “zero balance cash pooling”, instead excluding, on the basis of the same documentation of practice of the Tax Administration, that in the second case (“zero balance”), a loan contract can be configured. The reasoning of the contested decision does not therefore make the basis of the decision discernible, because it contains arguments objectively incapable of making known the reasoning followed by the judge in forming his own conviction, since it cannot be left to the interpreter to supplement it with the most varied, hypothetical conjectures” (Sez. U. no. 22232 of 2016), the trial judge having failed to indicate in a congruous manner the elements from which he drew

K. S.A. had made an in-kind contribution to a subsidiary (a partnership) in the form of previously created or acquired and depreciated trademark protection rights for individual beer brands. The partnership in return granted K. S.A. a licence to use these trademarks (K. S.A. was the only user of the trademarks). The partnership made depreciations on these intangible assets, which – due to the lack of legal personality of the partnership – were recognised as tax deductible costs directly by K. S.A. According to the tax authorities the role of the partnership was limited to the administration of trademark rights, it was not capable of exercising any rights and obligations arising from the licence agreements. Therefore the prerequisites listed in Article 11(1) of the u.p.d.o.p. were met, allowing K. S.A.’s income to be determined without regard to the conditions arising from those agreements. The assessment issued by the tax authorities was later set aside by the Provincial Administrative Court. An appeal and cross appeal was then filed with the Supreme Administrative Court. Judgment of the Supreme Administrative Court. The Supreme Administrative Court upheld the decisions of the Provincial Administrative Court and dismissed both appeals as neither of them had justified grounds. The Provincial Administrative Court had correctly deduced that Article 11(1) of the u.p.d.o.p. authorises only adjustment of the amount of licence fees, but not the nature of the controlled transactions by recognising that instead of a licence agreement for the use of the rights to trademarks, an agreement was concluded for the provision of services for the administration of these trademarks. Excerpts “The tax authorities, in finding that the applicant had not in fact made an in-kind contribution of trademark rights to the limited partnership, but had merely entrusted that partnership with the duty to administer the marks, referred to Article 11(1) of the u.p.d.o.p. (as expressed in the 2011 consolidated text. ), by virtue of which the tax authorities could determine the taxpayer’s income and the tax due without taking into account the conditions established or imposed as a result of the links between the contracting entities, with the income to be determined by way of an estimate, using the methods described in paragraphs 2 and 3 of Article 11 u.p.d.o.p. However, these are not provisions creating abuse of rights or anti-avoidance clauses, as they only allow for a different determination of transaction (transfer) prices. The notion of ‘transaction price’ is legally defined in Article 3(10) of the I.P.C., which, in the wording relevant to the tax period examined in the case, stipulated that it is the price of the subject of a transaction concluded between related parties. Thus, the essence of the legal institution regulated in Article 11 of the u.p.d.o.p. is not the omission of the legal effects of legal transactions performed by the taxpayer or a different legal definition of those transactions, but the determination of their economic effect expressed in the transaction price, with the omission of the impact of institutional links between counterparties”  “For the same reasons, the parallel plea alleging infringement of Articles 191, 120 and 121(1) of the P.C.P. by annulling the tax authority’s legal rulings on the grounds of a breach of the aforementioned rules of evidence in conjunction with Articles 11(1) and 11(4) of the u.p.d.o.p. and holding that the tax authority did not correct the amount of royalties and the marketability of the transaction, but reclassified the legal relationship on the basis of which the entity incurred the expenditure, is also inappropriate. In fact, the assessment of the Provincial Administrative Court that such a construction of the tax authority’s decision corresponds to the hypothesis of the 2019 standard of Article 11c(4) of the u.p.d.o.p. is correct, but there was no adequate legal basis for applying it to 2012/2013 and based on Article 11(1) and (4) of the u.p.d.o.p. in its then wording. Failure to take into account a transaction undertaken by related parties deemed economically irrational by the tax authority violated, in these circumstances, the provisions constituting the cassation grounds of the plea, as the Provincial Administrative Court reasonably found.” “Contrary to the assumption highlighted in the grounds of the applicant’s cassation appeal, in the individual interpretations issued at its request, the applicant did not obtain confirmation of the legality of the entire optimisation construction, but only of the individual legal and factual actions constituting this construction, presented in isolation from the entire – at that time – planned future event. Such a fragmentation of the description of the future event does not comply with the obligation under Article 14b § 3 of the Code of Civil Procedure to provide an exhaustive account of the actual state of affairs or future event, and therefore – as a consequence – the applicant cannot rely on the legal protection provided under Article 14k § 1 or Article 14m § 1, § 2 (1) and § 3 of the Code of Civil Procedure.” Click here for English translation Click here for other translation

SA SACLA, which trades in protective clothing, footwear and small equipment, was the subject of a tax audit covering the financial years 2007, 2008 and 2009. In 2008, Sacla had sold a portfolio of trademarks to a related party, Involvex SA, a company incorporated under Luxembourg law, for the sum of 90,000 euros. In a proposed assessment issued in 2011, the tax authorities increased Sacla’s taxable income on the basis of Article 57 of the General Tax Code, taking the view that Sacla had made an indirect transfer of profits in the form of a reduction in the selling price by selling a set of brands/trademarks held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime. The tax authorities had estimated the value of the trademarks at €20,919,790, a value that was reduced to €11,288,000 following interdepartmental discussions. In a February 2020, the Lyon Administrative Court of Appeal, after rejecting the objection of irregularity of the judgment, decided that an expert would carry out a valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation was to take into account an agreed exemption from the payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert’s report was filed on 8 April 2021 and, upon receipt of the report, SA SACLA asked the court to modify the judgment by considering that the value of the transferred trademarks should be set at between EUR 1.3 million and EUR 2.1 million and that the penalties for wilful infringement should be waived. By judgment of 19 August 2021, the court rejected SACLA’s request and set the value of the trademarks – in accordance with the expert’s report – at 5,897,610 euros. “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” SACLA then appealed to the Supreme Administrative Court, which by decision no. 457695 of 27 October 2022 set aside articles 3 and 6 of the judgment from the Administrative Court of Appeal and remanded the case for further considerations. “2. In a judgment before the law of 13 February 2020, the Lyon Administrative Court of Appeal decided that, before ruling on the Sacla company’s request, an expert appraisal would be carried out in order to determine whether the sale price of the trademarks sold by that company corresponded to their value, taking into consideration, in particular, the waiver of payment of royalties for a period of five years granted by the purchasing company, Involvex, to the Sacla company. In order to fulfil the mission entrusted to them by the court, the expert and his assistant first considered four methods, then abandoned the method of comparables and the method of capitalisation of royalties, and finally retained only two methods, the method of historical costs and the method of discounting future flows, from which they derived a weighted average. It follows from the statements in the judgment under appeal that the court, after considering that the historical cost method did not allow the effect of corporation tax to be taken into account with any certainty and led to a valuation almost eight times lower than the discounted cash flow method, rejected the former method and adopted only the latter and considered that there was no need to carry out a weighting, since, in its view, the discounted cash flow method proved to be the most accurate. 3. It follows from the statements in the judgment under appeal that the court, after fixing the value of the trade marks transferred by Sacla at EUR 8 733 348 exclusive of tax, an amount also retained by the administrative court, intended to apply the discount recommended by the expert report of 7 April 2021 in order to take account of the exemption from payment of royalties granted for five years by the purchaser of the trade marks. In fixing the amount of that discount at EUR 2 400 000 exclusive of tax, whereas the expert report which it intended to apply estimated it, admittedly, at that amount in absolute terms, but by applying a rate of 37% to a value of the trade marks transferred estimated at EUR 6 500 000, the Court distorted that expert report and gave insufficient reasons for its judgment.” Judgment of the Administrative Court of Appeal The Court ruled as follows “…by selling on 19 October 2008 a set of trademarks held by it at a reduced price to Involvex, a company incorporated under Luxembourg law, had carried out an indirect transfer of profits. In a judgment of 10 October 2017, the Lyon Administrative Court, after finding that there was no need to rule on the claims for suspension of payment submitted at first instance, granted partial discharge of the additional corporation tax and social security contributions to

In 2010, E S.A. transferred the legal ownership of a trademark to subsidiary S and subsequently entered into an agreement with S for the “licensing of the use of the trademarks”. In 2013, the same trademark was transferred back to E. S.A. As a result of these transactions, E. S.A., between 2010 and 2013, recognised the licence fees paid to S as tax costs, and then, as a result of the re-purchase of those trademarks in 2013 – it again made depreciation write-offs on them, recognising them as tax costs. The tax authority found that E S.A. had reported income lower than what would have been reported had the relationships not existed. E S.A. had  overestimated the tax deductible costs by PLN […] for the depreciation of trademarks, which is a consequence of the overestimation for tax purposes of the initial value of the trademarks repurchased from S – 27 December 2013 – by the amount of PLN […]. The function performed by S between 2010 and 2013 was limited to re-registration of the trademarks with the change of legal ownership. In the tax authority’s view, the expenses incurred by E S.A. for the reverse acquisition of the trademarks did not reflect the transactions that unrelated parties would have entered into, as they do not take into account the functions that E S.A. performed in relation to the trademarks. A tax assessment was issued where – for tax purposes – the transaction had instead been treated as a service contract, where S had provided protection and registration services to E S.A. A complaint was filed by E S.A. Judgment of the Court The Court found that there was no legal basis for re-characterisation in Poland for the years in question and that the issue should instead be resolved by applying the Polish anti-avoidance provision. On that basis, the case was referred back for further consideration. Excerpts “In principle, the tax authorities did not present any argumentation showing from which rules of interpretation they came to the conclusion that such an application of the above-mentioned provisions is legally possible and justified in the present case. It should be noted in this regard that Article 11(1) in fine speaks of the determination of income and tax due without – ‘[…] taking into account the conditions arising from the relationship…’, but does not allow for the substitution of one legal act (a licence agreement) for another act (an agreement for the provision of administration services), and deriving from the latter the legal consequences for the determination of the amount of the tax liability. There should be no doubt in this case that, in fact, the authorities made an unjustified reclassification of the legal act performed in the form of the conclusion of a valid licensing contract, when they concluded (referring to the OECD Guidelines – Annex to Chapter VI – Illustrative Examples of Recommendations on Intangible Assets, example 1, point 4) that the transactions carried out by E. and S. in fact constitute, for the purposes of assessing remuneration, a contract for the provision of trademark administration services and the market price in such a case should be determined for administration services. As the applicant rightly argued, such a possibility exists as of 1 January 2019, since Article 11c(4) uses the expression – “[…] without taking into account the controlled transaction, and where justified, determines the income (loss) of the taxpayer from the transaction appropriate to the controlled transaction”. This is what is meant by the so-called recharacterisation, i.e. the reclassification of the transaction, which is what the tax authorities actually did in the present case. At the same time, the Court does not share the view expressed in the jurisprudence of administrative courts, referring to the content of the justification of the draft amending act, according to which, the solutions introduced in 2019 were of a clarifying rather than normative nature (cf. the judgment of the WSA in Rzeszów of 20 October 2022, I SA/Rz 434/22). The applicant rightly argues in this regard that the new regulation is undoubtedly law-making in nature and that the provisions in force until the end of 2018 did not give the tax authorities such powers. It is necessary to agree with the view expressed in the literature that a linguistic interpretation of Article 11(1) of the A.p.d.o.p. and Article 11c of the A.p.d.o.p. proves that Article 11c of that Act is a normative novelty, as the concepts and premises it regulates cannot be derived in any way from the wording of Art. 11(1) u.p.d.o.p. (cf. H. Litwińczuk, Reclassification (non-recognition) of a transaction made between related parties in the light of transfer pricing regulations before and after 1.01.2019, “Tax Review” of 2019, no. 3).” “It follows from the justification of the contested decisions that, in applying Article 11(1) and (4) of the TAX Act to the facts of this case, the tax authorities referred to the OECD Guidelines, inter alia, to the example provided therein (Anex to Chapter VI – Illustrative Examples of Recommendations on Intangible Assets, example 1, point 4), from which, according to the authorities, it follows that the transactions carried out by E. S.A. and S. for the purposes of assessing remuneration constitute, in fact, a contract for the provision of trademark administration services and, in that case, the market price should be determined for such services. In this context, it should be clarified that the OECD Guidelines (as well as other documents of this organisation), in the light of the provisions of Article 87 of the Constitution of the Republic of Poland, do not constitute a source of universally binding law. Neither can they determine in a binding manner the basic structural elements of a tax, since the constitutional legislator in Article 217 of the Basic Law has subjected this sphere exclusively to statutory regulations. Since these guidelines do not constitute a source of law, they can therefore neither lead to an extension of the powers of the tax authorities nor of the

The tax authorities had issued a notice of assessment which disallowed tax deductions for royalties paid by R…Cash & C…, S.A. to its Polish parent company, O…Mark Sp. Z.o.o. R… Cash & C…, S.A. appealed to the Administrative Court, which later annulled the assessment. The tax authorities then filed an appeal with the Administrative Court of Appeal. Judgment of the Court The Court of Appeal revoked the judgment issued by the administrative court and decided in favour of the tax authorities. Extracts “It is clear from the evidence in the case file that the applicant has succeeded in demonstrating that the agreement to transfer rights is not based on effective competition, in the context of identical operations carried out by independent entities. The studies presented by the challenger do not succeed in overturning this assertion, since, as is clear from the evidence (12), they relate to operations and market segments other than the one at issue in the case. The provision for the payment of royalties for the transfer of the brands, together with the unpaid provision of management and promotion services for the brands in question by the applicant, prove that there has been a situation that deviates from full competition, with the allocation of income in a tax jurisdiction other than the State of source, without any apparent justification. The application of the profit splitting method (Article 9 of Ministerial Order 1446-C/2001 of 21 December 2001) does not deserve censure. Intangible assets are at stake, so invoking the comparability of transactions, in cases such as the present one, does not make it possible to understand the relationships established between the companies involved. It should also be noted that the Polish company receiving the royalties has minimal staff costs, and that brand amortisation costs account for 97.72% of its operating costs. As a result, the obligations arising for the defendant from the licence agreement in question are unjustified. In view of the demonstration of the deviation from the terms of an arm’s length transaction, it can be seen that the taxpayer’s declaratory obligations (articles 13 to 16 of Ministerial Order 1446-C/2001, of 21.12.200) have not been complied with, as there is a lack of elements that would justify the necessary adjustment. Therefore, the correction under examination does not deserve to be repaired and should be confirmed in the legal order. By ruling differently, the judgment under appeal was an error of judgment and should therefore be replaced by a decision dismissing the challenge.” Click here for English translation. Click here for other translation

In 2008 and 2009 the Medtronic group acquired the entire share capital of the Israeli company, Ventor Technologies Ltd, for a sum of $325 million. Subsequent to the acquisition various inter-company agreements were entered into between Ventor Technologies Ltd and Medtronics, but no transfer of intangible assets was recognised by the Group for tax purposes. The tax authorities found that all the intangibles previously owned by Ventor had been transferred to Medtronic and issued an assessment of additional taxable profits. An appeal was filed by Medtronic Ventor Technologies Ltd. Judgment of the District Court The court dismissed the appeal and upheld the assessment issued by the tax authorities. Click here for English translation

The case concerned the valuation of intangible assets transferred from a Danish company to an affiliated foreign company. The Tax Tribunal basically agreed with the valuation of the expert appraisers according to the DCF model, but corrected the assumptions with regard to revenue growth in the budget period and the value of the tax advantage. Finally, the Tax Tribunal found that the value of product Y should be included in the valuation, as all rights to product Y were covered by the intra-group transfer. Excerpts “It was the judges’ view that the turnover growth for the budget period should be set in accordance with Company H’s own budgets prepared prior to the transfer. This was in accordance with TPG 2017 paragraphs 6.163 and 6.164 and SKM2020.30.LSR.” “With reference to OECD TPG section 6.178 on adjustment for tax consequences for the buyer and seller and SKM2020.30.LSR, the National Tax Tribunal ruled that the full value of the buyer’s tax asset should be added to the value of the intangible assets when valuing according to the DCF model.” Click here for English translation Click here for other translation

“Cosmetics sp. z o.o.” is a Polish distributor of cosmetics. It purchases the goods from a related foreign company. The contract concluded between “Cosmetics sp. z o.o.” and the foreign company contained a provision according to which 3% of the price of the goods purchased was to be paid (in the form of royalties) for the right to use the trademarks for the promotion, advertising and sale of the products. However, the invoices issued by the foreign company for the sale of the goods in question did not show the amount paid for the right to use the trademarks as a separate item. The invoices simply stated the price of the goods purchased. “Cosmetics sp. z o.o. requested an “individual interpretation” from the tax authorities as to whether the royalty payments included in the price of the goods were subject to withholding tax in Poland. According to Cosmetics sp. z o.o., the answer should be no, as the “royalty” element was an ancillary part of the main transaction – the purchase of the goods. The tax authority disagreed. According to the authorities, the payment of royalties for the right to use trademarks was not an ancillary element of the main transaction and its importance was not insignificant. Under the CIT Act and the relevant double tax treaty (DTT), the payment of royalties would be subject to withholding tax. Dismissing an appeal filed by Cosmetics sp. z o.o., the Administrative Court held that there were two separate transactions – one for the acquisition of goods and one for the acquisition of the right to use the trademark. Therefore, the tax authority’s interpretation was correct. Judgment of the Supreme Administrative Court. The Supreme Administrative Court upheld the decision of the Administrative Court and dismissed the appeal of “Cosmetics sp. z o.o.”. According to the court, it was clear from the agreement that the fee consisted of two transactions, one of which was a licence fee (royalty). Therefore, the claim that the tax authority was trying to separate this payment from the payment for the goods was not justified. Excerpt “The issue in dispute in the case is the taxation withholding tax on the amount paid by the Appellant to a foreign entity on account of the right to use trademarks, included in the agreement on the purchase of goods from that entity. Instead, the resolution of the above problem depends on whether the fee for the use of trademarks remains an ancillary element of the main consideration – the purchase of goods – and should then share the tax fate of that consideration, or whether it constitutes a separate element of the contract, which is subject to a separate method of taxation. The author of the cassation appeal argued that the elements comprising the subject matter of the contract and making up the price paid should be qualified together, as a single consideration. In the opinion of the Company’s attorney, a transaction transferring the right to use trademarks should not be treated as generating a licence fee, since the right is related only to the possibility of further resale of goods, and thus “the scope of the licence granted to the Applicant was significantly limited”. In support of the above argumentation, the attorney referred to the opinion of a representative of international tax doctrine, Professor Michelle Markham. Referring to the excerpt from the publication quoted on p. 6 of the cassation complaint concerning the issue analysed in the case, the panel finds that it is not relevant to the case at hand. Firstly, it is clear from the full context of the quoted sentence that these are considerations on the basis of US tax law regulations. Secondly, the quoted passage refers specifically to such contracts, the subject of which are at least two services (including one intangible service) covered by a single price, where it could be unreasonable to try to separate them for tax purposes. However, we do not face such a situation in the case, as the Company’s agreement with the Establishment clearly separates the remuneration for the right to use trademarks in the amount of 3% of the value of the purchased goods – even if the above amount is not specified on the invoices. Above all, however, the Supreme Administrative Court draws attention to the introduction in the agreement of a provision concerning the granting of a paid licence for the use of trademarks within the scope presented in the application, which is of fundamental importance in the case under consideration. Pursuant to Article 155 of the Act of 30 June 2000. – Industrial Property Law (Journal of Laws of 2019, item 2309; hereinafter: ‘p.w.p.’), the right of protection for a trademark suffers a significant limitation as a result of the exhaustion of the right to market the goods. “Pursuant to Article 155(1) p.w.p., the right of protection for a trademark does not extend to acts concerning goods with the trademark, consisting in particular in offering them for sale or further marketing of goods bearing the trademark, if the goods have been placed on the market in the territory of Poland by the authorised entity or with its consent. (…) By the act of placing the marked goods on the market, by the rightsholder or a third party acting with his consent, the rightsholder’s competence to use the trade mark in such a manner as to further distribute the goods is deemed to be exhausted. Therefore, the purchaser – as the owner of the goods – may continue to resell the goods and, in doing so, to advertise using the holder’s mark. Exhaustion, however, covers only one exclusive competence of the right holder, which is the right to put the marked goods on the market, and concerns only normal distribution processes of the marked goods, understood as a whole, which do not threaten the loss of connection with the goods.” (U. Promińska, Industrial Property Law, 5th edition, LexisNexis 2011, p. 340). Transferring the above considerations to the grounds

Italien fashion group, Dolce & Gabbana s.r.l. (hereinafter DG s.r.l.), the licensee of the Dolce&Gabbana trademark, entered into a sub-licensing agreement with its subsidiary Dolce&Gabbana Industria (hereinafter DG Industria or Industria) whereby the former granted to the latter the right to produce, distribute and sell products bearing the well-known trademark throughout the world and undertook to carry out promotion and marketing activities in return for royalties. DG s.r.l., in order to carry out promotion and marketing activities in the U.S.A., made use of the company Dolce&Gabbana Usa Inc. (hereinafter DG Usa) with contracts in force since 2002; in particular, on March 16, 2005, it entered into a service agreement whereby DG Usa undertook to provide the aforesaid services in return for an annual fee payable by DG s.r.l.; this consideration is determined on the basis of the costs analytically attributable to the provision of the agreed services in addition to a mark up, i.e. a mark-up, determined in a variable percentage based on the amount of the cost. In order to verify the fairness of the consideration, the parties have provided for the obligation of analytical reporting as well as an amicable settlement procedure through an auditing company. Lastly, DG s.r.l., DG Usa and DG Industria entered into another agreement, supply agreement, whereby DG Industria appointed DG Usa as its distributor for the USA in mono-brand shops, DG Usa committed to DG s.r.l. to adapt the shops to its high quality standards functional to increasing brand awareness, and DG s.r.l. committed to pay a service fee. The service contribution was recognised in relation to the costs exceeding a percentage of the turnover realised through the mono-brand sales outlets. In the course of an audit, the Italian Revenue Agency made the following findings in relation to the tax year 1 April 2004 to 31 March 2005: first, it denied the deductibility from the taxable income for IRES and IRAP purposes of part of the fees paid by DG s.r.l. to DG USA under the service contract and precisely: a) of the costs of certain services (in particular, it recognised the costs for commercial sales, executive consultant, advertising Madison sales, advertising all others and not the others), because, provided that these were generic services, falling within the normal activity of the reseller of goods, remunerated by the resale margin, and that the reimbursable costs were defined generically, without provision of a ceiling, a reporting method and prior approval by DG s.r.l., it pointed out that it could only recognise the costs rendered in the interest >>also of the parent company<<; b) the portion corresponding to the chargeback of the mark-up, referring to Revenue Agency Circular No. 32/80 on intra-group services, where it provides that the mark-up in favour of the service provider is recognisable only where the services constitute the typical activity of the service provider and not for those services rendered by the parent company that have no market value or are attributable to the general management or administrative activity of the parent company; secondly, it denied the deductibility of the consideration paid by DG s.r.l. to DG Usa under the supply agreement, pointing out that the costs to be considered for the purposes of the contribution would be generically identified, there would be no obligation of adequate reporting or prior approval, which would in fact transfer to DG s.r.l. the risk of substantial inefficiencies of DG Usa, a risk that no independent third party would have assumed, and that the party had not adequately demonstrated that the costs corresponded to the normal value of the costs inasmuch as the documentation produced, relating to other fashion groups, concerned persons who were also owners of the mark, directly interested in its development and promotion. DG s.r.l. brought an appeal before the Provincial Tax Commission of Milan, which rejected it. An appeal was then brought before the Regional Tax Commission of Lombardy which was likewise rejected. In particular, the Regional Tax Commission, for what is relevant herein rejected the preliminary objections (failure to contest the recovery by means of a report; insufficiency and contradictory motivation); reconstructed the subject matter of the dispute, pointing out that the Agency had contested some costs of the service agreement, excluding their inherent nature; for the costs deemed inherent, it had recalculated the amount, excluding the mark-up; for the supply agreement, it had re-taxed the costs, excluding their deductibility due to lack of inherent nature in relation to the service agreement, it confirmed that the costs for the excluded services were not inherent, because: a) DG Usa also carried out activities pertaining to the retailer DG Industria, distributor of Dolce&Gabbana branded products in the U.S. and the costs were connected to this marketing activity; b) the correlation deducted by the company between the costs recharged to DG s.r.l. and the revenues that the latter obtains as a result of the royalties paid by DG Industria, because the costs connected to services intended to increase sales are those of the retailer and not of the licensee of the trademark, to which are inherent only the costs intended to increase the prestige of the trademark itself; c) the costs incurred in the interest of both DG s.r.l. and DG Usa is not relevant and the only cost items recognisable in favour of the former are those pertaining exclusively to its relevance; d) for the purpose of proving congruity, the expert’s report by Prof. Lorenzo Pozza and the certification by Mahoney Cohen & company were irrelevant, since they were mere opinions that were not binding on the administration; (e) the mark up was not deductible since the services rendered by DG USA were rendered in the interest of both DG s.r.l., licensee of the mark, and DG Industria, reseller, and it was not possible to take into consideration the actions of the latter in favour of Itierre s.p.a., reseller and therefore different from DG s.r.l.; (f) the recharging of costs to DG s.r.l. was formally obligatory in the antero but largely

