Avon Cosmetics s.r.o. paid 6% of its net sales in royalties/licences for the use of intangible assets to a Group company in Ireland. The Irish company in turn was contractually obliged to pay 5.68% of Avon Cosmetics s.r.o.’s net sales as royalties to its US parent company. In the opinion of the tax authorities, the beneficial owner of the royalties was not the Irish company but the US parent and therefore the royalty payments were not exempt from withholding tax. An assessment of additional withholding tax was therefore issued. Decision of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the tax authorities and found that the US parent company was the beneficial owner of the royalties. Excerpt in English “[32] The interpretation of the concept of beneficial owner, including in the context of the OECD Model Tax Treaty relied on by the complainant, was dealt with by the Municipal court in the judgment referred to in N Luxembourg 1 and Others, which, although it dealt with preliminary questions relating to the exemption of interest from income tax, its conclusions can be applied without further ado to royalties, given the similarity of the legislation. In that judgment, the CJEU stated: “The concept of ‘beneficial owner of interest’ within the meaning of the Directive must therefore be interpreted as referring to the entity which actually benefits from the interest paid to it. Article 1(4) of the same directive supports this reference to economic reality by specifying that a company of a Member State is to be regarded as the beneficial owner of interest or royalties only if it receives them for itself and not for another person as an intermediary, such as an agent, trustee or principal. [paragraph 88] … It is clear from the development of the OECD Model Tax Treaty and the related commentaries, as described in paragraphs 4 to 6 of this judgment, that the concept of ‘beneficial owner’ excludes conduit companies and cannot be understood in a narrow and technical sense, but in a sense which makes it possible to avoid double taxation and prevent tax avoidance and evasion. [… Article 1(1) of Directive 2003/49, read in conjunction with Article 1(4) of that directive, must be interpreted as meaning that the exemption from any tax on interest provided for therein is reserved only to the beneficial owners of such interest, that is to say, to the entities which actually benefit economically from that interest and are therefore entitled to determine freely how it is used. [paragraph 122]’. [33] The Supreme Administrative Court reached similar conclusions in its judgment of 12 November 2019, no. 10 Afs 140/2018-32. In doing so, it also relied on the commentary to Article 12(4.3) of the OECD Model Tax Treaty cited by the complainant. In that judgment, the Supreme Administrative Court concluded that “the recipient of the (sub)royalties is the beneficial owner of the royalties only if it can use and enjoy them without restriction and is not obliged by law or contract to pass the payments on to another person”. In the present case, the Supreme Administrative Court finds no reason to depart from those conclusions in any way. [34] The answer to the question whether the complainant meets the statutory conditions for the exemption of royalty income from income tax therefore depends on an assessment of whether the complainant is the beneficial owner of the royalties, i.e. whether it actually benefits economically from them, is free to determine how they are used and is not obliged by law or contract to pass the payments on to another person. [35] At this point, the Supreme Administrative Court recalls that the administrative proceedings concerned the applicant’s application for a decision granting an exemption from the royalty income paid exclusively by ACS. The complainant attached to that application an extract from the commercial register, according to which she is the sole shareholder of ACS. In support of its application, the complainant attached a trademark and trade name use agreement dated 9 October 1993 between API and ACS, under which ACS, as licensee, is obliged to pay, as remuneration for the licensed rights (trademarks, trade names, copyrights and patents of AVON), a royalty of 6 % of the net sales of products, in US dollars, within 30 days of the last day of each calendar quarter of the term of the agreement. The Complainant also submitted a license agreement dated June 30, 2016, which it entered into with API and AIO as licensors. By this agreement, the Complainant licensed the use and exercise of API’s proprietary rights (API’s rights relating to technical information, patent rights and commercial rights – trademarks, industrial designs, trade names, copyrights) and the right to receive royalties under the current license agreements (including the aforementioned agreement with ACS) and agreed to pay a royalty of 5.68% of its and its sublicensees’ net sales, in U.S. dollars, within 60 days of the last day of each calendar quarter of the term of this agreement. These findings of fact were made by both the defendant and the municipal court. [36] It follows from the foregoing that the plaintiff, by entering into the agreement with API and AIO, acquired both the authority and the obligation to collect royalties from ACS, while contractually obligating itself to pay royalties to AIO for the same licensed rights. Thus, within 30 days of the end of each calendar quarter, the Complainant collects royalties from ACS at the rate of 6% of its net sales, and if it receives payment from ACS only on the last day, it then has 30 days to pay AIO royalties including an amount equal to 5.68% of ACS’s net sales. The complainant therefore pays 94.6667% of the royalties it collects from ACS to AIO. In essence, this is a contractual obligation to pass on the vast majority of the royalty payment received to another party. [37] The Supreme Administrative Court agrees with the Municipal court and the defendant that the ...

A sales, marketing and management service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and trademark license agreements pursuant to which Asian Hotels Limited was permitted to use Hyatt’s trademark in connection with the hotel’s operation. In 2012, the tax authorities issued assessment orders for FY