Arditi S.p.A. is an Italian group in the lighting industry. It has a subsidiary in Hong Kong which in turn holds the shares in a Chinese subsidiary where products are manufactured. Following an audit the tax authorities held that the entities in Hong Kong and China had used the trademark owned by the Italian parent without paying royalties, and on the basis of the arm’s length principle a 5% royalty was added to the taxable income of Arditi S.p.A. Arditi appealed against this assessment alleging that it had never received any remuneration for the use of its trademark by the subsidiary, and in any case that the tax authorities had not determined the royalty in accordance with the arm’s length principle. The Court of first instance upheld the appeal of Arditi and set aside the assessment. An appeal was then filed by the tax authorities. The Court of Appeal set aside the decision of the Court of first instance finding the assessment issued by the tax authorities regarding royalties well-founded. An appeal was then filed by Arditi with the Supreme Administrative Court. Judgment of the Court The Supreme Administrative Court dismissed the appeal of Arditi and upheld the decision of the Court of Appeal and thus the assessment of additional royalty income issued by the tax authorities. Excerpts “1.1. The plea is unfounded. In fact, it should be recalled that “On the subject of the determination of business income, the rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national regulations, does not require the administration to prove the elusive function, but only the existence of “transactions” between related companies at a price apparently lower than the normal price, while it is the taxpayer’s burden, by virtue of the principle of proximity of proof pursuant to art. 2697 of the Civil Code and on the subject of tax deductions, the onus is on the taxpayer to prove that such ‘transactions’ took place for market values to be considered normal within the meaning of Art. 9, paragraph 3, of the same decree, such being the prices of goods and services practiced in conditions of free competition, at the same stage of marketing, at the time and place where the goods and services were purchased or rendered and, failing that, at the nearest time and place and with reference, as far as possible, to price lists and rates in use, thus not excluding the usability of other means of proof” (Cass. 19/05/2021, n. 13571). Now, the use of a trade mark must be presumed not to have a normal value of zero, which can also be expressed, as the judgment under appeal does, by the exceptionality of the relative gratuitousness. This places the onus on the taxpayer to prove that such gratuitousness corresponds to the normal value, that is, to the normality of the fact that such use takes place without consideration.” (…) “3. The third plea alleges failure to examine a decisive fact, in relation to Article 360(1)(5) of the Code of Civil Procedure, since the appeal judges failed to assess the circumstance that a large part of the production of the Chinese subsidiary was absorbed by the Italian parent company. 3.1. This plea is inadmissible, since with it the taxpayer tends to bring under this profile the examination of the exceptional nature of the gratuitousness of the use of the mark, held by the CTR. In fact, the latter was well aware of the null value of the consideration for the use of the trade mark, while the fact that the trade mark itself was the subject of co-use was expressly taken into consideration by the appellate court, and the fact that its transfer free of charge in any case corresponded to a ‘valid economic reason’, constitutes a mere deduction, whereas the failure to mention the circumstance that the majority of the Chinese company’s transactions were directed to another subsidiary (this time a Brazilian one), without entering into the merits of its relevance, constitutes at most an aspect concerning the assessment of a single element of the investigation, which cannot be denounced under the profile under examination (Cass. 24/06/2020, n. 12387).” Click here for English translation Click here for other translation

In 2009 a British company – Bupa Insurance Limited – absorbed the Danish company International Health Insurance, whose shares it had acquired in 2005 and which had had a French branch since 1993. Following an audit for FY 2009 and 2010, the tax authorities considered that the French branch had passed on to Bupa Insurance Limited, free of charge, the customers associated with its insurance business in France, and considered this transaction to be an indirect transfer of profits within the meaning of Article 57 of the General Tax Code. The Administrative Court of Appeal set aside the assessment and an appeal was then filed with the Conseil d’État by the tax authorities. Judgment of the Supreme Administrative Court The Supreme Administrative Court upheld the decision from the CAA and dismissed the appeal of the tax authorities. Excerpts “3. It is clear from the statements in the judgment under appeal that the Marseille Administrative Court of Appeal held that the French branch of the Danish company International Health Insurance bore the operating risk of the insurance business carried out in France prior to 1 January 2009, but noted that prior to that date, the insurance contracts offered by this branch were governed by Danish law and did not benefit from any particular adaptation to the French situation, and that all the services offered to the insured parties, in particular the assistance service, were provided in Denmark, that the contracts concluded with the insurance brokers responsible for canvassing on French territory were partly concluded by the Danish company, that nothing in the file established that the employees of the French branch had the function of developing their own clientele for the benefit of the branch, and that the registration of French clients according to a specific quotation, although it allowed for an accounting analysis specific to clients who had concluded contracts with brokers operating on French territory, did not demonstrate that the activity of the branch would have consisted of developing such a client base. The Court deduced from these findings that the Minister did not establish that this branch had real commercial autonomy before 1 January 2009 and, consequently, the existence of a free transfer of customers leading to the presumption of an indirect transfer of profits to the British company Bupa Insurance Limited. 4. By ruling, in the light of the factors mentioned in point 3, which it assessed in a sovereign manner, that, since the French branch of the Danish company did not have genuine commercial autonomy, the fact that it had borne the operating risk inherent in the insurance business carried on in France prior to 1 January 2009 was not sufficient to establish the existence of its own customer base, In order to deduce that no free transfer of clientele, likely to characterise an indirect transfer of profits within the meaning of Article 57 of the General Tax Code, had been established, the Marseille Administrative Court of Appeal, which ruled in a sufficiently reasoned and uncontradicted judgment, did not commit an error of law or incorrectly characterise the facts before it. 5. It follows from the foregoing that the Minister has no grounds for seeking the annulment of the judgment which he is challenging. “ Click here for English translation Click here for other translation

SA SACLA, which trades in protective clothing and footwear as well as small equipment, was subject of a tax audit covering the FY 2007, 2008 and 2009. In a proposed assessment issued in December 2011, the tax authorities increased its taxable income on the basis of Article 57 of the General Tax Code, by considering that SACLA, by selling, a set of brands/trademarks held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime, had carried out an indirect transfer of profits in the form of a reduction in the selling price. In a ruling of February 2020, the Lyon Administrative Court of Appeal, after dismissing the plea of irregularity in the judgment, decided that an expert would carry out an valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation should take into consideration an agreed exemption from payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert report was filed on 8 April 2021 and after receiving the report SA SACLA asked the court to change the judgment by considering that the value of the transferred trademarks should be set at a sum of between 1.3 and 2.1 million euros and that penalties for deliberate breach should be discharged. By judgment of 19 August 2021 the court dismissed the request filed by SACLA and determined the value of the trademarks – in accordance with the expert report – to be 5,897,610 euros. “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” An appeal was then filed by SACLA with the Supreme Administrative Court Judgment of the Supreme Court The Supreme Court set aside articles 3 and 6 of the Judgment from the Administrative Court of Appeal. “Article 3: The judgment of the Lyon Administrative Court of 10 October 2017 is reversed insofar as it is contrary to the present judgment. … … Article 6: The remainder of the parties’ submissions is rejected.” Excerpts “2. In a judgment before the law of 13 February 2020, the Lyon Administrative Court of Appeal decided that, before ruling on the Sacla company’s request, an expert appraisal would be carried out in order to determine whether the sale price of the trademarks sold by that company corresponded to their value, taking into consideration, in particular, the waiver of payment of royalties for a period of five years granted by the purchasing company, Involvex, to the Sacla company. In order to fulfil the mission entrusted to them by the court, the expert and his assistant first considered four methods, then abandoned the method of comparables and the method of capitalisation of royalties, and finally retained only two methods, the method of historical costs and the method of discounting future flows, from which they derived a weighted average. It follows from the statements in the judgment under appeal that the court, after considering that the historical cost method did not allow the effect of corporation tax to be taken into account with any certainty and led to a valuation almost eight times lower than the discounted cash flow method, rejected the former method and adopted only the latter and considered that there was no need to carry out a weighting, since, in its view, the discounted cash flow method proved to be the most accurate. (3) It follows from the statements in the judgment under appeal that the court, after fixing the value of the trade marks transferred by Sacla at EUR 8 733 348 exclusive of tax, an amount also retained by the administrative court, intended to apply the discount recommended by the expert report of 7 April 2021 in order to take account of the exemption from payment of royalties granted for five years by the purchaser of the trade marks. In fixing the amount of that discount at EUR 2 400 000 exclusive of tax, whereas the expert report which it intended to apply estimated it, admittedly, at that amount in absolute terms, but by applying a rate of 37% to a value of the trade marks transferred estimated at EUR 6 500 000, the Court distorted that expert report and gave insufficient reasons for its judgment. (4) It follows from the foregoing that, without needing to rule on the other grounds of appeal, Articles 3 to 6 of the contested judgment should be set aside and, in the circumstances of the case, the State should be ordered to pay the sum of EUR 3 000 to Coverguards Sales under Article L. 761-1 of the Code of Administrative Justice.” Click here for English translation Click here for other translation

The shares in Memco Software Ltd (now CA Software Israel Ltd) was acquired by CA Inc. in the late 90’s for 400 millions. Later in 2010 all the intangibles developed by the company (software and know-how etc.) was transferred to a CA group company at a price of 111 millions. Following an audit the tax authorities issued an assessment where the value of the intangibles was instead determined to be 667 million and the additional gain was added to the taxable income. Furthermore, since payment of the determined arm’s length value had not been received by CA Software Israel Ltd, interest of 2,2585% was calculated on the amount owed and added to the taxable income in the years following the transfer. An appeal was filed by CA Software Israel Ltd. Judgment of the Court The court upheld the tax assessment and the value determined by the tax authorities. Click her for English translation

For use of a trademark “TM Corp” paid the trademark owner a royalty of 0.2 per cent of its consolidated sales plus additional royalties on sales of its overseas subsidiaries. However, no royalty was received from the overseas sales subsidiaries for their use of the trademark. The tax authorities issued an assessment, where royalties had been added to the taxable income of “TM Corp”. Not satisfied with the assessment, an appeal was filed with the Seoul Appeals Commission. In its appeal, TM Corp stated (a) Under the transfer pricing policy of “TM Corp”, the overseas sales subsidiary is only compensated for the price within the normal profit margin, and all excess profits related to overseas business are attributed to the claimant, so the economic benefits of using the trademark are also attributed to the claimant. (b) The Overseas Sales Entity is acting as a mere distributor, purchasing and selling the Products from “TM Corp” under the control and direction of “TM Corp” , while maintaining margins within the normal profitability range, and all major functions, including product research and development, purchasing, production and marketing strategy formulation, are performed by “TM Corp”. (c) Trademark royalties are paid in exchange for the economic benefits of using the trademark, and in practice, the trademark royalty rate is calculated based on the present value of the brand attributable portion of the future excess profits of the trademark (d) It is reasonable that “TM Corp” that enjoys excess profits should bear the trademark royalty rate in light of this method of calculating the trademark royalty rate. Decision The Appeals Commission was of the opinion that “TM Corp”‘s overseas sales subsidiaries are not mere distributors, but general wholesalers, and that “TM Corp” should receive royalties from the overseas sales subsidiaries for the use of the trademark rights at issue. In view of the fact that the personnel composition of “TM Corp”‘s overseas sales subsidiaries is relatively small, ranging from 6 (OOO subsidiary) to 21 (OOO subsidiary), making it difficult to consider them as general wholesalers, and that the transfer pricing reports of the OOO group alone do not indicate that “TM Corp”‘s overseas sales subsidiaries are in the same position as the overseas production subsidiaries that pay “TM Corp” the royalties for the use of the trademark in question, the decision to deduct the OOO on the grounds that the claimant did not receive the royalties for the use of the trademark in question from the overseas sales subsidiaries is erroneous.” In its decision reference was made to the paragraphs in the OECD TPG para 6.4, 6.10, 6.11, 6.13 and para. 41 in the annex to chapter 6. Click here for English translation Click here for other translation

“XZ Insurance SA” is the parent company in a group engaged in insurance activities in its various branches, both life and non-life, finance, investment property and services. An audit was conducted for FY 2013-2016 and in 2020 an assessment was issued in relation to both controlled transactions and other transactions. Among outher issued the tax authorities determined that “XZ Insurance SA” did not receive any royalty income from the use of the XZ trademark by to other entities of the group, both domestic and foreign. In the assessment the tax authorities determined the arm’s length royalty percentage for use of the trademarks to be on average ~0,5%. “In order to estimate the market royalty, the first aspect to be studied is the existence of an internal comparable or comparable trademark assignment contracts. And we have already stated that the absence of valid internal and external comparables has led us to resort to the use of other generally accepted valuation methods and techniques. In this respect, it should be noted that this situation is frequent when valuing transactions related to intangibles, and the Guidelines have expressly echoed this situation (in particular, in paragraphs 6.138, 6.153, 6.156, 6.157 and 6.162, which are transcribed in section 6.2 of this Report).” A complaint was filed by “XZ Insurance SA” Judgment of the TEAC The TEAC dismissed the complaint of “XZ Insurance SA” and upheld the tax assessment. Excerpts from the decision concerning the assessment of income for use of the trademarks by other group companies “On this issue, it is worth pointing out an idea that the complainant uses recurrently in its written submissions. The complainant considers that if there is no growth in the number of policies and premiums, it should not be argued that the use of the XZ brand generates a profit in the subsidiaries. However, as the Inspectorate has already replied, it is not possible to identify the increase in the profit of the brand with the increase in premiums, nor that the growth, in certain countries, of the entities is exclusively due to the value of the brand. Logically, increases and decreases in premiums are due to multiple factors, including the disposable income of the inhabitants of each country, tax regulations, civil liability legislation, among others, and we cannot share the complainant’s view that the brand does not generate a profit in the event of a decrease in premiums in the market. Furthermore, insofar as the enforceability of the royalty is conditioned by the fact that the assignment produces a profit for the company using the brand, there is greater evidence as to the usefulness of the brand in the main markets in which the group operates and in which it is most relevant: Spain, COUNTRY_1, Latin American countries, COUNTRY_2, COUNTRY_3, COUNTRY_4 and COUNTRY_5. Finally, one aspect that draws the attention of this TEAC is the contrast between what the complainant demands that the administration should do and the attitude of the administration in the inspection procedure. On the one hand, it demands that the administration carry out a detailed analysis of the valuation of the profit generated by the trademark for the group, but, on the other hand, there is a total lack of contribution on the part of the entity in providing specific information on the valuation of the trademark that could facilitate the task it demands of the administration. In fact, this information was requested by the Inspectorate, to which it replied that “there are no studies available on the value or awareness and relevance of the XZ brand in the years under inspection” (…) “It follows from the above that it has not been proven that the different entities of the group made direct contributions or contributions that would determine that, effectively, the economic ownership of the trademark should be shared. Therefore, this TEAC must consider, given the existing evidence, that both the legal and economic ownership of the trademark corresponds to the entity XZ ESPAÑA. In short, it is clear from the facts set out above that certain entities of the group used, and use, for the marketing of their services and products, a relevant and internationally established trademark, the “XZ” trademark, which gives them a prestige in the market that directly and undoubtedly has an impact on their sales figures, with the consequent increase in their economic profit. It is clear from the above that there was, in the years audited, a transfer of use of an established, international brand, valued by independent third parties (according to the ONFI report, according to …, between … and …. million euros in the years under review) and maintained from a maintenance point of view (relevant advertising and promotional expenses). Therefore, it is reasonable to conclude, as does the Inspectorate, that, in a transaction of this type – the assignment of the “XZ” trademark – carried out at arm’s length, a payment for the use of the intangible asset would have been made to its owner, without prejudice to the fact that the value assigned to the assignment of use of the aforementioned trademark may be disputed; but what seems clear, and this is what the TEAC states, is that it is an intangible asset whose assignment of use has value. In conclusion, the TEAC considers that the entity owning the trademark (XZ SPAIN) had an intangible asset and transferred its use, for which it should receive income; by transferring the use of the asset to group entities, both domiciled in Spain and abroad, it is appropriate to calculate that income for XZ SPAIN by applying the regime for related-party transactions.” (…) “In section 6 of the report, as we have already analysed, ONFI attempts to find external comparables, insofar as there are no internal comparables within the group, reaching the conclusion that they cannot be identified in the market analysed. Consequently, it proceeds to estimate the royalty that XZ Spain should receive, by applying other methodologies that allow an approximation to the arm’s length price, based

“Agri B.V.” is a Dutch subsidiary in an international group processing agricultural products. Following a restructuring in 2009 “Agri B.V.” had declared a profit of € 35 million, including € 2 million in exit profits. In an assessment issued by the tax authorities this amount had been adjusted to more than € 350 million. Judgment of the Court of Appeal The Court of appeal decided predominantly in favour of the tax authorities. An expert was appointed to determine the value of what had been transferred, and based on the valuation report produced by the expert the court set the taxable profit for 2009/2010 to €117 million. Excerpt “The Functional Analysis of [company 9] submitted, the Asset Sale and Purchase Agreements, the Manufacturing Services Agreements and the Consulting services and assistance in conducting business activities agreements show that there was a transfer of more than just separate assets and liabilities. The factual and legal position of [company 2] and [company 1] has changed significantly as a result of the reorganization. In this respect, the Court considered the following. 27. Whereas prior to the reorganization [company 1] operated independently under its own name on the purchasing and sales markets, independently hedged price risks and ran the full risk of good and bad luck in all its activities, after the reorganization it only provides (production) services to [company 3] for a fixed fee for a certain period of time. The claimant’s contention that already with the establishment of the [company 6] in 2000 there was far-reaching coordination as a result of which [company 1] no longer operated completely independently but only as a processing facility is only supported by written statements from employees in 2019. These statements are difficult to reconcile with the 2009 Functional Analysis, in which the [company 6] is not even mentioned. Therefore, the Court does not attach the value that the claimant wishes to see attached to these statements. That [company 3] and [company 4] were involved in the (strategic) planning of [company 1] prior to the reorganization is not surprising in view of the global activities of the group. However, no more can be deduced from the Functional Analysis than that [company 3] and [company 4] were operating in cooperation with [company 1]. That the form in which this cooperation is cast detracts from the independence of [company 1] described elsewhere in the Functional Analysis has not become plausible on the basis of the documents. 28. A similar analysis can be made of [company 2’s] activities before and after the reorganisation. Whereas prior to the reorganisation [company 2] operated independently under its own name on the purchasing and sales markets, independently hedged price risks (not only for its own benefit, but for the benefit of the activities of all group companies that it coordinated worldwide), and ran the full risk of good and bad opportunities in all its activities, after the reorganisation it only provides (production) services to [company 3] for a fixed fee for a limited period of time. 29. The claimant has stated without contradiction that the profitability of [company 4] depends to a large extent on daily global and regional price fluctuations over which [company 4] has no influence, and that the market developments are therefore analysed on a daily basis. From the description of the market expertise of [company 3] after the reorganization in the Functional Analysis (see recital 8), the Court deduces that the market expertise present in the group of [company 4], gained from hedging, taking positions on markets and contract negotiations, forms the basis for the activities of [company 3] after the reorganization. This description explicitly states that this knowledge plays a key role in improving the profitability of the Dutch oilseed business. In that connection, reference is made to the fact that [company 3] will set the price and volume guidelines for purchases and sales, conclude the contracts and take care of the hedging. It is established that all these activities were carried out by [company 1] and [company 2] prior to the reorganisation. It has not become plausible that, prior to the reorganization, [company 3] was already engaged in such similar activities that those of [company 1] and [company 2] can only be regarded as additional. During the reorganization, not only stocks, current purchase and sales contracts, currency contracts and futures, etc. were transferred to [company 3], but also dozens of employees, including traders from [company 1] and [company 2], were transferred to [company 3]. The Court therefore deems it plausible that the aforementioned market expertise was not actually invested in [company 3] itself until the transfer of these employees. 30. The prices agreed as part of the reorganisation only concern the transfer of assets and liabilities. However, in view of the foregoing, this transfer cannot be viewed separately from the concentration of market expertise at [company 3] that was previously held by [company 1] and [company 2]. The fact that the market expertise at the latter company was also supported by employees who were not employed by it does not mean that this knowledge should not be attributed to the company of [company 2]. In addition to market expertise, the power of decision regarding purchases, sales and hedging was also transferred from [company 1] and [company 2] to [company 3]. Since having market expertise, seen against the background of the aforementioned power of decision, plays a key role in the activities of [company 3] after the reorganization aimed at increasing profitability, the Court deems it plausible that a value must be attributed to it separately that has not already been reflected in the agreed prices for the assets and liabilities. The Court also sees support for this conclusion in the circumstance that the turnover and cash flow of [company 1] and [company 2] – as has not been contradicted by the claimant – decreased considerably after the reorganization, while those of [company 3] increased considerably.” Click here for English translation Click here for other translation

Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company. An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark. The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies. In 2017 the Administrative Court decided in favour of Ferragamo and dismissed the assessment issued by the tax authorities. According to the Court the tax administration had not demonstrated the existence of an advantage granted by Ferragamo France to the Italien parent, Salvatore Ferragamo SPA, nor the amount of this advantage. This decision was later upheld by the Administrative Court of Appeal. An appel was then filed by the tax authorities with the Supreme Court. The Supreme Court (Conseil d’Etat) overturned the decision and remanded the case back to the Administrative Court of Appeal for further considerations. “In ruling that the administration did not establish the existence of an advantage granted to the Italian company on the grounds that the French company’s results for the financial years ending from 2010 to 2015 had been profitable without any change in the company’s transfer pricing policy, whereas it had noted that the exposure of additional charges of wages and rents in comparison with independent companies was intended to increase, in a strategic market in the luxury sector, the value of the Italian brand which did not yet have the same notoriety as its direct competitors, the administrative court of appeal erred in law. Moreover, although it emerged from the documents in the file submitted to the trial judges that the tax authorities had established the existence of a practice falling within the provisions of Article 57 of the General Tax Code, by showing that the remuneration granted by the Italian company was not sufficient to cover the additional expenses which contributed to the value of the Salvatore Ferragamo trade mark incurred by the French subsidiary and by arguing that the latter had been continuously loss-making since at least 1996 until 2009, the court distorted the facts and documents in the file. By dismissing, under these conditions, the existence of an indirect transfer of profits to be reintegrated into its taxable income when the company did not establish, by merely claiming a profitable situation between 2010 and 2015, that it had received a consideration for the advantage in question, the court incorrectly qualified the facts of the case.” Judgment of the Administrative Court of Appeal The Administrative Court of Appeal issued a final decision in June 2022 in which the 2017 decision of the Paris Administrative Court was annulled and the tax assessment issued by the tax authorities reinstated. “Firstly, Ferragamo France argued that the companies included in the above-mentioned panel were not comparable, since most of their activities were carried out in the provinces, whereas its activity was concentrated in international tourist areas, mainly in Paris, and their workforce was less than ten employees, whereas it employed 68 people, that they are mere distributors whereas it also manages a network of boutiques and concessions in department stores, and that some of them own their premises whereas it rents its premises for amounts much higher than the rents in the provinces, the relationship between external charges and turnover thus being irrelevant. However, most of the comparables selected by the administration, which operate as multi-brand distributors in the luxury ready-to-wear sector, were proposed by Ferragamo France itself. Moreover, the company does not indicate the adjustments that should be made to the various ratios of salary and external costs used to obtain a result that it considers more satisfactory, even though it has been established that additional costs in the area of salaries and property constitute an advantage granted to Salvatore Ferragamo Spa. Furthermore, apart from the fact that it has not been established that some of the companies on the panel own their premises, Ferragamo France does not allege that excluding the companies in question from the calculation of the ratios would result in a reduction in the amount of the adjustments. Lastly, as regards the insufficient consideration of the management of a network of department stores’ boutiques and concessions, Ferragamo France does not provide any specific information in support of its allegations, whereas the comparison made by the administration is intended to assess the normality of the remuneration of its retail activity.” … It follows from all of the above that the Minister of the Economy, Finance and Recovery is entitled to argue that it was wrong for the Administrative Court of Paris, in the judgment under appeal, to discharge, in terms of duties and increases, the supplementary corporate tax assessment to which Ferragamo France was subject in respect of the financial year ended in 2010, of the withholding tax charged to it for 2009 and 2010 and of the supplementary minimum business tax and business value added contribution charged to it for 2009 and 2010 respectively. This judgment must therefore be annulled and the aforementioned taxes, in duties and increases, must be remitted to Ferragamo France.” Click here for English Translation Click here for other translation

The issue was whether “technical fees” received after a purported “transfer of patent rights” instead constituted business income – royalties – earned from continuous and recurring activities for profit and therefore subject to a higher income tax and VAT. During an audit, the tax authority found that “IP developer” had entered into a “technology transfer agreement” with a related party to transfer patent rights on four occasions between 2008 and 2020. Upon entering into the agreement, “IP developer” was to receive a “technology fee” of 5% of the annual sales of the subject technology. “IP developer” had registered a total of 78 patents, 8 design rights and 15 trademark rights, and had also entered license agreements with third parties and received income from these agreements in the form of royalty. On that basis the tax authorities considered that “IP developer” was engaged in the continuous and repeated act of licensing patent rights, and therefore the “technical fees” in question constituted business income, and the contract in question, although given the form of a transfer of patent rights, should instead be regarded as license agreement for use of patent rights. The “technical fees” received was therefore in fact royalties subject to higher tax and VAT. Judgment of the Court The Court found it reasonable to conclude that the technical fees received in exchange for the assignment of the patent rights constituted business income derived from activities carried on continuously and repeatedly, and that the payments were therefore subject to comprehensive income tax and VAT. “…In view of the above, it is difficult to conclude that it is unreasonable to expect the Claimant to declare and pay comprehensive income tax and VAT on the transfer of the patent rights at issue as business income, or that there is any justifiable reason to blame the Claimant for failing to comply with its obligations (see, e.g., Seoul Administrative Court’s judgment of 8 February 2022, 2021 No. 52112). (2) Therefore, we find no error in the decision to impose additional tax on the claimant’s failure to declare the income from the technical fee as business income and to pay the relevant comprehensive income tax and VAT.” Click here for English Translation Click here for other translation

SNC Oakley Europe, a subsidiary of SAS Oakley Holding, which belonged to the American group Oakley Inc. until its takeover in 2007 by the Italian group Luxottica, carried on the business of distributing clothing, footwear, eyewear and accessories of the Oakley brand on European territory. Following the takeover SNC Oakley Europe in 2008 transferred its distribution activity on the French market to another French company, Luxottica France, and its distribution activity on the European market to companies incorporated in Ireland, Luxottica Trading and Finance and Oakley Icon, and deducted restructuring costs in an amount of EUR 15,544,267. The tax authorities qualified these costs as an advantage granted without consideration to its sister companies, constituting, on the one hand, an abnormal management act and, on the other hand, an indirect transfer of profits within the meaning of Article 57 of the General Tax Code on the grounds that its costs had not been re-invoiced to the Italian company, the head of the group, which had taken the initiative to reorganise the distribution activity. SAS Oakley Holding filed an appeal with the administrative Court which decided in favor of the tax authorities. Not satisfied with the result, an appeal was then filed with the CAA of Lyon. Judgment of the CAA The Court of appeal set aside the decision of the court of first instance and ruled in favor of SAS Oakley Holding. Excerpt “…On the basis of such considerations, and while it is up to the administration to assess whether the transactions in question correspond to acts of normal commercial management with regard solely to the company’s own interests, the administration, In such considerations, and whereas it is up to it to assess whether the transactions at issue correspond to acts of normal commercial management with regard to the company’s own interests alone, the administration, which did not have to rule on the appropriateness of SNC Oakley Europe’s choice to sell its business assets in order to retain only the activity of promoting distribution in the network of sports shops on the French market, establishes neither the existence of an abnormal act of management nor proof of the existence of a practice that falls within the provisions of Article 57 of the General Tax Code. 7. Furthermore, it appears from the investigation that, by deed dated March 19, 2008, SNC Oakley Europe sold to the Irish company Luxottica Trading and Finance Ltd the goodwill related to its distribution activity within the “optical” network on the European market, with the exception of the French market, for the sum of EUR 17,773,551.29. By deed dated April 29, 2008, it sold to the French company Luxottica France the goodwill related to its distribution activity within the “optics” network on the French market for an amount of EUR 1,222,525.59. Finally, by deed dated 30 June 2008, it sold to the Irish company Oakley Icon Ltd the goodwill related to its distribution activity within the “sports” network on the European market for the amount of 5,857,175.13 euros. The tax authorities do not dispute that these transfer prices were in line with the market price. However, the transfer of the business assets related to the activities that SNC Oakley Europe sold necessarily had as a counterpart, as it results from the transfer contracts, the assumption by this company of the costs related to the refusal of retailers, distributors and sales agents to transfer their contracts to the transferee companies as well as the costs related to the termination of the employees’ contracts, pursuant to the provisions of Article L. 122-12 of the French Labour Code, which are reproduced in the present report. 122-12 of the French Labour Code, taken over as of 1 May 2008 in Article L. 1224-1 of this code, which only requires the transfer of current employment contracts in the event of the transfer by an employer to another employer of an autonomous economic entity, retaining its identity, and whose activity is continued and taken over by the new employer. Thus, the administration cannot be considered, by the considerations related in point 6 above on the appropriateness of the restructuring, as demonstrating that the charges in dispute should not have been borne by SNC Oakley Europe. By justifying the increase by the fact that the latter did not claim any consideration or compensation “from the party that initiated the takeover and reorganisation of the business”, i.e. the Italian company Luxottica Group, it does not demonstrate either that any advantage was granted to the sister companies, the transferees of the business. 8. It follows from the foregoing that SAS Luxottica France, as successor to SAS Oakley Holding, is entitled to argue that the Grenoble Administrative Court, in the judgment under appeal, wrongly rejected its request for discharge of the additional corporate income tax assessed against it for the financial year ending in 2008 because of the reconsideration of the assumption of responsibility by SNC Oakley Europe for the costs associated with the sale of its business assets in the amount of EUR 15,544,267.” Click here for English translation Click here for other translation

Keysight Technologies Malaysia Sdn Bhd (KTM) was incorporated in 1998 and active as a full-fledged manufacturer of various microwave devices and test instruments in which capacity it had also developed valuable intangibles. In 2008, KTM was converted into a contract manufacturer under an agreement with Agilent Technologies International s.a.r.l. and at the same time KLM purportedly transferred its intangibles to Agilent Technologies. KTM received an amount of RM 821 million which it reported as non-taxable gains form sale of intangibles in its tax return. Following an audit the tax authorities issued a notice of assessment for FY 2008 where the sum of RM 821 million had been considered revenue in nature and thus taxable under Section 4(f) of the ITA. This resulted in a claim of RM 311 million together with a 45% penalty. According to the tax authorities the transfer of technical knowhow was not actually a sale as KTM was still using the technical knowhow in its manufacturing activities. The proceeds were related to the conversion of KLM from a full-fledged manufacturer to a contract manufacturer, which had resulted in a reduction in taxable profits. “The gain on the transfer of technical knowhow was for the payment on the loss of income since it was related to the change of the Appellant’s function from a full-fledged manufacturer to a contract manufacturer which resulted in a reduction of profit margin of the Appellant after the change of the function.” KTM filed an appeal against the assessment in which it stated that proceeds from the sale of know-how were not revenue in nature and therefore not taxable under the ITA. KLM also appealed against the penalty imposed under Section 113(2) of the ITA. The appeal was dismissed by the Special Commissioners of Income Tax, and an appeal was then filed by KTM with the High Court. Judgment of the High Court The High Court Judge dismissed KTM’s appeal and upheld the decision of the Special Commissioners of Income Tax. According to the High Court KTM had “failed to support the claim that the gain from the transfer of technical knowhow (i.e. the marketing and manufacturing intangibles) by KTM to Agilent Technologies International totalling of RM821,615,000.00 is an outright sale.”. There were no documents showing that the IP rights had been registered in the name of Agilent Technologies International s.a.r.l. Hence the proceeds was considered revenue in nature and taxable under Section 4(f) of the Income Tax Act 1967(“ITA”). Click here for translation

In April 2010 Roche pharmaceutical group acquired the entire share capital of the Israeli company, Medingo Ltd, for USD 160 million. About six months after the acquisition, Medingo was entered into 3 inter-group service agreements: a R&D services agreement, pursuant to which Medingo was to provide R&D services in exchange for cost + 5%. All developments under the agreement would be owned by Roche. a services agreement according to which Medingo was to provided marketing, administration, consultation and support services in exchange for cost + 5%. a manufacturing agreement, under which Medingo was to provide manufacturing and packaging services in exchange for cost + 5. A license agreement was also entered, according to which Roche could now manufacture, use, sell, exploit, continue development and sublicense to related parties the Medingo IP in exchange for 2% of the relevant net revenues. Finally, in 2013, Medingo’s operation in Israel was terminated and its IP sold to Roche for approximately USD 45 million. The tax authorities viewed the transactions as steps in a single arrangement, which – from the outset – had the purpose of transferring all the activities of Medingo to Roche. On that basis an assessment was issued according to which the intangibles had been transferred to Roche in 2010. Based on the acquisition price for the shares, the value was determined to approximately USD 160 millions. An appeal was filed by Medingo claiming that there had been no transfer in 2010. Judgment of the District Court The court decided in favor of Medingo and set aside the 2010 tax assessment – but without passing an opinion in relation to the value of the sale of the intellectual property in 2013. Excerpts “96. The guidelines indicate that in a transaction between related parties, two different issues must be examined using the arm’s length principle: transaction characterization and transaction pricing. The characterization of the transaction must first be examined and it must be examined whether it would also have been made between unrelated parties. If the examination reveals that even unrelated parties would have entered into a transaction in the same situation, then it must be further examined whether the price paid for the assets complies with market conditions. It should be noted that in accordance with the guidelines, the characterization of the transaction should not be interfered with in violation of the agreements, except in exceptional circumstances, in which the agreements are fundamentally unfounded, or in no way allow a price to be determined according to the arm’s length principle. “Tax A tax administration should not disregard part or all of the restructuring or substitute other transactions for it unless the exceptional circumstances described in paragraph 1.142 are met”. out circumstances in which the transaction between the parties as accurately delineated can be disregarded for transfer pricing purposes. Because non-recognition can be contentious and a source of double taxation, every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult. e same transaction can be seen between independent parties in comparable circumstances… non-recognition would not apply… the transaction as accurately delineated may be disregarded, and if appropriate, replaced by an alternative transaction, where the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, thereby preventing determination of a price that would be acceptable to both of the parties taking into account their respective perspective and the options realistically available to each of them at the time of entering into the transaction “. 97. Further to this, sections 1.146 – 1.148 of the Guideline, 2022, provide two examples of cases in which the characterization of the transaction must be ignored. The second example deals with a case closer to our case, where a one-time payment is paid for R&D services and their products provided – for 20 years. 98. After examining the characterization of the transaction in our case, I found no defect in it. This is a completely different case from those mentioned in the guidelines, and it has been proven to me that transactions with a similar characterization can be conducted and are also conducted between unrelated parties. Thus, throughout the proceedings, the appellant presented various examples of similar license agreements and R&D agreements signed between unrelated parties: In Phase A, the appellant presented various transactions for comparison (P / 2 (to which the respondent did not even refer), p. 332 of the minutes (and within the appeal Of EY Germany and of Gonen in which additional transactions were presented for comparison, including transactions of similar companies in the relevant market.” “104. I also believe that it makes sense to enter into such agreements, especially in the situation of the appellant at that time. Appellant faced considerable obstacles, and her chances of success were not guaranteed, to say the least….” “105. The inter-group agreements secured the appellant’s future in the near term, and gave her more chances to survive. As the appellant’s experts clarified, small companies find it difficult to survive alone in the medical device market (see for example Section 1 of the Michlin Opinion (hence, a licensing and commercialization agreement is common practice in the field and common with contractors with experience and resources); See also paragraph 41 regarding Broadcom).” “110. In conclusion, as long as the appellant and Roche acted in accordance with the inter-group agreements, which are acceptable in industry and in the circumstances of the case there is logic in concluding them, I did not find any invalidity in the characterization of the agreements (see paragraphs 85 and 87 in the Broadcom case).” “….As stated, I believe that even if there was an intention to transfer the activity, there was no final decision until the date of the announcement. Second, and this is the

At issue was whether the acquisition value of an inventory acquired from a related company should be adjusted on the basis of Swedish arm’s length provisions or alternatively tax avoidance provisions According to the arm’s length rule in Chapter 18, Section 11 of the Income Tax Act, the acquisition value is to be adjusted to a reasonable extent if the taxpayer or someone closely related to the taxpayer has taken steps to enable the taxpayer to obtain a higher acquisition value than appears reasonable and it can be assumed that this has been done in order to obtain an unjustified tax advantage for one of the taxpayer or someone closely related to the taxpayer. Company (A) acquired a trademark from another company (B) in the same group for a price corresponding to its market value and used the acquisition value as the basis for depreciation deductions totalling approximately SEK 827 million. At B, the tax value of the trademark amounted to SEK 6 000 and B thus made a taxable capital gain. In connection with the transfer of the trademark, the shares in B were sold to a company in another group. Gains from the sale of shares was tax-free. In the group to which B belonged, the taxable capital gain on the trademark was set off against existing losses. The tax authorities adjusted the acquisition value of the trademark to SEK 6 000 and refused company A a depreciations in excess of that amount. The reason given was that the intra-group transactions had resulted in the trademark being valued higher by A than by B, without any taxation of the difference within the group, and that this had resulted in A receiving an unjustified tax advantage. The Tax Agency imposed a tax surcharge. Both the Administrative Court and the Court of Appeal rejected A’s appeals. In the Court of Appeal, the Tax Agency had, in the alternative, requested that the Tax Avoidance Act be applied to the proceedings. Judgment of the Supreme Administrative Court The Court set aside the Court of Appeal’s decisions on income tax and the tax surcharge and referred the cases back to Court of Appeal for consideration of the tax authorities alternative claim to apply the Tax Avoidance provisions to the proceedings. The Court found that only two measures could be examined in detail when assessing whether arm’s length provisions applied to A’s acquisition of the trademark: B’s sale of the trademark to A and the parent company’s external sale of the shares in B. According to the Court the first measure resulted in the entire capital gain being taxed in B and that the fact that the purchase price exceeded the taxable value did not mean that the acquisition value did not appear reasonable. The second measure was unrelated to the acquisition of the trademark by A. There were therefore no grounds for applying the arm’s length rule. Click here for English Translation Click here for other translation

On 30 November 2012, X sold its trademarks to subsidiary C which in turn sold the trademarks to subsidiary D. X and D then entered into a trademark license agreement according to which X would pay license fees to D. These license fees were deducted by X in its 2013 tax return. The tax authorities claimed that X had understated its taxabel income as the license fees paid by X to D for the use of trademarks were not related to obtaining or securing a source of revenue. The decision stated that in the light of the principles of logic and experience, the actions taken by the taxpayer made no sense and were not aimed at achieving the revenue in question, but instead at generating costs artificially – only for tax purposes. An appeal was filed by X. Judgment of the Administrative Court The court set aside the assessment of the tax authorities and decided in favor of X. According to the court taxpayers are not obliged to conduct their business in such a way as to pay the highest possible taxes, and gaining benefits from so-called tax optimization not prohibited by law, was allowed in 2013. The Polish anti-avoidance clause has only been in force since 15 July 2016. Furthermore, although it may have been possible to set aside legal effects of the transactions under the previous provision in Article 24b § 1 of the C.C.P., the Constitutional Tribunal in its verdict of 11 May 2004, declared this provision to be inconsistent with the Constitution of the Republic of Poland. Excerpts “In the Court’s view, the authorities’ findings fail to comply with the provisions applied in the case, including in particular Article 15 of the CIT Act. The legal transactions described in the appealed decision indeed constitute an optimisation mechanism. However, the realised transaction scheme is not potentially devoid of economic as well as tax rationales. The actions performed were undoubtedly also undertaken in order to achieve the intended tax result, i.e. optimisation of taxation. It should be strongly emphasised that none of the actions taken were ostensible. All of the applicant’s actions were as real as possible. Noticing the obvious reality of the above transactions, the tax authorities did not even attempt to apply the institution regulated in Article 199a of the CIT Act. The omission of legal effects of the transactions performed would probably have been possible in the former legal order, under Article 24b § 1 of the C.C.P., but this provision is no longer in force. The Constitutional Tribunal in its verdict of 11 May 2004, ref. no. K 4/03 (Journal of Laws of 2004, no. 122, item 1288) declared this provision to be inconsistent with the Constitution of the Republic of Poland. On the other hand, the anti-avoidance clause introduced by the Act of 13 May 2016 amending the Tax Ordinance Act and certain other acts (Journal of Laws 2016, item 846) has been in force only since 15 July 2016. Pursuant to the amended Article 119a § 1 o.p. – an act performed primarily for the purpose of obtaining a tax benefit, contradictory in given circumstances to the object and purpose of the provision of the tax act, does not result in obtaining a tax benefit if the manner of action was artificial (tax avoidance). Issues related to the application of the provisions of this clause in time are regulated by Article 7 of the Amending Act, according to which the provisions of Articles 119a-119f of the Act amended in Article 1 apply to the tax advantage obtained after the date of entry into force of this Act. Thus, the anti-avoidance clause applies to tax benefits obtained after the date of entry into force of the amending law, i.e. from 15 July 2016, which, moreover, was not in dispute in the present case. Considering the above, it should be pointed out that the tax authorities in the case at hand had no authority to use such argumentation as if the anti-avoidance clause applied. In the legal state in force in 2013. (applicable in the present case) the general anti-avoidance clause was not in force. This state of affairs amounts to a prohibition on the tax authorities disregarding the tax consequences of legal transactions carried out primarily for the purpose of obtaining a tax advantage.” Click here for English translation. Click here for other translation

“NGK-Insulators” is engaged in manufacturing and selling parts to the automotive industry (Diesel Particulate Filters or DPF’s) and had entered into an agreement with a group company in Poland granting it licenses to use intangibles (know-how and technology) in return for license/royalty payments. The tax authorities found that the amount of the consideration paid to “NGK-Insulators” for the licenses had not been at arm’s length and issued an assessment of additional taxes. “NGK-Insulators” filed a complaint and the district court set aside the assessment in a Judgment issued in November 2020. An appeal was then filed by the authorities with the Tokyo High Court. Judgment of the Court The Court found that the original judgment from the Tokyo District Court was appropriate and largely dismissed the appeal of the tax authorities. Excerpt (in English) “On the other hand, in this case, as already mentioned above, it is recognised that the important intangible assets and other factors overlap as multiple profit-generating factors and that excess profit (residual profit) was generated in unison while mutually influencing each other, and such circumstances, including the content of the profit-generating factors, do not apply to the comparable corporation in this case. Such circumstances, including the content of the profit-generating factors, do not apply to the comparable corporation in this case, and these profit-generating factors cannot be taken into account in the calculation of basic profit, so the Honda case should also be regarded as a different case. According to the selection criteria in this case, in selecting the comparable corporation in this case, practically, only the fact that it is an EU member state company listed in ORBIS, its industry code (automotive parts and accessories manufacturing industry), its turnover (business scale), its location, the fact that intangible assets have not been formed, etc. are taken into consideration. However, this does not mean that the comparable corporations in this case do not have comparability in the calculation of basic profit. The above argument of the respondent cannot be adopted either. (d) Therefore, without going into the rest of the points, there is no reason for the respondent’s supplementary allegation (2). … 4 Conclusion According to the above, the amount of corporation tax and the amount of additional tax for under-declaration to be paid by the appellant for each of the fiscal years in question is as shown in Appendix 7 of the original judgment, and each part of the dispositions in excess of these amounts is illegal, so the appellant’s claims are justified to this extent and the dispositions in question should be revoked to this extent, and the original judgment to the same effect is appropriate. The original judgment is appropriate, and as there is no reason for this appeal and this supplementary appeal, they are dismissed and the judgment is given in the main text.” Click here for English Translation Click here for other translation

One assessment was issued by the tax authorities where Q-Med’s taxable income for FY2011 was adjusted upwards as a result of corrections made to the valuation of trademarks transferred to a related party in Switzerland. Further assessments were issued for FY2013 and FY2014 concerning the arm’s length remuneration for the limited risk distribution of Q-Med’s products in the Chinese market. Q-Med appealed to the Administrative Court and later to the Administrative Court of Appeal. Judgment With respect to the 2011 trademark transfer, the court upheld the tax authorities’ assessment. “The Court of Appeal agrees with the administrative court’s assessment that it can be considered almost impossible that two independent traders would not have used the latest sales figures when valuing the assets in connection with a transfer of a current nature. A valuation based on these more recent figures shows that the Restylane brand had a significantly higher value than the parties assumed. The transfer of the trademarks cannot therefore be considered to have taken place at a reasonable price. The correction rule in ch. 14 Section 19 of the Income Tax Act (1999:1229) is therefore applicable. The question then is how large a correction should take place, i.e. what is an arm’s length price. The company has claimed that the Swedish Tax Agency’s calculation of the lowest possible arm’s-length price is incorrect because the Swedish Tax Agency has not used a correct tax rate when calculating the buyer’s tax benefit from the deal. According to the Court of Appeal, the Swedish Tax Agency has made a relatively cautious assessment of what constitutes an arm’s length price. Even taking into account the new tax rate, the findings speak to the lowest price an independent company would have been prepared to accept strongly because it would not have been able to go below that price in any case. In making that assessment, the Court of Appeal has particularly taken into account that there is nothing in the investigation to indicate that the company would have been in a difficult financial situation or was in dire need of selling the brands for any other reason. There is therefore no reason to determine the arm’s length price at anything other than what the Swedish Tax Agency has done. With regard to the question of whether there was a basis for post-assessment, the Court of Appeal, like the Administrative Court, considers that the incorrect decision was due to the company having provided incorrect information by using old and out-of-date factual information in its valuation of the assets. It does not appear from the company’s declaration that there were later, more current, sales figures that had not been taken into account. The information in the company’s declaration is also not such that the Swedish Tax Agency’s obligation to investigate can be considered to have been triggered. The conditions for post-assessment are thus met. The company’s appeal must therefore be rejected in this part.” With restpect to the remuneration of the Chinese distributor, the court annulled the assessment for FY 2013. “In the cases it is clear that there were no sales or other transactions that could be characterized as sales between the company and the trading company during the tax year 2013. The sales that are now relevant and which may have been made at too low a price were instead made during the tax year 2012. A correction of the company’s results due to those sales would therefore have been made that year. The Tax Agency’s appeal in this part must therefore be rejected.” But the court largely upheld the assessment for FY 2014. “The study prepared by PwC China covers the relevant time period and covers only companies active in the Chinese and Taiwanese markets. The Court of Appeal considers that study to be a suitable starting point when assessing an arm’s length price. The study states that the combined operating margin for the comparable companies is between 2.87 percent and 13.65 percent with a lower quartile of 4.13 percent and an upper quartile of 6.86 percent. An arm’s length price is generally not a fixed price, but a range. As a starting point, the entire range of the companies that have been deemed comparable must therefore be considered to constitute an arm’s length price. From PwC China’s study, however, it appears that one of the compared companies has an operating margin many times higher than the other three, which have relatively equal operating margins. The study states that the companies are indeed the ones most comparable to the trading company, but that there may still be differences that are impossible to quantify. It is also stated that if all values ​​are taken into account, the range becomes so extensive that the result may become less reliable. To increase the reliability of the study, PwC China believes that the arm’s length price should therefore be determined based on the interquartile range. Against this background, the Court of Appeal considers that an arm’s length price in this case consists of what is stated in the study to be the interquartile range. An arm’s-length price cannot therefore be lower than it corresponds to an operating margin of 6.86 percent for the buyer. This means that the company’s income for the tax year 2014 should not be increased by SEK 87,446,389 but by SEK 79,285,197 (1.1135 x (91,396,000 – (294,350,000 x 0.0686))). The company’s appeal must therefore be upheld in part in this part.” Click here for English Translation Click here for other translation

Synamedia Ltd. provides open end-to-end digital technology services to digital pay television platform operators. The company has expertise in the area of providing conditional access system, interactive systems and other software solutions as well as integration and support services for digital pay TV networks. For FY 2014-15 the company filed a tax return with nil income. The case was selected for a transfer pricing audit. The tax authorities in India accepted the arm’s length pricing determined by Synamedia, but some of the intra-group licence payments for software were considered subject to withholding taxes in India. Hence an assessment was issued. An appeal was filed by the company. Judgment of the Tax Appellate Tribunal The Tribunal decided in favor of Synamedia Ltd. and set aside the assessment. After analyzing the terms of the agreement the Tribunal concluded that the terms of agreement in the present case are similar to those considered by the Indian Supreme Court in the case of Engineering Analysis Centre of Excellence. Excerpt “The terms of the licence in the present case does not grant any proprietory interest on the licencee and there is no parting of any copy right in favour of the licencee. It is non-exclusive non-tranferrable licence merely enabling the use of the copy righted product and does not create any interest in copy right and therefore the payment for such licence would not be in the nature of royalty as defined in DTAA. We therefore hold that the sum in question cannot be brought to tax as royalty.” “Technical and commercial proposal given by the Assessee along with the STB provides technical specifications for the engineering of the relevant systems. That by itself cannot be the basis to conclude that there has been use of any copyright or that technical services have been provided. This is like providing a technical and user manual describing the system and does not imply granting of any copyright rights or transferring technical knowledge. The software is only licensed for use without granting any license.”

Ikea France (SNC MIF) had concluded a franchise agreement with Inter Ikea Systems BV (IIS BV) in the Netherlands by virtue of which it benefited, in particular, as a franchisee, from the right to operate the ‘Ikea Retail System’ (the Ikea concept), the ‘Ikea Food System’ (food sales) and the ‘Ikea Proprietary Rights’ (the Ikea trade mark) in its shops. In return, Ikea France paid Inter Ikea Systems BV a franchise fee equal to 3% of the amount of net sales made in France, which amounted to EUR 68,276,633 and EUR 72,415,329 for FY 2010 and 2011. These royalties were subject to the withholding tax provided for in the provisions of Article 182 B of the French General Tax Code, but under the terms of Article 12 of the Convention between France and the Netherlands: “1. Royalties arising in one of the States and paid to a resident of the other State shall be taxable only in that other State”, the term “royalties” meaning, according to point 2. of this Article 12, “remuneration of any kind paid for the use of, or the right to use, (…) a trade mark (…)”. As the franchise fees paid by Ikea France to Inter Ikea Systems BV were taxable in the Netherlands, Ikea France was not obligated to pay withholding taxes provided for by the provisions of Article 182 B of the General Tax Code. However, the tax authorities held that the arrangement set up by the IKEA group constituted abuse of law and furthermore that Inter Ikea Systems BV was not the actual beneficiary of the franchise fees paid by Ikea France. On that basis, an assessment for the fiscal years 2010 and 2011 was issued according to which Ikea France was to pay additional withholding taxes and late payment interest in an amount of EUR 95 mill. The court of first instance decided in favor of Ikea and the tax authorities then filed an appeal with the CAA of Versailles. Judgment of the CAA of Versailles The Court of appeal upheld the decision of the court of first instance and decided in favor of IKEA. Excerpt “It follows from the foregoing that the Minister, who does not establish that the franchise agreement concluded between SNC MIF and the company IIS BV corresponds to an artificial arrangement with the sole aim of evading the withholding tax, by seeking the benefit of the literal application of the provisions of the Franco-Dutch tax convention, is not entitled to maintain that the administration could implement the procedure for abuse of tax law provided for in Article L. 64 of the tax procedure book and subject to the withholding tax provided for in Article 182 B of the general tax code the royalties paid by SNC MIF by considering them as having directly benefited the Interogo foundation. On the inapplicability alleged by the Minister of the stipulations of Article 12 of the tax convention without any reference to an abusive arrangement: If the Minister maintains that, independently of the abuse of rights procedure, the provisions of Article 12 of the tax treaty are not applicable, it does not follow from the investigation, for the reasons set out above, that IIS BV is not the actual beneficiary of the 70% franchise fees paid by SAS MIF. It follows from all of the above that the Minister is not entitled to argue that it was wrongly that, by the contested judgment, the Versailles Administrative Court granted SAS MIF the restitution of an amount of EUR 95,912,185 corresponding to the withholding taxes payable by it, in duties, increases and late payment interest, in respect of the financial years ended in 2010 and 2011. Consequently, without there being any need to examine its subsidiary conclusions regarding increases, its request must be rejected.” Click here for English translation Click here for other translation

A restructuring that followed the acquisition of Timberland by VF Enterprises in 2011 resulted in an intra-group transfer of ownership to valuable intangibles to a Swiss corporation, TBL Investment Holdings. The IRS was of the opinion that gains from the transfer was taxable. Judgment of the US Tax Court The tax court upheld the assessment of the tax authorities. Excerpt: “we have concluded that petitioner’s constructive distribution to VF Enterprises of the TBL GmbH stock that petitioner constructively received in exchange for its intangible property was a “disposition” within the meaning of section 367(d)(2)(A)(ii)(II). We also conclude, for the reasons explained in this part IV, that no provision of the regulations allows petitioner to avoid the recognition of gain under that statutory provision.” “Because we do not “agree[] to reduce the adjustment to income for the trademarks based on a 20-year useful life limitation, pursuant to Temp. Treas. Reg. § 1.367(d)-1T,” we determine, in accordance with the parties’ stipulation, that “[p]etitioner’s increase in income for the transfer of the trademarks is $1,274,100,000.” Adding that figure to the agreed value of the foreign workforce and customer relationships that petitioner transferred to TBL GmbH and reducing the sum by the agreed trademark basis, we conclude that petitioner’s income for the taxable year in issue should be increased by $1,452,561,000 ($1,274,100,000 +$23,400,000 + $174,400,000 − $19,339,000), as determined in the notice of deficiency. Because petitioner did not assign error to the other two adjustments reflected in the notice of deficiency, it follows that respondent is entitled to judgment as a matter of law. Accordingly, we will grant respondent’s motion for summary judgment and deny petitioner’s corresponding motion.” Click here for translation

“ACQ-Group” had acquired the shares in foreign subsidiaries and financed the acquisition partially by intra group loans. Furthermore, in the years following the acquisition, goodwill amortisations were deducted for tax purposes. The tax authorities issued an assessment where the interest rate on the loans had been reduced, and where costs related to external financing and amortisations of acquired goodwill had been denied. An appeal was filed by “ACQ”. Decision of the Federal Tax Court Before the judgment was delivered the appeal filed by “ACQ” in regards of the interest rate on the intra group loans was withdrawn. “***Firma*** Services GmbH pays interest of a non-variable 9% p.a. to the affiliated (grandparent) company ***6*** for an intercompany loan (“Intercompany Loan”). As stated in the statement of facts in the enclosure, the high difference between the intercompany loan interest rate and the arm’s length interest rate is a clear violation of the arm’s length principle as defined in the OECD Transfer Pricing Guidelines and the current case law of the Administrative Court. The payments exceeding the arm’s length interest rates constitute a hidden distribution.” The Court partially upheld the appeal and amended the assessment in regards of goodwill amortisations and financing costs. Goodwill amortisation within the meaning of section 9(7) KStG 1988 and the deduction of interest on borrowed capital in the case of acquisitions of shareholdings pursuant to section 11(1)(4) KStG 1988 were introduced with the 2005 Tax Reform Act in order to make Austria more attractive as a business location. § Section 9 (7) KStG 1988 contained a “group barrier” from the beginning in order to prevent arrangements within the group or within the group of companies. Thus, goodwill amortisation is not available if the participation is acquired by a company belonging to the group or by a shareholder exercising a controlling influence. The Budget Accompanying Act 2011 restricted the deductibility of interest on borrowed capital to the extent that debt-financed group acquisitions should no longer lead to a deduction of operating costs. The explanatory notes justified this change in the law by stating that undesirable arrangements in the group, which led to an artificial generation of operating expenses, should be prevented. Click here for English translation Click here for other translation

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. An appeal was filed with the Administrative Court, In March 2020 the Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. In the opinion of the Administrative Court, the Double tax agreement prevents Belgium from taxing increases in the value of the assets from the time where the assets were owned in Sweden. Consequently, any fictitious tax cannot be credited in the Swedish taxation of the transfer. The Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. An appeal was then filed with the Administrative Court of Appeal Decision of the Administrative Court of Appeal The Court upheld the decision of the Administrative Court and the assessment issued and the penalty added by the tax authorities. The Administrative Court of Appeal found that when assessing the amount of credit to be given for notional tax on a transfer of business, the tax treaty with the other country must also be taken into account. In the case at hand, assets were transferred to the company’s Belgian branch shortly before the assets were disposed of through the transfer of business. The tax treaty limited Belgium’s taxing rights to the increase in value accrued in Belgium after the allocation and a credit could be given up to an amount equal to that tax. In the case at hand, the company had claimed a notional credit for tax on the increase in value that had taken place in Sweden before the assets were transferred to Belgium, while the transferee company in Belgium was not taxed on the corresponding increase in value when the assets were subsequently disposed of, as the Belgian tax authority considered that the tax treaty prevented such taxation. The Court of Appeal held that there were grounds for back-taxation and the imposition of a tax surcharge on the basis of incorrect information. The information provided by the company was not considered sufficient to trigger the Tax Agency’s special investigation obligation and the tax fine was not considered unreasonable even though it amounted to a very large sum. Click here for English Translation Click here for translation

An assessment was issued for FY 2017, whereby additional income tax was imposed on “GSS Ltd” in the amount of 843.344,38 €, plus a fine of 421.672,19 €, i.e. a total amount of 1.265.016,57 €. Various adjustments had been made and among them interest rates on intra group loans, royalty payments, management fees, and losses related to disposal of shares. Not satisfied with the assessment, an appeal was filed by “GSS Ltd.” Judgment of the Tax Court The court dismissed the appeal of “GSS Ltd.” and upheld the assessment of the tax authorities Excerpts “Because only a few days after the entry of the holdings in its books, it sold them at a price below the nominal value of the companies’ shares, which lacks commercial substance and is not consistent with normal business behaviour. Since it is hereby held that, by means of the specific transactions, the applicant indirectly wrote off its unsecured claims without having previously taken appropriate steps to ensure its right to recover them, in accordance with the provisions of para. 4 of Article 26 of Law 4172/2013 and POL 1056/2015. Because even if the specific actions were suggested by the lending bank Eurobank, the applicant remains an independent entity, responsible for its actions vis-à-vis the Tax Administration. In the absence of that arrangement, that is to say, in the event that the applicant directly recognised a loss from the write-off of bad debts, it would not be tax deductible, since the appropriate steps had not been taken to ensure the right to recover them. Because on the basis of the above, the audit correctly did not recognise the loss on sale of shareholdings in question. The applicant’s claim is therefore rejected as unfounded.” “Since, as is apparent from the Audit Opinion Report on the present appeal to our Office, the audit examined the existence or otherwise of comparable internal data and, in particular, examined in detail all the loan agreements submitted by the applicant, which showed that the interest rates charged to the applicant by the banks could not constitute appropriate internal comparative data for the purpose of substantiating the respective intra-group transactions, since the two individual stages of lending differ as to the nature of the transactions. (a) the existence of contracts (the bank loans were obtained on the basis of lengthy contracts, unlike the loans provided by the applicant for which no documents were drawn up, approved by the Board of Directors or general meetings), (b) the duration of the credit (bank loans specify precisely the time and the repayment instalments, unlike the applicant’s loans which were granted without a specific repayment schedule), (c) the interest rate (bank loans specify precisely the interest rate on the loan and all cases where it changes, unlike the applicant’s loans, (d) the existence of collateral (the bank loans were granted with mortgages on all the company’s real estate, with rental assignment contracts in the case of leasing and with assignment contracts for receivables from foreign customers (agencies), unlike the applicant’s loans which were granted without any collateral), (e) the size of the lending (the loans under comparison do not involve similar funds), (f) security conditions in the event of non-payment (the bank loans specified precisely the measures to be taken in the event of non-payment, unlike the applicant’s loans, for which nothing at all was specified), (g) the creditworthiness of the borrower (the banks lent to the applicant, which had a turnover, profits and real estate, unlike the related companies, most of which had no turnover, high losses and negative equity), (h) the purpose of the loan (83 % of the applicant’s total lending was granted to cover long-term investment projects as opposed to loans to related parties which were granted for cash facilities and working capital). Since, in the event that the applicant’s affiliated companies had made a short-term loan from an entity other than the applicant (unaffiliated), then the interest rate for loans to non-financial undertakings is deemed to be a reasonable interest rate for loans on mutual accounts, as stated in the statistical bulletin of the Bank of Greece for the nearest period of time before the date of the loan (www.bankofgreece.gr/ekdoseis-ereyna/ekdoseis/anazhthsh- ekdosewn?types=9e8736f4-8146-4dbb-8c07-d73d3f49cdf0). Because the work of this audit is considered to be well documented and fully justified. Therefore, the applicant’s claim is rejected as unfounded.” Click here for English translation Click here for other translation

A AG, which was founded in 2000 by researchers from the University of Applied Sciences D, has as its object the development and distribution of …, in particular in the areas of ….. It had its registered office in Zurich until the transfer of its registered office to Zug in 2021. By contract dated 16 June 2011, it was taken over by Group E, Country Q, or by an acquisition company founded by it for this purpose, for a share purchase price of EUR …. On the same day, it concluded two contracts with E-Schweiz AG, which was in the process of being founded (entered in the Commercial Register on 7 September 2011), in which it undertook to provide general and administrative services on the one hand and research and development on the other. As of 30 September 2011, A AG sold all ”Intellectual Property Rights” (IPR) and ”Non-Viral Contracts” to E-Company, a company in U with tax domicile on the island of V, for a price of EUR … for the IPR and EUR … for the ”Non-Viral Contracts”. A AG had neither identifiable operating activities nor personnel substance in the financial year from 01.10.2011-30.09.2012 following the shareholding transaction. The transfer of the tangible and intangible business assets and the personnel of A AG to other companies of the E group corresponded to an integration plan that had already been set out in a draft power point presentation of the E group prior to the acquisition of the shares. Following an audit the tax authorities issued an assessment for additional taxable net profit for the tax period 01.01.-30.09.2011 for state and communal taxes and direct federal tax, as well as taxable equity of CHF … for state and communal taxes. The assessed taxable net profit included a hidden profit distribution from the sale of the IPR and customer relationships to the E-Company. The calculations of profits was made as a discretionary estimate. An appeal was filed by A AG with the tax court which was dismissed with respect to the calculations of profits due to the sale of intangible assets at a lower price, but were upheld with respect to the transfer of functions. An appeal was then filed with the administrative court by both A AG and the tax authorities. A AG requested that the assessment of the Tax Office be dismissed with costs and compensation. The Tax Office requested the dismissal of the complaints of the obligated party and the annulment of the decision of the Tax Appeal Court and confirmation of the objection decisions with costs to be borne by the obligated party. Judgment of the Administrative Court The court ruled in favour of the tax authorities and remanded the case to the court of first instance for recalculation. Excerpts “The subject matter of the proceedings are reorganisation measures carried out after the change of shareholders, which were connected with the sale of assets of the obligated party to other group companies and the abandonment of traditional operating activities. The dispute revolves around the question of whether the obligated party provided services to related companies under conditions that do not comply with the principles of tax law regarding the appropriateness of performance and consideration between related parties and whether it therefore provided non-cash benefits or hidden profit distributions that are subject to profit tax.” “According to the correct findings of the Tax Appeals Court, to which reference can be made, the large discrepancy between the values according to the transfer price study of company I and the share purchase price and the result of the PPA was suitable to cast doubt on the correctness of the transfer price study. Even if the objections to the comparability with the PPA were true, the relevance of the PPA (wrongly disputed by the obligated party) could not be verified without the data used in its preparation. The share purchase price was agreed among independent third parties and therefore corresponded to the enterprise value at the time of the acquisition of the shareholding. According to the findings of the lower court, the transfer price study was only subsequently prepared in 2012 and is incomplete in various respects, which was not refuted by the obligated party. The Tax Appeals Court therefore concluded that the requirement had not been fulfilled and that the facts of the case had remained unclear. In particular, there had been uncertainty about the actual value of the intangible rights sold after the investigation had been completed. The Cantonal Tax Office’s assertion that the agreed purchase price for the intangible rights was too low had not been refuted and, based on the comparison with the PPA and the share purchase price, this assertion appeared very likely. The Cantonal Tax Office had therefore provided the main evidence incumbent upon it. Because the cantonal tax office had not been able to carry out its own valuation due to the lack of data, it had rightly proceeded to an estimate. According to the decision of the lower court, the discretionary assessments regarding the profit from the sale of the intangible assets were rightly made.” “Moreover, the burden of proving the obvious incorrectness of the discretionary assessment is placed on the taxpayer, which is not to be equated with a “reversal of the burden of proof” (on the whole Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 44; diesel, Kommentar DBG, Art. 132 N. 37; Zweifel et al., Schweizerisches Steuerverfahrensrecht, § 20 Rz. 22).” “An estimate is “obviously incorrect” if it cannot be objectively justified, in particular if it is recognisably motivated by penalties or fiscal considerations, if it is based on improper bases, methods or aids for estimation or if it cannot otherwise be reasonably reconciled with the circumstances of the individual case as known from the experience of life. Obviously incorrect is therefore an estimate that is based on an abusive use of the estimation discretion, i.e. is arbitrary (Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 59; dieselben, Kommentar DBG, Art. 132 N.

SA SACLA, which trades in protective clothing and footwear, as well as small equipment, was the subject of an tax audit covering the FY 2007, 2008 and 2009. In a proposed assessment issued in December 2011, the tax authorities increased its taxable income, on the basis of Article 57 of the General Tax Code, by considering that SACLA, by selling, a set of brands held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime, had carried out an indirect transfer of profits in the context of a reduction in the selling price. In a ruling of February 2020, the Lyon Administrative Court of Appeal, after dismissing the plea of irregularity in the judgment, decided that an expert would carry out an valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation should take into consideration an agreed exemption from payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert report was filed on 8 April 2021. After receiving the expert report SA SACLA asked the court to change the judgment by considering that the value of the transferred trademarks should be set at a sum of between 1.3 and 2.1 million euros and that penalties for deliberate breach should be discharged. Judgment of the Court of Appeal The court dismissed the request filed by SACLA and determined the value of the trademarks – in accordance with the expert report – to be 5,897,610 euros. Excerpt “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” Click here for English translation Click here for other translation

While living in France, Israel Daniel Amram (IDA) devised an idea for the development of a unique and efficient computerized interface that would link insurance companies and physicians and facilitate financial accounting between medical service providers and patients. IDA registered the trademark “SEPHIRA” and formed a company in France under the name SAS SEPHIRA . IDA then moved to Israel and formed Sephira & Offek Ltd. Going forward the company in Israel would provid R&D services to SAS SEPHIRA in France. All of the taxable profits in Israel was labled as “R&D income” which is taxed at a lower rate in Israel. Later IDA’s rights in the trademark was sold to Sephira & Offek Ltd in return for €8.4m. Due to IDA’s status as a “new Immigrant” in Israel profits from the sale was tax exempt. Following the acquisition of the trademark, Sephira & Offek Ltd licensed the trademark to SAS SEPHIRA in return for royalty payments. In the books of Sephira & Offek Ltd, the trademark was labeled as “goodwill” and amortized. Following an audit the tax authorities determined that the sale of the trademark was an artificial transaction. Furthermore, they found that part of the profit labeled by Sephira & Offek Ltd as R&D income (subject to a lower taxation in Israel) should instead be labeled as ordinary income. On that basis an assessment was issued. Sephira & Offek Ltd and IDA disapproved of the assessment and took the case to Court. Judgment of the Court The court ruled in favor of the tax authorities. The trademark  transaction was artificial, as commercial reasons for the transaction (other than tax optimization) had been provided. The whole arrangement was considered non-legitimate tax planning. The court also agreed that part of the income classified by the company as R&D income (subject to reduced taxes) should instead be taxed as ordinary income. Click here for English translation Click here for other translation

“Uniclick B.V.” had performed all the important DEMPE functions with regard to intangible assets as well as managing all risks related to development activities without being remunerated for this. Royalty-income related to the activities had instead been received by a foreign group company incorporated in Ireland and with its place of management in Luxembourg. In 2012, the administration sent notices of amendment to the tax return to the respondent for assessment years 2006 and 2010. The tax administration stated that “Uniclick B.V.”, through its director B.T. and employees M.C. and S.M., invented and developed the Uniclic technology in 1996 and continued to exploit it, and that the subsequent transfer of rights to the Uniclic invention to U.B. BV was simulated. The administration added the profits foregone annually by the “Uniclick B.V.”, i.e. the royalties received by F. from third party licensees less the costs borne by F., to “Uniclick B.V’s” taxable base. “Uniclick B.V.” disagreed with this and argued, among other things, that the tax administration had failed in demonstrating that the transfer of the Uniclic invention and the right to patent had been recognised by various third parties and was not fiscally motivated. “Uniclick B.V.” further disputed the existence of tax evasion and raised a number of breaches of procedural rules – including retrospective application of the DEMPE concept introduced in the 2017 Transfer Pricing Guidelines. The tax administration maintained its position and sent the notices of assessment. The assessment was appealed by “Uniclick B.V.” and the court of first instance found the appeal admissible and dismissed the assessment. This decision was then appealed by the tax authorities. Judgment of the Court of Appeal The Court of Appeal concluded that the administration failed in its burden of proof that the transfer prices applied between F. and Uniclick B.V for assessment year 2010 were not in accordance with the arm’s length principle. The administration did not show that Uniclick B.V. granted an abnormal or gratuitous advantage to F. in income year 2009, which should be added to its own profit by virtue of Article 26 WIB92. Since the existence of the abnormal or gratuitous advantage was not proven, it was not necessary to discuss the claim of the tax administration, put forward in secondary order, to determine what an arm’s length remuneration would be in respect of the functions performed, assets owned and risk born by “Uniclick B.V.” Excerpt “The discussion between the parties regarding the applicability of the OECD TPG 2017 is legally relevant notwithstanding the question whether it is decisive in the factual assessment (see factual assessment in section 4.3.3 below). The OECD guidelines are intended to provide insight into how the at arm’s length principle can be applied in practice and contain recommendations for determining transfer pricing policy. The OECD guidelines as such have no direct effect in Belgium but are used as a starting point in the area of transfer pricing. From the conclusion of the Belgian State supporting the filed subsidiary assessment, it is clear that the administration bases the valuation of the abnormal or gratuitous benefit at least partially on the 2017 version of the OECD TPG. However, the 1995, 2010 and 2017 versions of the OECD TPG differ in a number of respects and to varying degrees. These differences range from mere clarifications that do not impact on the content of previous versions to completely newly developed parts, namely recommendations that were not included, even implicitly, in previous versions. One of these completely newly developed parts that have only been included in the 2017 OECD TPG concerns the DEMPE functional analysis method as well as the method of ex post outcomes of hard-to-value intangibles, on which the Belgian State bases the subsidiary assessment at issue at least in part. The subsidiary assessment relates to the 2010 tax year/the 2009 income year in which the economic context and the regulatory framework applicable in 2009 had to be taken into account. The only OECD TPG available at the time were the 1995 OECD TPG. In the light of this, the administration is permitted to base the valuation on the 1995 OECD TPG (which, moreover, as stated above, are merely a non-binding instrument). The administration is also permitted to base the valuation on later versions of the OECD TPG (such as those of 2010), but only to the extent that these contain useful clarifications, without further elaboration, of the 1995 OECD TPG. The 2017 OECD TPG were published after 2009 and to the extent that the recommendations contained therein have evolved significantly since the 1995 OECD TPG, they cannot be applied in the current dispute. In particular, the DEMPE functional analysis method and the method of a posteriori results of intangibles that are difficult to value cannot be usefully applied in the present dispute from a temporal point of view, as these are tools that are only set out in the 2017 OECD TPG. Moreover, this position is also confirmed in Circular 2020/C/35 of 25 February 2020, which summarises and further interprets the 2017 OECD TPG, in which the administration explicitly states in para. 284 that the provisions of the Circular are in principle only applicable to transactions between related companies taking place as of 1 January 2018 (see also EU General Court judgment, 12 May 2021, cases T-816/17 and T-318/18, Luxembourg-lreland-Amazon v. Commission, para. 146- 155).” Click Here for English Translation Click here for other translation

B Restructuring LDA was a distributor within the E group. During FY 2014-2016 a number of manufacturing entities within the group terminated distribution agreements with B Restructuring LDA and subsequently entered into new Distribution Agreements, under similar terms, with another company of the group C. These events were directed by the Group’s parent company, E. The tax authorities was of the opinion, that if these transaction had been carried out in a free market, B would have received compensation for the loss of intangible assets – the customer portfolio and the business and market knowledge (know-how) inherent to the functions performed by B. In other words, these assets had been transferred from B to C. The tax authorities performed a valuation of the intangibles and issued an assessment of additional taxable income resulting from the transaction. E Group disagreed with the assessment as, according to the group, there had been no transaktion between the B and C. Furthermore the group held that there was no transaction or disposal of intangibles, as B could not sell what did not belong to it, namely the client portfolio, which had been, almost in its entirety, raised by the Group, prior to its use by B. Result reached in the arbitration tribunal The Tribunal set aside the assessment of additional income in respect of transfer of intangibles. Excerpts “…The Tax Authorities, anchored in the positions of the OECD, states in the RIT that: “From this perspective, the acceptance by B… of a distribution contract, on which the entirety of its activity depends, containing clauses that (i) harm its individual interest (Clause 11, which provides that the parties waive the right to claim damages in connection with the execution or termination of the contract) […] is a decision that differs from the rationality of pursuing self-interest that would exist in an independent company ” Indeed, the position that independent entities, when transacting with each other, would require consideration for the transfer of assets is understandable. However, it is also true that § 6.13 of the OECD Guidelines underlines that within a Group there are special relationships, with rules specific to the Group, which should not be automatically called into question for failure to respect the arm’s length principle, particularly in transactions involving intangibles. In this context, the RIT is totally silent, and should not be, on the value of the Group’s contribution to B… customers, as based on the evidence, in particular in the logic of application of the excess earnings method (and respective elements contributing to the assets under appraisal). In a transaction between independent parties, the selling party, having previously obtained such a right or intangible asset, certainly through the payment of a consideration, what it would gain is the value arising from its specific contribution, and not the total value of the asset, since a substantial part of it was not developed by it . In the present case, the profit of B… would have to be deducted the value contributed by the group for the portfolio of clients reallocated to C… . If a compensation for the reallocation of B…’s intangibles was accepted, it would also have to be analysed how it would be shared among the Group’s entities that contributed to the generation of the reallocated intangibles. In light of all the foregoing, it can be concluded that the tax acts of assessment of the CIT and the compensatory interest inherent thereto are vitiated by an error in the assumptions and can therefore be annulled on the grounds of substantive defects, by virtue of the AT’s failure to observe the legal criteria of the method for determining the comparable market price (PCM) or other alternative method. Specifically: a. The allegedly comparable price was obtained by the AT from the data of a controlled transaction, and not from a transaction between independent parties – which is not admissible under Article 63 of the IRC Code, Ministerial Order 1446-C/2001 and the OECD Guidelines that enshrine the guidelines to be followed for this purpose; b. The evaluation method used was the discounted cash-flow method, which has as general postulate that the value of an asset (or company) is based on the cash flows that it will release, updated (present value) to the moment when the transaction of that asset (or company) takes place. However, inconsistently, despite invoking that method, the AT did not rely on a projection of cash flows for a multi-year period, basing itself on the profits (and not, as stated, cash flows) of a given year – 2014 (and not, as stated, on a multi-year basis); c. Relevant comparability factors were not taken into account, such as, in the present case, the fact that the “profit” of B… should be deducted the value contributed by the Group for the portfolio of clients reallocated to C…”. Also with regard to the choice of method, in the words of the TCA Sul, in its Judgment of 25 January 2018, rendered in Case No. 06660/13 (available in http://www.dgsi.pt): “Transfer prices, as we have already stated, must be determined in accordance with the arm’s length principle (Pursuant to article 2 of Ordinance no. 1446-C/2001, the arm’s length principle is applicable (i) to controlled transactions between an IRS or IRC taxpayer and a non-resident entity; (ii) to transactions carried out between a non-resident entity and its permanent establishment, including those carried out between a permanent establishment in Portuguese territory and other permanent establishments of the same entity located outside this territory; (iii) controlled transactions carried out between entities resident in Portuguese territory subject to IRS or IRC. And by virtue of Article 58(10) of the CIRC and Article 23 of the above-mentioned Ministerial Order, the arm’s length principle is also applicable to the situations provided for therein. Maybe for this reason, the legislator consecrated an open clause regarding the methods to be adopted to determine the transfer prices (see the wording of paragraph b) of article 4 of Ministerial Order no. 1446-C/2001, of 21st March).

Transactions had taken place between Vibac S.p.A. and related foreign group companies related to use of trademarks and royalty/license payments. It was up to the Vibac S.p.A. to demonstrate that the remuneration received from related companies for use of the trademark of the products had been at arm’s length. According to the company the royalty had been set at a low price to ensure that the foreign subsidiaries were more competitive. An upward adjustment was issued by the tax authorities rejecting the taxpayer’s argument that the below market royalty was explained by the need to enable its foreign subsidiary to penetrate more effectively the US market. The tax authorities argued that such a strategy could only be justifiable in a limited period. The tax authorities determined the arm’s length royalty payment by application of the Resale Price Method (RPM). However, due to the uniqueness of the asset transferred, which hardly allows the identification of comparable transactions, the same circular, while not excluding that in some cases one of the basic criteria adopted for the transfer of tangible goods (comparison, resale or increased cost) may be applied, points out that it should not be overlooked that a licence agreement depends essentially on the forecasts of the result that may be achieved by the licensee in the territory to which the right of exploitation refers and that it is, therefore, necessary to develop subsidiary valuation methods, always inspired by the principle of the arm’s length price, i.e. the price that would have been agreed upon between independent undertakings. With regard to the determination of the fee concerning the use of intangible assets, the circular notes that it is greatly affected by the specific characteristics of the economic sector to which the intangible right refers and that, in general, it is commensurate with the turnover of the licensee, so that the reference to these indices is a valid initial data for the assessment of the “normal value”. Vibac S.p.A. did not approve of the assessment an brought the case to court. The court of first instance held in favour of the tax authorities. This decision was then appealed to Corte di Cassazione. Judgment of the Court The Italien Corte di Cassazione upheld the decision of the court of first instance and dismissed the appeal of Vibac S.p.A. Excerpts: Indeed, the rationale of the abovementioned domestic tax legislation is to be found in the safeguarding of the principle of free competition, as set out in Article 9 of the OECD Model Convention, which is to be interpreted in the light of the specific features of tax law on tax arbitrage. In fact, the rationale of the domestic tax rules referred to above is to be found in the safeguarding of the principle of free competition, set out in Article 9 of the OECD Model Convention, which provides for the possibility of taxing profits arising from intra-group transactions that have been governed by conditions different from those that would have been agreed between independent companies in comparable transactions carried out on the free market; it is therefore necessary to verify the economic substance of the transaction and to compare it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and to assess its compliance with these (Court of Cassation no. 5645 of 2020, id. no. 9615 of 2019; id. 27018 of 2017). Thus, company policy, taken in itself, is not a necessary and sufficient cause of justification for derogating from the normal value rule. Since the normal value of a transaction is a function of the economic characteristics of the transaction, the transaction from which the normal value is to be derived will concern (a) goods and services of the same kind, (b) at the same marketing stage, (c) at the same time and (d) in the same market where the goods or services were acquired. In order to achieve the highest possible degree of comparability, the second part of Article 9 TUIR states that “for the determination of normal value”, reference should be made, “as far as possible, to the price lists or tariffs of the person who supplied the goods or services”. The presence of varied intra-group commercial transactions fully captures the estimative meaning of Article 9, as well as the OECD model. The adoption of the Resale Price Method is advocated, not only by Circular 22.9.1980 (No. 32/9/2267), but also and above all by the 1995 OECD Report. Click here for English translation Click here for other translation

S GmbH was an Austrian trading company of a group. In the course of business restructuring, the real estate division of the Austrian-based company was initially separated from the “trading operations/brands” division on the demerger date of 31 March 2007. The trademark rights remained with the previous trading company, which was the parent company of the group, now M GmbH. On 25 September 2007, M GmbH transferred all trademark rights to a permanent establishment in Malta, which was set up in the same year, to which it also moved its place of management on 15 January 2008. Licence agreements were concluded between S GmbH and M GmbH, which entitle S GmbH to use the trademarks of M GmbH for advertising and marketing measures in connection with its business operations in return for a (turnover-dependent) licence fee. The tax authorities (re)assessed the corporate income tax for the years 2008 and 2009. The audit had shown that the licence fees were to be attributed in their entirety to S GmbH as the beneficial owner of the trade marks, which meant that the licence payments to M GmbH were also not to be recognised for tax purposes. S GmbH had created the trademark rights, which had been valued at a total value of €383.5 million in the course of its spin-off; the decisions regarding the use, creation, advertising and licensing of the trademark rights continued to lie with the decision-makers of the operational company advertising the revisions at the Austrian group location. The Maltese management was present at meetings with advertising agencies in Austria, but its activities did not actually go beyond support and administration. The aim of the chosen structure had been a tax-saving effect, whereby the actual taxation of the licence income in Malta had been 5%. A complaint filed by S GmbH was dismissed by the Bundesfinanzgericht. S GmbH then filed an appeal with the Verwaltungsgerichtshof. Judgment of the Court The Court dismissed the appeal of S GmbH and upheld the decision of the tax authorities Excerpts: “In the appeal case, the BFG found that the trademark rights had been created before the separation of the companies. No new trademarks had been registered during the audit period. The advertising line was determined by a two-year briefing of the group and was based on the requirements of the licensees. The brand managers of M GmbH participated in the process, but the decisions were made by the organs of the appellant, which spent over €56 million in 2008 and almost €68 million in 2009 on advertising and marketing.. In contrast, M GmbH had hardly incurred any advertising expenses, and its salary expenses were also disproportionate to the tasks of a company that was supposed to manage corporate assets of almost €400 million in trademark rights and to act as the (also economic) owner of these assets. The minimal salary expenditure, which amounted to a total of € 91,791.0 in 2008 and € 77,008.10 in 2009 and was distributed among eight persons (most of whom were part-time employees), could only be explained by the fact that all relevant trademark administration, maintenance and management tasks were, as in the past, handled either by group companies (by way of group-internal marketing activities) or by specialists commissioned by the group (trademark lawyer, advertising agency) and that M GmbH only acted in a supporting capacity. If, against this background, the BFG assumes, despite the formal retention of the legal ownership of the trademark rights, that the economic ownership of the trademark rights, which had already been created at that time, was also transferred to the appellant at the time of the spin-off, this cannot be seen as an unlawful act which the Administrative Court should take up. If, in the case at hand, the appellant nevertheless concluded licence agreements with M GmbH, the reason for this cannot have been the acquisition of the right of use to which it was entitled from the outset as the beneficial owner. The BFG was therefore correct in denying that the amounts paid by the appellant under the heading of “licence payments” were business expenses. …” Click here for English translation Click here for other translation

“NGK-Insulators” is engaged in manufacturing and selling parts to the automotive industry (Diesel Particulate Filters or DPF’s) and had entered into an agreement with a group company in Poland where it granted the Polish company a licenses to use intangibles (know-how and technology) in return for license/royalty payments. The tax authorities found that the amount of the consideration paid to “DPF Corp” for the licenses had not been at arm’s length and issued an assessment of additional taxes. “NGK-Insulators” filed a complaint which the district court. Judgment of the Court The Court ruled in favour of “NGK-Insulators” and set aside the assessment issued by the tax authorities. Click here for English Translation Click here for other translation

Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company. An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark. The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies. The Administrative Court decided in favour of Ferragamo and dismissed the assessment. According to the Court the tax administration has not demonstrated the existence of an advantage granted by Ferragamo France to Salvatore Ferragamo SPA, nor the amount of this advantage. Judgment of the Conseil d’Etat The Conseil d’Etat overturned the decision of the Administrative Court and remanded the case back to the Administrative Court of Appeal for further considerations. “In ruling that the administration did not establish the existence of an advantage granted to the Italian company on the grounds that the French company’s results for the financial years ending from 2010 to 2015 had been profitable without any change in the company’s transfer pricing policy, whereas it had noted that the exposure of additional charges of wages and rents in comparison with independent companies was intended to increase, in a strategic market in the luxury sector, the value of the Italian brand which did not yet have the same notoriety as its direct competitors, the administrative court of appeal erred in law. Moreover, although it emerged from the documents in the file submitted to the trial judges that the tax authorities had established the existence of a practice falling within the provisions of Article 57 of the General Tax Code, by showing that the remuneration granted by the Italian company was not sufficient to cover the additional expenses which contributed to the value of the Salvatore Ferragamo trade mark incurred by the French subsidiary and by arguing that the latter had been continuously loss-making since at least 1996 until 2009, the court distorted the facts and documents in the file. By dismissing, under these conditions, the existence of an indirect transfer of profits to be reintegrated into its taxable income when the company did not establish, by merely claiming a profitable situation between 2010 and 2015, that it had received a consideration for the advantage in question, the court incorrectly qualified the facts of the case.” Click here for English Translation Click here for other translation

A Colombian taxpayer had filed an unconstitutionality complaint against Article 70 (partial) of Law 1819 of 2016, “Whereby a structural tax reform is adopted, mechanisms for the fight against tax evasion and avoidance are strengthened, and other provisions are enacted.” The Constitutional Court ruled that the Colombian GAAR legislation was not unconstitutional. Click here for English translation Click here for other translation

Perrigo has lost is request for overturning a €1.64 billion tax assessment in a judicial review by the Irish High Court. The contention of the Irish Revenue is that a transaction (involving the disposal of intellectual property rights) which has been treated as part of the trade of Perrigo in its corporation tax returns should properly have been treated as a capital transaction. When treated as a capital transaction an effective tax rate of 33% is applied rather than the usual 12.5% rate. The Irish Revenue’s qualification of the transfer in question as an capital transaction results in additional taxes in the amount of €1,636,047,645. The transaction involved the sale to Biogen, in 2013, of Perrigo’s remaining 50% interest in the intellectual property relating to a pharmaceutical product sold under the brand name Tysabri which is used to treat multiple sclerosis and Crohn’s disease. “Perrigo explains that from 1st January, 2000, EPIL [Elan Pharma International Ltd] began to fund the continued development of Tysabri. It sought to find a collaboration partner with the necessary technical capability knowledge and experience in the area of multiple sclerosis research and development. Biogen was chosen as the counterparty as it satisfied both of those requirements. EPIL first disposed of 50% of its interest in the IP relating to Tysabri to Biogen in 2000 and received an upfront payment of US$15 million as reimbursement of research and development expenditure incurred to that date together with milestone payments if certain triggering events in the development process occurred. At the time of this partial disposal, Tysabri had not undergone the full clinical trials process and required “hundreds of millions of dollars of additional research and development investment with absolutely no guarantee of success”. Perrigo maintains that all income associated with the 2000 disposal was at the time treated and returned for corporation tax purposes as part of trading income and no issue was raised by the inspector or by the Revenue. Between 2004 and 2006, Tysabri was launched on the United States market, withdrawn from the market and subsequently relaunched. EPIL continued to actively manage the IP asset (representing the remaining 50% interest in the patents and the other IP relating to Tysabri) remaining in its portfolio. This was principally done through the detailed governance arrangements in the Collaboration Agreement with Biogen. It involved (inter alia) trying to establish the efficacy of the drug for the treatment of other diseases (such as Crohn’s disease) and attempting to secure licences for its release in jurisdictions outside the United States.” “Throughout this period of collaboration, EPIL did not manufacture Tysabri. Instead it was manufactured by Biogen. In April, 2013, the remaining 50% interest in the Tysabri IP was sold to Biogen with the consideration paid in the form of an upfront payment together with future contingent payments. The upfront payment received from Biogen in 2013 was included in the trading income in the EPIL tax return filed with Revenue in September, 2014 for the 2013 period. Perrigo complains that it was not until 30th October, 2018, not long before the expiry of the applicable four-year statutory limitation period, that the Revenue issued the audit findings letter in which the contention was made, for the first time, that the disposal of IP did not constitute part of EPIL’s trade.” Perrigo contends that the Revenue is incorrect in characterising the sale of the intellectual property (“the Tysabri IP”) as a capital transaction and has appealed the notice of amended assessment to the Tax Appeal Commission (“the TAC”). In the event that the present application for judicial review fails, it will be for the TAC to determine whether the disposal of the Tysabri IP was or was not a trading transaction. In the proceedings before the court, Perrigo claims that the appeal should never have to proceed before the TAC. Perrigo claims that, irrespective of the nature of the transaction, there was no legal entitlement on the part of the inspector to issue the assessment. Perrigo has instituted these judicial review proceedings challenging the legality of the notice of amended assessment on the grounds that the assessment is (a) in breach of Perrigo’s legitimate expectations; (b) so unfair as to amount to an abuse of power; and (c) that it amounts to an unjust attack on its constitutionally protected property rights. The conclusion of the Irish High Court “Perrigo has failed to establish that there is anything in the course of dealing between the parties which would make it unfair in the present case for the Revenue to exercise its statutory powers under the 1997 Act to issue an amended assessment.” “Perrigo has failed to establish a basis for either the legitimate expectation or the abuse of power/unfairness claims, it seems to me that its argument based on the Constitution must also fail.” “Perrigo has failed to establish any basis to interfere with the assessment issued in respect of the disposal of the Tysabri IP and, accordingly, its claim must be dismissed. Whether the disposal of the Tysabri IP constituted a trading or a capital transaction will now have to be resolved before the Tax Appeals Commissioner, and according to the High Court there are clearly arguments available as to why the disposal of the Tysabri IP should be regarded as a capital transaction.

Software A/S was a fully fledged Danish distributor of software an related services up until 2010 where the company was converted into a commissionaire dealing on behalf of a newly established sales and marketing hub in Switzerland. Following an audit, the Danish tax authorities issued a assessment where additional taxable income from the transfer of intangibles to Switzerland in 2010 had been determined by application of the DCF valuation model. As no transfer pricing documentation had been prepared on the transfer, the assessment was issued on a discretionary basis. Software A/S filed a complaint to the Danish Tax Court. The Tax Court found that the tax authorities did not have the authority to make a discretionary assessment. It was emphasized that the company in its transfer pricing documentation had described the relevant circumstances for the restructuring. Furthermore, the company had analyzed functions and risks and prepared comparability analyzes for transactions before and after the restructuring. However, the Tax Court found that the authorities had proved that during the restructuring, valuable intangible assets had been transferred, which were to be priced in accordance with Danish arm’s length provisions. For this purpose, the Tax Court applied the valuation model prepared by the tax authorities, but where the expected useful life of the assets was limited to only 10 years – and not indefinite as determined by the authorities – resulting in a lower value. Click here for other translation

The tax authority conducted an inspection of Groklin-Carpathians LLC, which revealed that the company had failed to file a controlled transactions report for 2015. On this basis, the tax authority issued a documentation penalty notice to the company. Groklin-Carpathians LLC appealed the decision, which was upheld by both the District Court and the Court of Appeal. The tax authorities then appealed to the Supreme Court. Judgment of the Supreme Court The Supreme Court dismissed the appeal. “Taking into account the circumstances of this case, as well as the officially expressed position of the fiscal authority on the procedure for determining the transaction as a controlled one, the panel of judges agrees with the conclusions of the courts of previous instances that the plaintiff has no statutory obligation to reflect the return of intangible assets in the TP Report, since such transactions do not in any way affect the increase or decrease of the plaintiff’s taxable object, which in turn indicates that the challenged tax notice is unfounded.” Click here for English translation Click here for other translation

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle). In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to the relevant provocations that H1 A/S has not lifted the burden of proof that the payments of royalties to the group-affiliated company G1 SA, constitutes a deductible operating expense, cf. section 6 (a) of the State Tax Act. 4.5 and par. 4.6, the national court finds that the company’s royalty payment cannot otherwise be regarded as a deductible operating expense.” Adecco appealed the decision to the Supreme Court. The Supreme Court overturned the decision of the High Court and ruled in favor of Adecco. The Supreme Court held that the royalty payments had the nature of deductible operating costs. The Supreme Court also found that Adecco A/S’s transfer pricing documentation for the income years in question was not insufficient to such an extent that it could be considered equal to lack of documentation. The company’s income could therefore not be determined on a discretionary basis by the tax authorities. Finally, the Supreme Court did not consider that a royalty rate of 2% was not at arm’s length, or that Adecco A/S’s marketing in Denmark of the Adecco brand provided a basis for deducting in the royalty payment a compensation for a marketing of the global brand. Click here for translation

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. The Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. A double taxation agreement applies between Sweden and Belgium. In the opinion of the Administrative Court, the agreement prevents Belgium from taxing the assets. Consequently, any fictitious tax cannot be deducted. The Administrative Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. Click here for translation

D AB was accused of undervaluing its income due to internal restructuring with its U.S.-based parent company, DWC, for the tax years 2013, 2014, and 2015. The Swedish Tax Agency argued that DAB had transferred its sales activities, intangible assets, and rights to product technology to DWC without receiving appropriate arm’s length compensation, thereby reducing its taxable income in Sweden. Judgment The Court agreed with the Swedish Tax Agency, finding that D AB had indeed transferred significant assets and responsibilities, including sales, marketing, and product development functions, to DWC. DAB did not retain control over these assets after restructuring, and the actual relationship between DAB and DWC was inconsistent with the terms of their distribution agreements. Regarding compensation, the Court determined that DAB did not receive an arm’s length price for these transferred assets. The Swedish Tax Agency’s valuation, based on DWC’s acquisition cost adjusted for goodwill and other operational assets, was accepted by the Court as a fair approximation of the arm’s length value. Additionally, the Court found that DAB provided development services to DWC in 2014 and 2015, which should have been compensated at an arm’s length rate, as these services directly benefited DWC’s business. The Court upheld the decision to impose additional taxes and penalties, as DAB had submitted incorrect information on its tax returns. Excerpts in English “Based on how the business had been organized after the restructuring, it was questionable, according to the Administrative Court of Appeal, whether the company had had any opportunities to maintain these parts of the distribution agreements. According to information from the company during the audit, the agreements have not reflected how it has worked in practice. The Administrative Court of Appeal considers that the terms of the agreement differ from the parties’ actual conduct. The Administrative Court of Appeal agrees with the Swedish Tax Agency’s assessment that it is important to analyze the parties’ actual actions when determining what the actual transaction is. After the restructuring, DWC has had formal control over the company’s operations in general. According to the Administrative Court of Appeal, it is also clear that the company’s intention in connection with the restructuring was that it would cease its sales activities and that contact with customers and partners would take place at DWC. During a transitional period, certain agreements remained with the company. Without Mr. S… and the other employees of the company, DWC would not have had the competence to carry out the development activities. However, in a formal sense, it is clear that DWC has had control over the product development activities and the important decisions regarding the exploitation of the intangible assets and has had the real ability to prevent others from using the asset. It has also emerged that Mr. S.. considered that DWC made crucial strategic decisions which he considered to be manifestly bad. He also argued that, although he had a key role in the company, he had no control over the decisions. He also argued that DWC was responsible for marketing, market strategy and market risks. According to the Court of Appeal, it is also clear that the sales activities have been completely transferred to DWC.” “According to the Administrative Court of Appeal, the purchase price paid by DWC on the transfer date is a reasonable starting point for the calculation of an arm’s length price of the transferred business. The Administrative Court of Appeal considers that the valuation that led DWC to make a write-down cannot be considered to constitute an independent and commercial valuation. Moreover, the write-down in question was made more than a year after the acquisition of the company. However, in order for the purchase price to be considered a reasonable starting point for the calculation of an arm’s length price of the transferred business, it should be required that in principle all value in the company has been transferred to DWC and that no actual value has remained in the company. Otherwise, any value remaining in the company should be set off against the purchase price paid by DWC on the date of transfer. Although the company has argued that there was “know-how” in the company, it has not provided any further arguments in this respect. According to the Administrative Court of Appeal, it has not been established that there was a higher remaining value in the company to be set off against the amount in question than that calculated by the Swedish Tax Agency. The Administrative Court of Appeal considers that the arm’s length price for transferred sales activities including intangible assets and transferred rights to product technology amounts to the amount that the Swedish Tax Agency, after certain adjustments, has arrived at in its review decision” Click here for English translation Click here for other translation

Toyota Kirloskar Auto Parts Private Limited manufactures auto parts and sold them to Toyota Kirloskar Motors Limited, another Indian corporation in the Toyota Group. In FY 2013-14 Toyota Kirloskar Auto Parts Private Limited paid a 5% royalty to the Japanese parent Toyota Motor Corporation for use of know-how. The royalty rate had been determined by application of the TNMM method. The Indian tax authorities did not agree with the choice of method and argued that the most appropriate method was the Profit Split Method (PSM). Judgment of the Tax Appellate Tribunal The Tribunal decided in favor of Toyota Kirloskar Auto Parts and set aside the assessment. Excerpt “17. It is clear from the above OECD guidelines that in ‘order to determine the profits to be split, the crux is to understand the functional profile of the entities under consideration. Although the comparability analysis is at the “heart of the application of the arm’s length principle”, likewise, a functional analysis has always been a cornerstone of the comparability analysis. In the present case the Assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. It may be true that the Assessee aggregated payment of royalty with the transaction of manufacturing as it was closely IT(TP)A Nos.1915/Bang/2017 & 3377/Bang/2018 linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Further, the Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. 18. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. The decision of the Tribunal in the earlier AY 2008-09 has also been upheld by the Hon’ble High Court of Karnataka in ITA No.104/2015, judgment dated 16.7.2018, which was an appeal of the revenue against the order of Tribunal for AY 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed. 19. The facts in AY 2014-15 are identical and the reasoning given in AY 2013-14 will equally apply to the AY 2014-15 also and the TPO is directed to compute the ALP for AY 2014-15 by applying TNMM as the MAM , after affording due opportunity to the assessee. 20 The other issues with regard to the objections regarding the manner in which ALP was determined by applying PSM as the MAM does not require any adjudication because of the conclusion that TNMM is the MAM.” Click here for other translation

Results in a Danish company engaged in distribution of pharmaceuticals were significantly below the arm’s length range of net profit according to the benchmark study, but by disregarding annual goodwill amortization of DKK 57.1 million, the results were within the arm’s length range. The goodwill being amortized in Pharma Distributor A A/S had been determined under a prior acquisition of the company, and later – due to a merger with the acquiring danish company – booked in Pharma Distributor A A/S. The main question in the case was whether Pharma Distributor A A/S were entitled to disregard the goodwill amortization in the comparability analysis. The national tax court had ruled in favor of the company, but the national court reached the opposite result. Thus, the National Court found that the goodwill in question had to be regarded as an operating asset, and therefore the depreciation had to be regarded as operating expenses when calculating the net profit (EBIT margin). In 2017 the Danish tax tribunal found in favor of Pharma Distributor A A/S However, The Danish National Court found that the controlled transactions had not been priced in accordance with the arm’s length principle in section 2 (2) of the Tax Assessment Act. 1, and that the tax authorities was therefore basically justified in assessing the income of Pharma Distributor A A/S. But there was no basis for adjustment for the income year 2010, where the EBIT margin of the company (including goodwill amortization) was within the interquartile range of the benchmark. The National Court further found that Pharma Distributor A A/S had not demonstrated that the companies whose results were included in the benchmark possessed goodwill that was simply not capitalized and which corresponded approximately to the value of the goodwill in Pharma Distributor A A/S. Therefore, the National Court did not find that adjusting for goodwill amortization in the comparability analysis, would make the comparison more correct. Pharma Distributor A A/S also claimed that special commercial conditions (increased price competition, restructuring , etc.) and not incorrect pricing had led to lower earnings. The Court found that such conditions had not been demonstrated by the company. On this basis, the National Court found that the tax authorities was entitled to make the assessment of additional income in FY 2006-2009, but not for FY 2010. The court found that, when adjusting the taxable income, an individual estimate must be made for each year, based on what income the defendants could be assumed to have obtained if they had acted in in accordance with the arm’s length principle. The court referred the case for re-assessment of the taxable income for FY 2006-2009. Click here for translation

Brewery S.A. had transferred its trademarks to a subsidiary in Cyprus and in subsequent years paid royalties/licences for the use of the trademarks. The tax authorities had disregarded deductions of the royalty/licence payments for tax purposes, and the resulting assessment of additional taxable income was later upheld by the District Administrative Court. Judgment of the Supreme Administrative Court In its judgment, the court stated that it is beyond the scope of the legal possibilities of tax authorities to assess legal actions and to derive – contrary to their content – negative tax consequences for the taxpayer, if such authorisation does not directly result from a tax provision. The court referred to the position contained in the NSA’s judgment of 16 December 2005, in the light of which, the tax authorities have no grounds under tax law for questioning effectively concluded agreements, even if their purpose is to reduce the tax burden. Seeking to pay the lowest possible taxes is not prohibited by law; it is, as it were, a natural right of every taxpayer. It is up to the tax authorities and then the administrative court to assess how effectively (in accordance with the law) these aspirations are realised by a particular entity . In conclusion, the NSA stated that in the light of the above remarks and the factual circumstances of that case, it is reasonable to conclude that, from the perspective of the content of Article 15(1) of the TAX Act, only the assessment of the transaction between the appellant company and the Cypriot company, connected with determining whether the expenditure incurred on account of the concluded sub-license agreement fulfils the prerequisites resulting from that provision, and in particular whether there is a causal link between the incurred expenditure and the obtained (objectively obtainable) revenue or the preservation or protection of a source of revenue, is of significance. The court gave a positive answer to this question. Since the transaction of selling copyright to trademarks was legally effective, it means that the ownership of these rights was transferred to another entity, even if it is a company controlled by a domestic company. Therefore, if the exclusive holder of the rights to use certain property rights is another entity than the applicant company, and in order to maintain the current domestic production, it was necessary to use the right to these trademarks, even in the form of a sub-licence (the acquisition of which was also not questioned) and production and sale of goods with these trademarks was carried out, it is difficult not to see the connection of the incurred expense with the source of revenue, which is economic activity, and the fact that the expense was incurred in order to obtain revenue. The Court stated that the tax authorities did not make use in that case of the possibility provided in the legal state of 2011 by the provision of Article 11 of the tax act. This regulation, concerning the possibility of correcting the prices applied between related parties, in fact introduced an exception to the principle of determining income taking into account the prices applied between counterparties. Its purpose was and is to prevent the erosion of the tax base through the harmful transfer of profits between related parties. Click here for English Translation Click here for other translation

In this case, the Gothenburg Court of Appeal reviewed the tax treatment of a 2012 sale of the “L” trademark by E AB, a Swedish company, to its Dutch affiliate SGH BV. The main issues were whether E AB should be taxed on the full sales revenue and whether the sale was conducted at an arm’s length price. E AB argued that it held only a minor economic interest in the trademark and should be taxed accordingly. The company also claimed that the price should not be adjusted for the seller’s tax effects, as this was not an arm’s length consideration. E AB referenced Cost Sharing Agreements (CSAs) to justify its lower taxable income, arguing that these agreements represented contributions from other subsidiaries to the trademark’s value. Judgment The court found that E AB was both the legal and economic owner of the trademark at the time of sale, given its control and investment in the brand, and ruled that E AB should be taxed on the entire sales revenue. The court rejected the CSAs as evidence of shared ownership, noting that they merely allowed subsidiaries to use E AB’s brand assets for a fee and did not support a transfer of ownership rights. Additionally, the court ruled that an arm’s length price should reflect both the buyer’s and seller’s tax effects, following OECD guidelines that advise considering all relevant economic factors in a transaction. The court upheld the Swedish Tax Agency’s adjustment, finding that the sale price did not cover the full market value, including the seller’s tax cost. This undervaluation resulted in a SEK 117 million income adjustment for E AB, which was added to its taxable income. Click here for English translation Click here for other translation

“Metal Plating Corp” is engaged in manufacturing and selling plating chemicals and had entered into a series of controlled transactions with foreign group companies granting licenses to use intangibles (know-how related to technology and sales) – and provided technical support services by sending over technical experts. The company had used a CUP method to price these transactions based on “internal comparables”. The tax authorities found that the amount of the consideration paid to “Metal Plating Corp” for the licenses and services had not been at arm’s length and issued an assessment where the residual profit split method was applied to determine the taxable profit for the fiscal years FY 2007-2012. “Metal Plating Corp” on its side held that it was inappropriate to use a residual profit split method and that there were errors in the calculations performed by the tax authorities. Judgment of the Court The Court dismissed the appeal of “Metal Plating Corp” and affirmed the assessment made by the Japanese tax authority. On the company’s use of the CUP method the Court concluded that there were significant differences between the controlled transactions and the selected “comparable” transactions in terms of licences, services and the circumstances under which the transactions were took place. Therefore the CUP method was not the most appropriate method to price the controlled transactions. The Court recognised that “Metal Plating Corp” had intangible assets created by its research and development activities. The Court also recognised that the subsidiaries had created intangible assets by penetrating regional markets and cultivating and maintaining customer relationships. The Court found the transactions should be aggregated and that the price should be determined for the full packaged deal – not separately for each transaction. Click here for English Translation Click here for other translation

SA Sacla, a French company trading in protective clothing and footwear, as well as small equipment, was audited for fiscal years 2007, 2008 and 2009. The French tax administration issued an assessment, considering that SA Sacla by selling brands owned by it for an amount of 90,000 euros to a Luxembourg company, Involvex, had indirectly transfered profits abroad. Due to inconclusive results of various valuations presented by the tax authorities and the taxpayer, an expert opinion was ordered by the Court on the question of whether the price of the brands sold by SA Sacla to the company Involvex had been at arm’s length. DECIDES: Article 1: Before ruling on the request of SA SACLA, an expert will carry out an assessment in order to determine whether the selling price of the brands sold by SA SACLA corresponds to their value, taking into account the exemption payment of royalties for a period of 5 years granted by the company Involvex to SA SACLA. Click here for translation

Altera has asked the US Supreme Court for a judicial review of the Decision from the U.S. Court of Appeals for the Ninth Circuit over the validity of Internal Revenue Service regulations  that requires related companies to share the cost of stock-based employee compensation when shifting their intangible assets abroad applying US Cost Sharing regulations. In the decision a divided panel in the Court of Appeal upheld the regulation as “permissible” and therefore entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). In the Petition Altera presents three questions: 1. Whether the Treasury Department’s regulation is arbitrary and capricious and thus invalid under the Administrative Procedure Act, 5 U.S.C. 551 et seq. 2. Whether, under SEC v. Chenery Corp., 332 U.S. 194 (1947), the regulation may be upheld on a rationale the agency never advanced during rulemaking. 3. Whether a procedurally defective regulation may be upheld under Chevron on the ground that the agency has offered a “permissible” interpretation of the statute in litigation. Under the third bullit Altera argues that the Chevron doctrin was applied erroneously by the Court of Appeals. The Chevron doctrin states that an agency is allowed a “permissible” interpretation where statutes are not sufficiently clear. Excerps from the 1984 Chevron case: "In these cases the Administrator's interpretation represents a reasonable accommodation of manifestly competing interests and is entitled to deference: the regulatory scheme is technical and complex, the agency considered the matter in a detailed and reasoned fashion, and the decision involves reconciling conflicting policies. Congress intended to accommodate both interests, but did not do so itself on the level of specificity presented by these cases. Perhaps that body consciously desired the Administrator to strike the balance at this level, thinking that those with great expertise and charged with responsibility for administering the provision would be in a better position to do so; perhaps it simply did not consider the question at this level; and perhaps Congress was unable to forge a coalition on either side of the question, and those on each side decided to take their chances with the scheme devised by the agency. For judicial purposes, it matters not which of these things occurred. Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges' personal policy preferences. In contrast, an agency to which Congress has delegated policymaking responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration's views of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make such policy choices-resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to agency charged with the administration of the statute in light of everyday realities. When a challenge to an agency construction of a statutory provision, fairly conceptualized, really centers on the wisdom of the agency's policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges - who have no constitu­ency - have a duty to respect legitimate policy choices made by those who do. The responsibilities for assessing the wisdom of such policy choices and resolving the struggle between competing views of the public interest are not judicial ones: "Our Constitution vests such responsibilities in the political branches." TVA v. Hill, 437 U. S. 153, 195 (1978). We hold that the EPA's definition of the term "source" is a permissible construction of the statute which seeks to accommodate progress in reducing air pollution with economic growth. "The Regulations which the Adminstrator has adopted provide what the agency could allowably view as ... [an] effective reconciliation of these twofold ends" United States v. Shimer, 367 U. S., at 383." Altera ends the partition with the following statement: “The Ninth Circuit permitted a startling departure from accepted rules of administrative law, and its expansion of Chevron validates the concerns many Justices have raised about that doctrine. The Tax Court rejected the agency’s position in an opinion that was striking for its “uncommon unanimity and severity of censure,” yet the court of appeals simply “assume[d] away” the regulation’s problems, “send[ing] a signal that executive agencies can bypass proper notice-and- comment procedures as long as they come up with a clever post-hoc rationalization by the time their rules are litigated.” App., infra, 160a, 165a, 167a (Smith,  J., dissenting from denial of rehearing). It is time for this Court to step in.”

The Swedish Tax Agency’s had increased G AB’s income from business activities by SEK 544 million for the 2014 tax year. The issue stemmed from an internal transfer of intellectual property (IP) rights from G AB to its U.S. subsidiary, GRP, at a price the Tax Agency deemed undervalued due to G AB not accounting for goodwill associated with the transferred assets. G AB argued that the goodwill and synergies, identified in an earlier external acquisition by parent company B, did not relate to the transferred IP and that reduced sales and an eventual goodwill write-down suggested a decline in asset value. Judgment The court found that goodwill indeed applied to the transferred assets and agreed with the Tax Agency’s use of the 2013 external acquisition price as a comparable benchmark, following OECD transfer pricing guidelines. The court also supported the Tax Agency’s estimated goodwill value of USD 82.5 million. Additionally, the court confirmed the tax surcharge, ruling that G AB’s omission of goodwill in its valuation constituted an incorrect statement, not merely a subjective valuation. Click here for English translation Click here for other translation

The main activity in a Danish branch of a German group was development, licensing and services related to engines that were being produced by external licensees. Under a restructuring of the group, it was decided that royalty income for a particular engine type previously received by the Danish branch should be transferred to the German company. The Danish branch received a compensation corresponding to the net earnings for a two-year notice period. The tax administration increased the taxable income of the branch claiming that the branch had made valuable contributions to the development of the type of engine in question and thereby obtained co-ownership. The Tax Tribunal found that valuable intangible assets had been transferred, The decision was based on prior contractual arrangements and conduct of the parties.  Click here for other translation

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. “Section 2 of the Tax Assessment Act. Paragraph 1 states that, when calculating the taxable income, group affiliates must apply prices and terms for commercial or economic transactions in accordance with what could have been agreed if the transactions had been concluded between independent parties. SKAT does not consider it in accordance with section 2 of the Tax Assessment Act that during the period 2006 to 2009, H1 A/S had to pay royalty to G1 SA for the right to use trademark, “know-how intangibles” and “ international network intangibles ”. An independent third party, in accordance with OECD Guidelines 6.14, would not have agreed on payment of royalties in a situation where there is a clear discrepancy between the payment and the value of licensee’s business. During the period 2006 to 2009, H1 A/S did not make a profit from the use of the licensed intangible assets. Furthermore, an independent third party would not have accepted an increase in the royalty rate in 2006, where the circumstances and market conditions in Denmark meant that higher profits could not be generated. H1 A/S has also incurred considerable sales and marketing costs at its own expense and risk. Sales and marketing costs may be considered extraordinary because the costs are considered to be disproportionate to expected future earnings. This assessment takes into account the licensing agreement, which states in Article 8.2 that the termination period is only 3 months, and Article 8.6, which states that H1 A/S will not receive compensation for goodwill built up during the contract period if the contract is terminated. H1 A/S has built and maintained the brand as well as built up “brand value” on the Danish market. The company has contributed to value of intangible assets that they do not own. In SKAT’s opinion, an independent third party would not incur such expenses without some form of compensation or reduction in the royalty payment, cf. OECD Guidelines 6.36 – 6.38. If H1 A/S was not associated with the trademark owners, H1 A/S would, in SKAT’s opinion, have considered other alternatives such as terminating, renegotiating or entering into more profitable licensing agreements, cf. OECD Guidelines 1.34-1.35. A renegotiation is precisely a possibility in this situation, as Article 8.2 of the license agreement states that the agreement for both parties can be terminated at three months’ notice. The control of the group has resulted in H1 A/S maintaining unfavorable agreements, not negotiating better terms and not seeking better alternatives. In addition, SKAT finds that the continuing losses realized by the company are also due to the Group’s interest in being represented on the Danish market. In order for the Group to service the global customers that are essential to the Group’s strategy, it is important to be represented in Denmark in order to be able to offer contracts in all the countries where the customer has branches. Such a safeguard of the Group’s interest would require an independent third party to be paid, and the company must therefore also be remunerated accordingly, especially when the proportion of global customers in Denmark is significantly lower than in the other Nordic countries.“ Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle) . In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to

In 2012 Broadcom Corporation acquired all the shares of Broadlight Inc, another US corporation which owned a subsidiary in Israel, for around $200 million. Three months later, the subsidiary in Israel sold its IP to a group company for $59.5m and then an agreement was entered according to which the subsidiary going forward would supply R&D, marketing and support services to the other group companies for a cost plus fee. Based on these facts the Israeli tax authorities issued an assessment equivalent to $168.5m. The tax authorities found that the full value of the company in Israel had been transferred. The tax assessment was brought to court where Broadcom claimed that the tax authorities had re-characterised the transaction and that the onus of proof was on the tax authorities to justify the value of $168.5m. The District Court held that all the values in the Israeli subsidiary had been transferred and ruled in favor of the tax authorities. This ruling was upheld by the Supreme Court. Click here for translation

In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee Amazon.com, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See 26 U.S.C. § 482. Tax regulations required that the buy-in payment reflect the fair market value of Amazon’s pre-existing intangibles. After the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, the Internal Revenue Service performed its own calculation, and Amazon filed a petition in the Tax Court challenging that valuation. At issue is the correct method for valuing the preexisting intangibles under the then-applicable transfer pricing regulations. The Commissioner sought to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of innovcation, the value of workforce in place, going concern value, goodwill, and growth options. The panel concluded that the definition of “intangible” does not include residual-business assets, and that the definition is limited to independently transferrable assets. The Court of Appeal concluded “We therefore agree with the tax court that the former regulatory definition of an “intangible” does not include residualbusiness assets.” The Court thus affirmed the prior decision of the tax court

In 2013, Philips Uruguay S.A. agreed to sell of its business division related to the marketing of audio and video products to another entity within the group, Woox Innovations Sucursal Uruguay. The related parties had agreed on a price of USD 2,546,409. Philips Uruguay, had not include the transaction in its transfer pricing documentation as – according to the company – the transfer pricing regime in Uruguay was only applicable to transactions involving different jurisdictions (transactions with foreign entities) – unless the domestic transactions were between local entities taxed under different local tax regimes. The tax administration disagreed that purely domestic transactions were not subject for to transfer pricing rules in Uruguay. They also disagreed with the arm’s length nature of the agreed price of USD 2.546.409 and instead estimated an arm’s length value of USD 5,063,294. Consequently, an assessment was issued resulting in an additional tax of USD 630.000. Philips Uruguay disagreed with the assessment and brought the case to court. Judgment of the Court The court agreed that transfer pricing rules in Uruguay are also applicable to purely domestic transactions. However, the tax assessment was annulled by the court, as the price agreed between the parties was considered to have been at arm’s length. Click here for English translation Click here for other translation

In FY 2005 Shell Timur Sdn Bhd in Malaysia had sold its economic rights in trademarks to a group company, Shell Brands International AG. The sum (RM257,200,000.00) had not been included in the taxable income, but had – according to Shell – been treated as a capital receipt which is not taxable. The tax authorities conducted a transfer pricing audit beginning in June 2015 and which was finalized in 2018. Following the audit an assessment was issued where the gain had been added to the taxable income of Shell Timur Sdn Bhd. According to the tax authorities they were allowed to issue the assessment after the statutory 5-year time-bar in cases of fraud, wilful default or negligence of a taxpayer. An application for leave was filed by Shell. Courts decision The Court dismissed the application. Excerpt “I am, by the doctrine of stare decisis, bound by these pronouncements of the Court of Appeal and Federal Court. Hence, it is crystal clear that in matters concerning the raising of assessments of tax under section 91(1) or 91(3) of the ITA, challenges by the tax payer are best left to be dealt by the SCIT, unless of course if there are any exceptional circumstances. (27) In this case, I do not find exceptional circumstance that would warrant leave to be granted for judicial review. Which would then make this application an abuse of process. Wherefore, the I dismissed the application for leave.”

The question at issue was whether a tax adviser at Crop BV had acted in accordance with the requirements of a reasonably competent and reasonably acting adviser when advising on the so-called royalty routing and its implementation and when giving advice on trading. Click here for translation

“Drinks Distributor S.A.” was involved in purchase, sale and distribution of alcoholic beverages in Mexico. “Drinks Distributor s.a” had entered into a non-exclusive trademark license agreement with a related party for the sale of its product. Following a restructuring process, the related party moved to Switzerland. Following an audit the Mexican tax administration, determined that deductions for marketing and advertising costs related to brands and trademarks used under the licensing agreement, were not “strictly indispensable” and therefore not deductible, cf. requirement established by the Income Tax Law in Mexico. Drinks Distributor S.A on its side held that the marketing and advertising costs were strictly indispensable and that the tax deductions should be accepted. The dispute ended up in the Federal Court of Administrative Justice. Judgment: The Court determined what should be understood as “strictly indispensable“. To establish this concept the purposes of the specific company and the specific costs must first be determined – in particular that the costs are directly related to the activity of the enterprise the costs are necessary to achieve the aims of its activity or the development of this activity; in the absence of the costs, the commercial activity of the taxpayer will be hindered. “ADVERTISING AND PUBLICITY EXPENSES. THE DEDUCTION IS INAPPROPRIATE, AS THEY ARE NOT STRICTLY INDISPENSABLE FOR THE COMPANY SELLING PRODUCTS UNDER TRADEMARKS WHOSE USE AND EXPLOITATION WERE GRANTED TO IT BY MEANS OF A NON-EXCLUSIVE LICENSE AGREEMENT. Article 31, section I of the Income Tax Law provides that the deductions must comply with various requirements, including that they are strictly indispensable for the purposes of the taxpayer’s activity; the latter being understood to mean that said expenses are directly related to the activity of the company, that they are necessary to achieve the purposes of its activity or the development thereof and that if they do not occur they could affect its activities or hinder its normal operation or development. Therefore, in order to determine whether such expenditure satisfies that requirement, account must be taken of the aims of the undertaking and the specific expenditure itself. Therefore, if a company has as its object the sale of a certain product, and to this end has entered into a non-exclusive license agreement for the use and exploitation of intangibles, which grants it the use and exploitation of a brand name to sell this product; The latter is prevented from deducting advertising and publicity expenses, since, as it does not own the trademark it uses to sell its product, the aforementioned expenses – understood as the acts through which something is made known in order to attract followers or buyers through the means used to disseminate or spread the news of things or facts – are not strictly indispensable for the development of its activity, as they increase the value of the trademark for the benefit of a third party; That is to say, the owner of the trade mark, since they are not aimed at the article, but at positioning the trade mark on the market, in order to give it notoriety, fame and recognition among the consumer public.” Click here for English Translation Click here for other translation

Intangibles had been transferred from a Danish subsidiary to a US parent under a written agreement. According to the agreement the Danish subsidiary – which had developed and used it’s own intangibles – would now have to pay royalties for the use of trademarks, know-how and patents owned by the US parent. The tax authorities had issued an assesment on the grounds that the majority of the Danish company’s intangibles had been transferred to the US parent. In the assesment the value of the intangibles had been calculated based on the price paid when the US group acquired the shares in the Danish company. H Group argued that the transferred intangibles no longer carried any value and that the Danish company now used intangibles owned by the US group. The Tax Tribunal found that tax authorities had been entitled to make an assessment as the transaction had not been described in the Transfer pricing documentation. However, the Tribunal considered that the valuation based on the price paid when the US group acquired the shares in the Danish company was too uncertain and instead applied a relief-from-royalty method.  Click here for translation

In January 2013 the Swiss company Normet International Ltd acquired all the shares in the Norwegian company Dynamic Rock Support AS (now Normet Norway AS) for a price of NOK 78 million. In February 2013 all intangibles in Dynamic Rock Support AS was transfered to Normet International Ltd for a total sum of NOK 3.666.140. The Norwegian tax authorities issued an assessment where the arm’s length value of the intangibles was set at NOK 58.2 million. The Court of Appeal upheld the tax assessment issued by the tax authorities and rejected the appeal. Click here for translation

The question in the case was whether Cytec Norway KS (now Allnex Norway A/S) had paid an arm’s length price for an intra-group transfer of intangible assets in 2010. Cytec Norway KS had set the price for the accquired intangibles at NOK 210 million and calculated tax depreciations on that basis. The Norwegian tax authorities found that no intangibles had actually been transferred. The tax Appeals Committee determined that intangibles had been transferred but only at a total value of NOK 45 million. The Court of appeal upheld the dicision of the Tax Appeals Committee, where the price for tax purposes was estimated at NOK 44.9 million. Click here for translation

In a case on hidden distribution of profits, the Luxembourg tax authorities stated the following on the issue of valuation methods for intangible assets (a patent): “…the evaluation of an intellectual property right is a rather complex subject; that evaluation reports from “independent” experts in this field are often rather subjective; whereas, therefore, reference should be made to a neutral and recognized body for the evaluation of patents, in this case WIPO, which proposes three different methods of valuation, including (a) the cost method, (b) the revenue method, as well as (c) the market method; that the first method of evaluation is to be dismissed from the outset in view of the absence of research and development expenses reported by the Claimant; that the second method is based on the future revenues of the patent invention; therefore, there must be a large enough amount of data to predict future revenues over the life of the patent, which is not the case here, as the tax dispute has only the royalties collected for the years 2013 and 2014; that, finally, the market method consists in the search for a similar patent whose price is known because it has already been the subject of a transaction; whereas, however, this method raises two major problems, on the one hand, the collection of data on patents already having a price because they have been the subject of a transaction, and, on the other hand, the uniqueness and the rarity of each patent that has at least a small similarity; that in view of this finding, a precise and fair evaluation proving impossible, the present instance sets the operating value of the patent of invention on January 1 , 2014 to 1.000.000 euros under § 217 AO…“ Click here for translation

A GmbH (“Sport Data GmbH”) was founded in 2006 as a wholly-owned subsidiary of A Holding AG, which had been founded shortly before and had its registered office in Switzerland. A AG, Switzerland was also founded as a sister company of A GmbH. A AG is A GmbH´s only customer. The business of A GmbH is the development and support of software for A AG, the maintenance of hardware, the training of employees and the forwarding of information. A AG, Switzerland sells the information provided by A GmbH. For these services A GmbH receives a remuneration from A AG determined as actual costs plus a profit surcharge of 5 %. The tax authorities noted that A AG did not initially have any active business activities. Against this background, the tax office had doubts about the arm’s length nature of the transfer prices. The tax authorities concluded, there were also no “simple services” by A GmbH for which, according to international accounting principles (services of a routine nature), procedures with profit mark-ups in the range of 5% to 15% could be considered. A high quality service should not be compensated by a 5% mark-up, especially if the service is performed using self-created intangible assets. In such cases, the profit split method should instead be applied. An assessment of estimated additional profits was issued. Judgment of the Court The court decided that the remuneration should be based on the cost plus method, but that the margin should be changed from 5 % to 10 % due to the advanced functions performed by A GmbH. Excerpts: “The contacts with the international sports organisers such as the IFA and the customers (companies) are again (only) with A AG, Switzerland. This picture also shows the overall profit situation of the group of companies in comparison: In the first year in dispute, the 5% mark-up applied by the Bf. amounted to 276,214.58 euros, while the share of the company’s profit applied by the tax office (in the context of the BVE) was “only” 195,120 euros. In the following year, the ratio changed in such a way that the surcharge of the complainant amounted to approximately 150,000 euros, while the part assessed by the tax office amounted to approximately 270,000 euros, and in the third year, with the same accounting of the complainant, even approximately 840,000 euros, and in the following years much more. While the performance of the complainant thus remained relatively constant (in the first year longer periods were affected due to a different business year), A AG, Switzerland was able to increase its business results enormously through efficient marketing on the basis of the good functioning of the EDP and/or the training of the employees working worldwide. Even if the business idea and the IT implementation of the same originated with the complainant, the economic success of the group of companies is not least due to the marketing activities of A AG, Switzerland, under the motto “even the best product must first find a buyer”. In this situation, the appropriateness can only be checked using the standard cost+ method.” “As far as a profit mark-up of 5% is charged for this routine activity, a higher profit mark-up must be applied for the services of the complainant in comparison. Determining the amount of the appropriate mark-up within the range of 5 – 15% is naturally associated with uncertainties. One indication in the case of a complaint can be the mark-up rates for IT programming of between 4.78% and 13.95% determined in the transfer pricing study by PwC. Another indication is the assessment of the complainant herself, who had to concede at the hearing that the 5% mark-up may be too low. In a detailed discussion, she was unable to offer any substantive arguments against a 10% mark-up rate. Considering that the defendant’s activities after the development and sale of the software “A Live System”, which is not in dispute here, consist of very different services, a mixed mark-up rate of 10% seems appropriate:” Click here for English translation Click here for other translation

At issue were the tax consequences from (alleged) “key account expenses” paid by “Key Account – X GmbH” to a related party, X FL. X GmbH provided marketing services for an unrelated German manufacturer of machine tools Y. The marketing contract between X GmbH and Y was the basis for the intensive cooperation between Y and X GmbH in the years in dispute. In connection with the intensification of the business relationship with Y, X GmbH took measures regarding a cross-border restructuring. The owners of the group had X FL Lichtenstein established as of March 1998. The business purpose of X FL was “conception and consultancy in the areas of advertising, marketing and public relations”. By invoice dated 1 September 1998, X GmbH informed X FL of the following: “For the provision of (A) as a key account we charge you a one-off goodwill in the amount of ATS 8,000,000.” On 3 September 1998 A, as managing director of X GmbH, and M, as member of the board of directors of X FL, signed the “Cooperation Agreement (Y)”. In this contract, X GmbH as “principal” transferred the advertising contract received from Y to X FL as “contractor” with regard to certain activities listed in detail, which were subsequently summarised under the term “key accounting”. In return, it was agreed that X GmbH would reimburse X FL for the ordinary expenses incurred in connection with the fulfilment of the order and pay 25% of the total order volume (payments by Y to X GmbH). In the period from 1998 to 30 September 2011, X GmbH recorded “key account expenses” in the amount of approximately EUR 82 million as profit-reducing. The tax authorities, examined these transactions between X GmbH and X FL and came to the conclusion that the payments made by X GmbH to X FL under the name of “key account expenses” were not matched by an equivalent service. The prerequisite of a concrete and detailed description of services, which was necessary for the recognition of such payments, was lacking. The “key account” sale transaction of September 1998 was not to be recognised for lack of arm’s length and could not form the basis for the tax recognition of the later current payments. The chosen legal structure constituted abuse within the meaning of section 22 of the BAO. The reductions in assets at X GmbH were hidden profit distributions. An assessment regarding corporate income tax 2005 to 2008 was issued. X GmbH appealed against the decision. The appeal was allowed by the Federal Tax Court where a ruling in favour of X Gmbh was issued. This ruling was then appealed by the tax authorities to the Administrative court of appeal. Judgment of the Court The Court allowed the appeal and decided in favour of the tax authorities. Excerpts: ” Business expenses are those expenses or expenditures that are caused by the business (§ 4 para. 4 EStG 1988). The taxable profit of a corporation may not be reduced by transactions that are not caused by the business activity of the corporation but by the corporate relationship. For the question of whether a measure is caused by the company, it is decisive whether it would also have been taken by persons who are strangers to each other (cf. VwGH 11.2.2016, 2012/13/0061, mwN). An arm’s length comparison requires that the services rendered and remunerated are recorded and presented in detail in a concrete and detailed manner. The description of the services must be concrete to such an extent that it is possible to estimate the exact market value of the service and subsequently determine whether a third party would have been willing to provide the consideration that was provided by the related party. A particularly precise description of the service is required in particular if the subject matter of the contract consists of the provision of services that are difficult to grasp (e.g. “efforts”, consultations, mediation of contacts, transfer of know-how) (cf. VwGH 28.1.2003, 99/14/0100, VwSlg. 7786F; 15.9.2016, 2013/15/0274, mwN). In the appeal case, the Federal Supreme Finance Court therefore had to examine which services X FL had provided in detail and make (concrete and detailed) findings in this regard (cf. VwGH 26.2.2004, 99/15/0053). Such concrete and detailed findings are not to be found in the contested decision. The Federal Finance Court only referred in general to “key account” services. The contested decision does not specify which services were involved in detail. Insofar as the contested decision refers to the decision of the Federal Supreme Finance Court in the freezing proceedings (decision of 18 November 2015 in the continued proceedings pursuant to VwGH 30.6. 2015, 2012/15/0165), there is indeed a description of the content of the contract between X FL and X GmbH (acquisition of customers, agreement of the terms of the contract, cultivation and maintenance of existing customer contacts through regular visits by the respective management, preparation of advertising concepts, briefing with the customers and their representatives as well as monitoring of the advertising campaigns; selection and appointment of any subcontractors, agreement of the terms of the contract, preparation of the advertising concept, preparation of the marketing mix, conception of the marketing plan, selection of advertising media and their use). However, it is not clear which of these services were actually provided in the individual years in dispute. There is also no description of services that could have been used to determine the market value of the services. Insofar as it was also stated in that decision that in the private expert opinion of an expert for marketing, both the key account activities of X FL in relation to Y and the activities of X GmbH were described and evaluated in detail, it was stated in the contested ruling on this private expert opinion that it contained many generalities and had little reference to the specific case; the expert opinion also did not refer to the actual historical processes and the documented contractual situation or negated them. … The reference to

C Uyemura & Co, Ltd. is engaged in the business of manufacturing and selling plating chemicals and had entered into a series of controlled transactions with foreign group companies granting licenses to use intangibles (know-how related to technology and sales) – and provided technical support services by sending over technical experts. The company had used a CUP method to price these transactions based on “internal comparables”. The tax authorities found that the amount of the consideration paid to C Uyemura & Co, Ltd for the licenses and services had not been at arm’s length and issued an assessment where the residual profit split method was applied to determine the taxable profit for the fiscal years 2000 – 2004. C Uyemura & Co, Ltd disapproved of the assessment. The company held that it was inappropriate to use a residual profit split method and that there were errors in the calculations performed by the tax authorities. Judgment of the Court The Court dismissed the appeal of C Uyemura & Co, Ltd. and affirmed the assessment made by the Japanese tax authority. On company’s use of the CUP method the Court concluded that there were significant differences between the controlled transactions and the selected “comparable” transactions in terms of licences, services and circumstances in which the transactions were took place. Therefore the CUP method was not the best method to price the controlled transactions. The Court recognised that C Uyemura & Co, Ltd had intangible assets created by its research and development activities. The Court also recognised that the Taiwanese, Malaysian and Singaporean subsidiaries had created intangible assets by penetrating regional markets and cultivating and maintaining customer relationships. The Court found the transactions should be aggregated and that the price should be determined for the full packaged deal – not separately for each transaction. Click here for English translation

A AB had deducted a termination fee paid to its affiliate, APO, as part of a restructuring in 2013. The Swedish Tax Agency, found that this restructuring benefitted the group as a whole rather than A AB specifically, asserting that the costs related to this termination were not aligned with an arm’s length principle. The Agency noted that A AB’s payment of this fee reduced its taxable income in Sweden, while APO, which received the fee, was not subject to tax in Sweden. In an appeal, A AB argued that the restructuring, which involved changing licensees within the corporate group, was commercially motivated to align its business model for future opportunities. The company also claimed the termination fee paid to APO was justified as it allowed the company to terminate an existing license and establish a new agreement, theoretically enhancing its future revenue prospects. Judgment The Court found in favor of the Swedish Tax Agency, stating that the termination was primarily part of a group-wide restructuring rather than a decision that independently benefited A AB. Given that A AB did not have sufficient resources to finance the termination fee independently (relying on a shareholder contribution from its parent company), and subsequently entered into a similar license agreement with another party under similar terms, the Court deemed that an independent party would not have incurred this expense under the same conditions. Consequently, the Court upheld the denial of the deduction for the termination fee, deeming it non-deductible under the Swedish’s arm’s length provision. Click here for English translation Click here for other translation

A AB appealed a Swedish Tax Agency decision regarding the income assessment for 2012, specifically around transfer pricing for the transfer of a business segment (P business) from its Swedish subsidiary, C AB, to its U.S. parent, A INC. A AB argued that only specific intellectual property assets, such as technology, a customer list, and a trademark, were transferred, rather than an entire ongoing business. It claimed the transfer price set by the Tax Agency was too high, asserting that a significant portion of the value should be attributed to Mr. X’s know-how, who continued to develop products post-transfer on behalf of A INC. The Swedish Tax Agency contended that the entire P business, including functions, risks, and key personnel like Mr. X, had been transferred, resulting in C AB being left without any assets or business activities. Judgment The Court of Appeal agreed, finding that Mr. X’s expertise was integral to the business and constituted part of the transfer, classifying the transaction as a transfer of an “ongoing concern,” or a full business unit, rather than isolated assets. Following OECD guidelines on transfer pricing, the Court supported the Tax Agency’s position that the transaction should reflect the value of an entire ongoing business, including goodwill. The Court ruled that the company’s arguments did not substantiate a lower valuation and upheld the Tax Agency’s income adjustment. Consequently, A AB’s appeal was dismissed. Click here for English translation Click here for other translation

Hewlett-Packard pays NIS 1.6 billion ($450 million) in tax on its 2006 acquisition of the intellectual property of Israel company Mercury Interactive, in addition to the NIS 1 billion already paid to the Israel Tax Authority. The acquisition at issue took place in two stages. First the shares in Mercury Interactive were acquired by Hewlett-Packard for $4.5 billion in 2006. Then in 2009 Mercury Interactive’s intellectual property was transferred to Hewlett-Packard for a substantially lower price of $963 million. The Tax Authority held that the sales of the intellectual property should be taxed at the full value of $4.5 billion The case was settled in international arbitration, which ended with an additional tax payment of NIS 1.6 billion by Hewlett-Packard.

The French Court considers that in the event of a transfer of shares, the goodwill recognized at the acquisition of the shares shall no longer be included in the balance sheet of the parent company. Click here for translation

In November 2006 Microsoft Corp. purchased 100% of the shares of Gteko Ltd. (IT Support technology), for USD 90 million. The purchase was made with the intention of integrating Gteko’s technology into Microsoft’s own products. Following this purchase of Gteko Ltd., the employees were transferred to the local Microsoft subsidiary and a few months later another agreement was entered transferring Gteko’s intellectual property/intangibles to Microsoft. This transfer was priced at USD 26 million based on the purchase price allocation (PPA). The tax authorities of Israel found that the price of 26 mio USD used in the transaction was not at arm’s length. It was further argued, that the transaction was not only a transfer of some intangibles but rather a transfer of all assets owned by Gteko as a going concern to Microsoft Corp. The arm’s length price for the transfer was set at USD 80 million. The District Court agreed with the assessment and held that “value does not disappear or evaporate” and that Gteko had not succeeded in arguing why the total values in Gteko should not be equal to the $90 million share price paid.

Amazon is an online retailer that sells products through Amazon.com and related websites. Amazon also sells third-party products for which it receives a commissions. In a series of transactions  in 2005 and 2006, Amazon US transferred intangibles to Amazon Europe, a newly established European HQ placed in Luxembourg. A Cost Sharing Arrangement (“CSA”), whereby Amazon US and Amazon Europe agreed to share costs of further research, development, and marketing in proportion to the benefits A License Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Technology IP An Assignment Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Marketing IP and Customer Lists. For these transfers Amazon Europe was required to make an upfront buy-in payment and annual payments according to the cost sharing arrangement for ongoing developments of the intangibles. In the valuation, Amazon had considered the intangibles to have a lifetime of 6 to 20 years. On that basis, the buy-in payment for pre-existing intangibles had been set to $254.5 million. The IRS disagreed with the valuation and calculated a buy-in payment of $3.5 billion, by applying a discounted cash-flow methodology to the expected cash flows from the European business. The IRS took the position, that the intangibles transferred to Amazon Europe had an indefinite useful life and had to be valued as integrated components of an ongoing business rather than separate assets. The case brought before the US Tax Court HAD two issues had to be decided: Amazon Europe’s buy-in payment with respect to the intangibles transferred; and The pool of cost, on which Amazon Europe ongoing cost sharing payments were to be calculated. The Courts decision on Amazon Europe’s buy-in payment IRS’s position of “indefinite useful life” in the valuation of the intangibles and the buy in payment was rejected by the court, and the comparable uncontrolled transaction (“CUT”) method applied by Amazon – after appropriate upward adjustments – was found to be the best method. The Courts decision on Cost Share Payments The Court found that Amazon’s method for allocating intangible development costs, after adjustments, was reasonable. US CSA regulations pre- and post 2009  US CSA regs in effect for 2005-2006 refer to the definition of intangibles set forth in section 1.482-4(b), Income Tax Regs. Here intangibles are defined to include five enumerated categories of assets, each of which has “substantial value independent of the services of any individual.” These include patents, inventions, copyrights, know-how, trademarks, trade names, and 20 other specified intangibles. The definition of intangibles in the pre 2009 CSA regs did not include value of workforce in place, going concern value, goodwill, and growth options, corporate resources or opportunities. In 2009 new CSA regs were introduced in the US where the concept of “platform contribution transaction” (PCT) applies. According to the new regs. there are no limit on the type of intangibles that must be compensated under a cost sharing arrangement. But these new US CSA regulations did not apply to the years 2005 – 2006 in the Amazon case. See also the US vs. Veritas case from 2009. 2019 UPDATE The 2017 decision of the Tax Court has later been appealed by the Commissioner of Internal Revenue

The Danish Tax administration had made an estimated assessment due to a insufficient TP documentation. In the assessment goodwill amortizations were included when comparing the operating income of the company to that of independent parties in a database survey. The Tax Tribunal found that the tax administration was not entitled to make an estimated assessment under Article 3B (3) of the current Tax Control Act. 8 (now paragraph 9) and section 5 3, where the TP documentation provided a sufficient basis for assessing whether prices and terms were in accordance with the arm’s length principle. According to the Tax Tribunal goodwill amortizations should not be included when comparing the operating income of the company to the operating income of independent parties in a database survey. Hence the assessment was reduced to DKK 0. (The case was appealed to the Danish Court of Appeal by the tax authorities, where the decision of the tax court was overturned.) Click here for translation

The IRS argued that Medtronic Inc failed to accurately account for the value of trade secrets and other intangibles owned by Medtronic Inc and used by Medtronic’s Puerto Rico manufacturing subsidiary in 2005 and 2006 when determening the royalty payments from the subsidiary. In 2016 the United States Tax Court found in favor of Medtronic, sustaining the use of the CUT method to analyze royalty payments. The Court also found that adjustments to the CUT were required. These included additional adjustments not initially applied by Medtronic Inc for know-how, profit potential and scope of product. The decision from the United States Tax Court has been appealed by the IRS in 2017.

AB bioMérieux had entered into a trademark and know-how licensing agreement, followed by a reduction of its activities and a transfer of strategic personnel to its French parent company. The tax authorities concluded that the entire arrangement constituted a transfer of value (intangible assets) and issued a notice of additional taxable income resulting from the transfer. AB bioMérieux filed an appeal which ended up in the Administrative Court of Appeal. Judgment The court upheld the assessment of the tax authorities. It found that AB bioMérieux became the formal legal owner of the intangible assets, while the value (intangible assets related to the ongoing business) was transferred to the French parent company. Excerpt in English “Initially, based on the wording of the licence agreement and the legal opinions issued by the professors………………………………………………, the Administrative Court of Appeal cannot find sufficient reasons to consider that the agreement in itself is something other than a licence agreement under civil law. Thus, the licence agreement as such alone does not constitute grounds for departing from the parties’ characterisation of the agreement itself as a licence agreement. However, when assessing which transaction has been undertaken between the parties, all of the parties’ dealings must be taken into account (cf. paragraph 1.52 et seq. of the OECD Guidelines). Similarly, there may be reasons to disregard the parties‘ designation of the transaction in the case where a transaction is indeed the same in form and content, but where the parties’ other dealings in relation to the transaction, viewed as a whole, differ from those that would have applied between independent traders acting in a commercial and rational manner (paragraph 1.65 of the Guidelines). In addition to the written licence agreement, the actual circumstances and the parties‘ intention as well as the economic significance of the parties’ combined conduct must therefore also be taken into account. The Administrative Court of Appeal considers, as does the Administrative Court, that it cannot be considered consistent with the arm’s length principle to isolate the licence from the parties’ other dealings during the period from the share acquisition in June 2008 to the licence in July 2010. The Administrative Court of Appeal further agrees with the Administrative Court’s assessment that the actual circumstances are best described as a restructuring. Prior to the share acquisition in 2008, the company was a fully fledged company, which meant that the company itself developed, manufactured, marketed and sold its products. In addition to the exclusive licence that the company granted to …………. under the licence agreement, the company gradually ceased its activities relating to research and development, manufacturing, marketing, sales and distribution of ……………….. during 2008-2010, while …………. was given the opportunity to conduct the same activities. Following the expiry of the licence agreement, the company retains only the ownership of the know-how and trade marks relating to………….. The licence agreement clearly regulates the assignment of the intellectual property rights between the parties for a fixed period. Furthermore, it is clear that, even taking into account that no unit or branch of activity has been transferred from the company to the parent company, the restructuring in its entirety means that the company has relinquished the functions linked to the …………… and …………….. products in favour of the parent company. It is also apparent from the documents in the cases that two persons who have been the bearers of the know-how that the licence agreement is intended to regulate have terminated their employment in the company in order to work for a certain period of time in the parent company for the purpose of incorporating know-how relating to …………….. The Administrative Court of Appeal further finds that the financial risk associated with functions and activities linked to has essentially been transferred to the parent company. According to what has emerged, it is …………… that ties up capital, carries out investments for research and development and bears all operational risks, e.g. linked to production, damages, etc. This assessment is also well in line with points 9.188-9.189 of the guidelines. The gradual winding down of the company’s operations and the start-up of the same operations together with the licence agreement has thus entailed a transfer of value in that assets, functions and risks linked to ——— have been transferred to ……………….. (cf. ongoing concern, paragraph 9.93 of the OECD Guidelines). The entire reorganisation and the resulting transfer of value should therefore be regarded as one transaction. In the opinion of the Court of Appeal, the transaction that should form the basis for the continued assessment is thus the transfer of research and development, manufacturing, marketing, sales and distribution of Etest, as well as the licensing of know-how and trademarks linked to …………… for a period of ten years.” Click here for English translation Click here for other translation

The U.S. Tax Court held in favor of the Commissioner of Internal Revenue, stating that neither Internal Revenue Code §482 nor the regulations thereunder require the Respondent to always determine the separate taxable income of each controlled taxpayer in a consolidated group contemporaneously with the making of the resulting adjustments. The Tax Court further held that §482 and the regulations thereunder allow the Respondent to aggregate one or more related transactions instead of making specific adjustments with respect to each type of transaction.

The Supreme Tax Court has held that a parent company cannot be deemed to have earned income from allowing its Polish subsidiary to register locally in the group name. A German business was active in a field of patented technology associated with its own firm name, “B”. It allowed its Polish subsidiaries to register in that name, “B Sp.z.o.o.”, but made an appropriate charge for the use of the technology. It also did not authorise the Polish companies to use its logo, but left it up to them to design their own. The tax office maintained that the group name was a valuable intangible and demanded an income adjustment to reflect its use by foreign subsidiaries. However, the Supreme Tax Court has now confirmed its previous case law in holding that the mere use of the group name in the company registration of a subsidiary – including the right to trade under that name – does not give rise to a royalty entitlement of the parent. Such entitlement only arises in connection with other associated rights, such as the use of a logo or technology, in which case, the benefit from the use of intangibles should be seen as a package. However, this did not arise in the case at issue, as the rights to the logo had not been assigned and the rights to the technology had been charged for separately. Se also the publication [Verwaltungsanweisung] from the German Bundesministerium der Finanzen (BMF) 2017-04-07-namensnutzung-im-konzern and the prior German ruling on the issue I R 12/99. The prior ruling of the Local Tax Court is found in case No 4 k 1053 11 e. Click here for translation

LuxCo TM sold trademarks to a newly established sister company. The price had been set at €975,000. The tax authorities issued an assessment where the price had been set at €6,475,000 and the difference was considered to be hidden profit distribution. The Administrative court ruled in favor of the tax authorities. LuxCo TM’s valuation had been based on wrong facts and assumptions. Click here for translation

In this case the Federal Court of Appeal upheld the decision of the Canadian International Trade Tribunal in which the tribunal upheld seven decisions – one for each of the years 2005 through 2011 – of the Canada Border Services Agency under subsection 60(4) of Canada’s Customs Act. Skechers Canada, a subsidiary of Skechers USA, purchases footwear to sell in Canada from its parent at a price equal to the price paid by Skechers US to its manufacturers, the cost of shipping the foodware to the US and warehousing, and an arm’s length profit. Skechers Canada also makes payments to Skechers US pursuant to a cost sharing agreement to compensate the parent for activities associated with the development and maintenance of the Skechers brand and to the creation and sale of footwear. The Court ruled that CSA payments relating to research, design, and development (R&D) were “in respect of” the goods sold for export into Canada and thus part of the “price paid or payable” for the goods for customs purposes. As a result, Skechers Canada must add the amounts of these payments made to Skechers USA to the customs value of imported footwear supplied by its parent. In its conclusion, the Court found that the conclusion reached by CITT “falls within the range of possible, acceptable outcomes, defensible in respect of the facts and the law.”

S AB appealed a decision by the Swedish Tax Agency regarding its income assessments for 2007 and 2008, which involved disputes over transfer pricing. The primary issue was the valuation of trademarks sold by S AB, specifically whether the sale price of SEK 103 million adhered to the arm’s length principle. The Swedish Tax Agency argued that a hypothetical independent buyer would be willing to pay more, estimating an arm’s length price of SEK 134 million by factoring in the tax effects of the transaction. Judgment The Administrative Court of Appeal agreed with the valuation of the Tax Agency, thereby adjusting S AB’s taxable income for the years in question. S AB had contended that tax benefits should not influence the valuation, citing ambiguities in the 2006 OECD guidelines and challenging the suitability of using the Gordon growth model. However, the court determined that tax implications for both buyer and seller are relevant to the valuation of intangible assets and should be included. Click here for English translation Click here for other translation

LG India is a wholly owned subsidiary of LG Korea, a multinational manufacturer of electronic products and electrical appliances. LG Korea and LG India entered into a technical assistance and royalty agreement in 2001 where LG India, as a licensed manufacturer, would pay a 1% royalty to LG Korea for the use of various rights for the manufacture and sale of products in India. The agreement also gave LG India a royalty-free use of the LG brand name and trademarks. The tax tribunal in 2013 held that the advertising, marketing and promotion (AMP) expenditure in excess of the arm’s length range helps to promote the brand of the foreign associated enterprise and that the Indian associated enterprise should necessarily be compensated by the foreign one. Then an appeal was filed with the Income Tax Appellate Tribunal.

“H-trademark S.A.” applied for a ruling on the tax rules governing a business restructuring where trademarks were transferred to another group company and licensed back – whether Polish arm’s length provisions would apply to the transaction. The company was of the opinion that Polish arm’s length provision (article 11) would not apply, since the arrangement was covered by special Polish provisions related to financial leasing (article 17b-g). Judgment of the Court The Court found that the Polish arm’s length provisions applied to the transaction. Excerpts “In the present case, the legal problem boils down to the correct identification of the nature of the norms arising from Article 11 of the A.p.d.o.p. and its relationship with the provisions on leasing raised by the applicant (Articles 17b – 17g of the A.p.d.o.p.). Indeed, the applicant takes the view that the leasing provisions themselves introduce derogations from market conditions and that, consequently, it is not possible to examine certain activities governed by the leasing provisions on the basis of the criteria provided for in Article 11 of the A.p.d.o.p.” “Therefore, it should be stated that the norm of Article 11 of the A.l.t.d.o.p. constitutes lex specialis in relation to the norms concerning taxation of leasing agreements (Article 17a et seq. of the A.l.d.o.p.). It may therefore also be applied in the case concerning taxation of such agreements. Thus, the Court does not share the view of the Appellant Company that it is the provisions concerning the leasing agreement that constitute lex specialis in relation to Article 11 of the discussed Act. It is also of no significance for the position of the Court that the agreement presented in the description of the future event is not a commonly occurring agreement, and therefore, as the appellant claims, it will not be possible to make determinations on the basis of Article 11 of the A.l.t.d.o.p. This is because the very demonstration that the price would have been different if certain connections on the basis of the aforementioned provision had not occurred is already an element of establishing the facts and conducting tax proceedings in a specific case. Meanwhile, the subject of the present proceedings, was the answer to the question whether the aforementioned provision is excluded in the case of taxation of leasing agreements. In addition, it should be noted that, contrary to the assertions in the application, it was not in the description of the future event, but in the position presented by the party that it stated that: “(…) the initial value of the rights to be used will be determined on the basis of a valuation prepared by an independent entity and will therefore correspond to their market value”.” Click here for English translation Click here for other translation

In connection with a restructuring, Ferring Sweden (a Scandinavian pharmaceutical) had transferred intangible assets to a group company in Switzerland. Among the assets transferred was an exclusive worldwide license to manufacture and sell a drug and a number of ongoing R&D projects. The question in the case was whether the price agreed between the Group companies was consistent with the arm’s length principle. Ferring’s position was that the price was consistent with the arm’s length principle, while the Swedish Tax Agency believed that an arm’s-length price was significantly higher. In support of its pricing, the company had submitted a valuation made by the audit company A, where the value of Ferring after the transfer (the residual company) was compared with the value of the company if it had continued to operate as a full-fledged company (the original company). These values ​​were determined through a present value calculation of the future cash flows in each unit. The difference in value was considered to correspond to the value of the intangible assets transferred. The Swedish Tax Agency had made its own assessment of a market-based remuneration for the license only to manufacture and sell the drug. In this valuation, the present value of the future cash flows was calculated according to what the sale of the drug could be expected to generate, ie the income that the Swedish company would lose after the transfer of the license. The value obtained exceeded the price that the Group companies had agreed on for all intangible assets. The Swedish Tax Agency had also made a calculation regarding the ongoing R&D projects. In this calculation, the present value of the estimated costs of R&D projects was compared with the present value of the future revenues that these projects could be expected to lead to. In support of the assessment, the Swedish Tax Agency also relied on a valuation made by the audit firm B, which was made on behalf of the Swedish Tax Agency. Like the audit firm A, the accounting firm B calculated the value of the transferred assets by comparing the value of the parent company with the value of the residual company. However, Audit Company B came to a significantly higher value in its valuation than Audit Company A did. The Court of Appeal considered that clearly overwhelming reasons indicated that the audit firm B’s valuation provided a reasonable arm’s length value. This conclusion was reinforced by the Swedish Tax Agency’s evaluation of the license to manufacture and sell the drug, by the Swedish Tax Agency’s calculation of R&D projects, and by an evaluation of the outcome of the respective auditing companies’ values ​​by using multiples. The Court of Appeal also took into account the size of the amounts that the Swedish company invested in R&D in the years prior to the transfer. The Court found that in the absence of proportionality and in the absence of explanations, the relationship between the value of intangible assets and the sums invested in developing them may give an indication that the price is not market-based. The Court of Appeal also held that the information contained in the case was insufficient to explain the seemingly unreasonable relationship between what had been invested in R&D up until the transfer and the price that was then determined at the transfer of assets, which included the R&D projects. All in all, the court considered that the Swedish Tax Agency had sufficiently proved that the market price of the assets transferred between the Group companies exceeded the agreed price, at least with the increase decided by the Swedish Tax Agency. According to the court, the Swedish Tax Agency had therefore had grounds for taxing Ferring in the manner that had taken place. Click here for translation

Maruti Suzuki India manufactures and sells cars and spare parts. A license agreement had been entered with the group parent for use of licensed information and trademark for the manufacture and sale of the products. Hence, Maruti Suzuki paid royalties to the parent for trademark and technology. The tax administration made an adjustment where the royalty paid for use of the trademark was disallowed and where a reimbursement with mark-up for non-routine advertising, marketing and promotion of the brand name was imputed. The High Court, referred the case back to the tax administration with observations. If there is an agreement between the group parent and the taxpayer which carries an obligation on the taxpayer to use the trademark owned by the group parent. Such agreement should be accompanied either by an appropriate payment by the group parent or by a discount provided to the taxpayer. Appropriate payment should be made on account of benefit derived by the group parent in the form of marketing intangibles obtained from such mandatory use of the trademark. However, if the agreement between the group parent and Maruti Suzuki for the use of the trademark is discretionary, no payment is required to the foreign entity.

The issue in the VERITAS case involved the calculation of the buy-in payment under VERITAS’ cost sharing arrangement with its Irish affiliate. VERITAS US assigned all of its existing European sales agreements to VERITAS Ireland. Similarly,VERITAS Ireland was given the rights to use the covered intangibles and to use VERITAS US’s trademarks, trade names and service marks in Europe, the Middle East and Africa, and in Asia-Pacific and Japan. In return, VERITAS Ireland agreed to pay royalties to VERITAS US in exchange for the rights granted. The royalty payment included a prepayment amount (i.e. lump-sum payment) along with running royalties that were subject to revision to maintain an arm’s length rate. Thereafter, VERITAS Ireland began co-developing, manufacturing and selling VERITAS products in the Europe, the Middle East and Africa markets as well as in the Asia-Pacific and Japan markets. These improvements, along with the establishment of new management, allowed VERITAS’ 2004 annual revenues to be five times higher than its 1999 revenues from Europe, the Middle East and Africa, and Asia-Pacific and Japan. the IRS’s economic expert employed the income method to calculate the buy-in payment (for pre-existing intangibles that were to be used by the parties to develop future technology under the cost sharing arrangement). These calculations were based on the assumption that the transfer of pre-existing intangibles by VERITAS US was “akin to a sale” and should be evaluated as such. To value the transfer, the IRS expert aggregated the intangibles so that, in effect, he treated the transfer as a sale of VERITAS US’s business, rather than a sale of each separate intangible asset. The aggregation of  the intangibles was necessary, in the view of the IRS expert, because the assets collectively (the package of intangibles) possessed synergies and, as a result, the package of intangibles was more valuable than each individual intangible asset standing alone. The Court rejected the IRS’s method on the following premises: The IRS did not differentiate between the value of  subsequently developed intangibles and pre-existing intangibles, thus including intangibles beyond what  is required for the buy-in payment; The IRS included intangibles such as access to VERITAS US’s marketing and R&D teams, which are not among the intangibles recognized by the US transfer pricing rules; and The IRS incorrectly assigned a perpetual useful life for transferred intangibles that have a useful life of four years.

This case is about business restructuring and transfer of intangibles – customer list, technology, trademarks and goodwill. Cytec Norge was originally a full-fledged manufacturer that was changed into a toll manufacturer. The customer portfolio, technology, trademarks and goodwill were transferred to the related entity, Cytec Netherlands, free of charge. The court found that Cytec Norge AS had held intangibles of considerable value prior to the business restructuring in 1999, and that the Norwegian entity should have received an arm’s-length remuneration for the transfer of these rights to the related Dutch entity. The court ruled that the Norwegian tax authorities’ calculation of such remuneration and the increased income was correct. An appeal to the Supreme Court was dismissed in 2008. Click here for translation

This case is about a IP sale-and-license-back arrangement. The taxpayer acquired the shares in BV Z (holding). BV Z owns the shares in BV A and BV B (the three BVs form a fiscal unity under the CITA). BV A produces and sells shoes. In 1993, under a self-proclaimed protection clause, BV A sells the trademark of the shoes to BV C, which is also part of the fiscal unity. The protection clause was supposedly intended to protect the trademark in case of default of BV A. Taxpayer had created BV C prior to the sale of the trademark. In 1994, the taxpayer entered into a licensing agreement with BV C: the taxpayer pays NLG 2 to BV C per pair of shoes sold. Next, BV C is then moved to the Netherlands Antilles, which results in the end of the fiscal unity as of January 1, 1994. The roundtrip arrangement, the sale of an intangible and the subsequent payment of licensing fees, is now complete. In 1999 the royalty for use of the trademark was increased from fl. 2 per pair of shoes to fl. 2.50 per pair, resulting in annual royalty payments of fl. 300.000 from A BV to B BV. The Court disallowed tax deductions for the royalty payments. The payments were not proven to be at arm’s length. B BV had no employees to manage the trademarks. There were no business reasons for the transactions, only a tax motive. Hence the sale-and-license back arrangement was disregarded for tax purposes. Also, the licensing agreement were not found to produce effective protection of the brand and was therefore also considered part of a tax planning plan. Taxpayers often seek to maximise differences in tax rates through selling intangibles to a low- tax country and subsequently paying royalties to this country for the use of these intangibles, thereby decreasing the tax-base in the high-tax country. The arm’s length principle requires taxpayers to have valid business purposes for such transactions and requires them to make sure that the royalties are justified – why would an independent company pay royalties to a foreign company for an intangible it previously owned?’ To adress such situations a decree was issued in the Netherlands on August 11, 2004. The decree provided additional rules for transfers of intangibles when the value is uncertain at the time of the transaction (HTVI). It refers to situations in which an intangible is being transferred to a foreign group company and where this company furthermore licenses the intangible back to the transferor and/or related Dutch companies of this company. In these situations a price adjustment clause is deemed to have been entered. The deemed price adjustment clause prevents a sale at a very low price with a consequent high royalty fee to drain the Dutch tax base. Through the price adjustment clause the Dutch tax authorities are guaranteed a fair price for the sale of the intangible. Click here for translation

In September 2006 the Internal Revenue Service announced that it has successfully resolved a transfer pricing dispute with Glaxo SmithKline. Under the settlement agreement, GSK will pay the Internal Revenue Service approximately $3.4 billion, and will abandon its claim seeking a refund of $1.8 billion in overpaid income taxes, as part of an agreement to resolve the parties’ long-running  transfer pricing dispute for the tax years 1989 through 2005. See also the GlaxoSmithKlein decision from july 2001 The IRS announcement

In a situation where a new intangible asset has been developed and is transferred to an affiliate at a time when its success is not yet sufficiently apparent, for example, because the intangible asset has not yet generated revenues and there are significant uncertainties in estimating future revenues, the valuation at the time of the transaction is highly uncertain and the inclusion of a price adjustment clause makes sense. Click here for English translation Click here for other translation

X BV, is member of the English XX-group. One of X’s parents is XX Ltd., based in the United Kingdom. In 1992, X BV acquired licensing rights relating to the trade name J from J Ltd. Their value was determined to be GBP 19.2 million. According to the agreement, X BV paid GBP 19 million for the ten-year economic ownership of the licensing rights. J Ltd. sold the legal ownership to W BV for GBP 200,000 in which X BV owned all shares. In 1996, X BV sells the ten-year economic ownership to W BV for GBP 2 million. To support the GBP 19 million price for the economic ownership, a valuation report is drawn up in 1992. The valuation is based on “projected royalty streams” which showed increasing royalty streams over the ten-year period 1992-2002. The tax authorities disagrees with the price of GBP 19 mio. and argue that the total value of the brand was GBP 43 mio. bases on a continued royalty stream. According to the authorities, GBP 19 million was attributable to the economic ownership and GBP 24 million should be attributed to the legal ownership. In court X BV provided an opinion on the value of the legal and economic ownership of the brand in 1992. In the report it is concluded that the projected income streams did not take into account the Product Life Cycle of the brand. The report states, that to support the brand and to keep the income streams at a high level, investments in the brand will have to be made. No such expenses had been planned and it was very unlikely that there would have been significant income streams after the ten-year period. The Court find there was no evidence that X BV had planned to invest in further support the brand. Hence, at the time of the purchase – the parties did not expect the brand to produce royalty streams after the ten year period. The Court also emphasises that as the royalty stream was in fact in decline in 1994. Click here for translation

Sherwin-Williams is an Ohio corporation, headquartered in Cleveland, and is engaged in the manufacture, distribution and sale of paints and paint-related products. In 1991, it formed two subsidiaries under Delaware law to hold certain tradenames, trademarks and service marks that it had developed. Sherwin-Williams and the subsidiaries teen entered into nonexclusive licensing agreements for the right to use these various intangibles. In filing its 1991 state income tax return, Sherwin-Williams deducted all royalty and interest expenses accrued under the agreement, in computing taxable income. Following an audit, the Department of Revenue disallowed the deductions and assessed additional tax, because the transfer and license back of the marks was a “sham” disallowed under the “sham-transaction doctrine”. According to the Department of Revenue the royalty payments were not deductible, because the transactions had no valid business purpose and transactions were not at “arm’s-length.” On appeal, the Appellate Tax Board upheld the assessment of the tax authorities. Judgment for the Court The Supreme Judicial Court of Massachusetts concluded that the Appellate Tax Board incorrectly found that certain transfer and licensing back transactions between the corporate taxpayer and its subsidiaries were without economic substance and therefore a sham, where the record established that the transactions between the corporate taxpayer and its subsidiaries were genuine, creating viable businesses engaged in substantive economic activities apart from the creation of tax benefits for the taxpayer. Certain royalty payments made by a corporate taxpayer to two wholly owned subsidiaries for the use of certain trade names, trademarks, and service marks (marks) that the taxpayer had transferred to the subsidiaries and licensed back as part of a corporate reorganization of its intangible assets were deductible by the taxpayer as ordinary and necessary business expenses, where obtaining licenses to use the marks was necessary to the conduct of its business; and where, even assuming G. L. c. 63, s. 39A, empowered the Commissioner of Revenue to eliminate payments made between a foreign parent corporation and its subsidiaries, it did so only to the extent that such payments were in excess of fair value, and in light of the substantial evidence that the royalties paid by the taxpayer reflected fair value, that was no basis to support the elimination of the payments. This court concluded that certain interest expense paid by a corporate taxpayer to a wholly owned subsidiary in connection with a loan made to it by the subsidiary, which was later repaid, was deductible, where certain transfer and license back transactions between the taxpayer and its subsidiary were not a sham, where royalty payments by the taxpayer to the subsidiary were necessary and ordinary business expenses of the taxpayer, and where there was no dispute that the loan was actually made.

When DHL sold the “DHL” trademark to DHL International, the IRS disagreed with DHL’s evaluation of the arms-length price of the intellectual property and used its authority under Section 482 to reallocate income and impose penalties. DHL appealed the IRS ruling and the tax court upheld the IRS allocation to DHL. In this decision the U.S. Court of Appeals for the Ninth Circuit affirmed the tax court’s application of Section 482 to the sale of the trademark and the $100 million valuation for the intangible asset, but reversed the tax court’s rejection of a $50 million value of the foreign trademark rights, as asserted by DHL. And

In this case a pharmaceutical company in the US, Eli Lilly & Co, transferred valuable pharmaceutical patents and manufacturing know-how to its subsidiary in Puerto Rico. The IRS argued that the transaction should be disregarded (substance over form) and claimed that all of the income from the transferred intangibles should be allocated to the U.S. parent. The Judgment from the Tax Court: “Respondent’s argument, that petitioner, having originally developed the patents and know-how, is forever required to report the income from those intangibles, is without merit. Respondent ignores the fact that petitioner, as developer and owner of the intangible property, was free to and did transfer the property to the Puerto Ricanaffiliate in 1966.” The Court of Appeals altered the judgment from the Tax Court. According to the Court of Appeals, the parent company had received an arm’s length consideration for the transfer of intangibles in the form of stock in the subsidiary. Hence, the Court disallowed the allocation of the intangibles’ income to the U.S. parent.

In this case, experts had utilized the relief-from-royalty method in the valuation of trademarks. On this method the Court noted: “In our view, the relief-from-royalty method necessarily undervalues trademarks. The fair market value of a trademark is the price a willing purchaser would have paid a willing seller to buy the mark…The relief-from-royalty model does not accurately estimate the value to a purchaser of a trademark. Royalty models are generally employed to estimate an infringer’s profit from its misuse of a patent or trademark… Resort to a royalty model may seem appropriate in such cases because it estimates fairly the cost of using a trademark… However, use of a royalty model in the case of a sale is not appropriate because it is the fair market value of a trademark, not the cost of its use, that is at issue. A relief-from-royalty model fails to capture the value of all of the rights of ownership, such as the power to determine when and where a mark may be used, or moving a mark into or out of product lines. It does not even capture the economic benefit in excess of royalty payments that a licensee generally derives from using a mark. Ownership of a mark is more valuable than a license because ownership carries with it the power and incentive both to put the mark to its most valued use and to increase its value. A licensee cannot put the mark to uses beyond the temporal or other limitations of a license and has no reason to take steps to increase the value of a mark where the increased value will be realized by the owner. The Commissioner’s view, therefore, fundamentally misunderstands the nature of trademarks and the reasons why the law provides for exclusive rights of ownership in a mark. Given the shortcomings of the relief-from-royalty methodology, the Tax Court erred when it adopted the Commissioner’s trademark valuations. The Tax Court is instructed to examine alternate methods of determining the fair market value of the trademarks in question.”

The United States Tax Court sustained the IRS determination that there were no arm’s-length business reasons why payments would have been made for the intangible property in question and therefore refused to allow those expenses to be included in the Section 482 calculation of net taxable income.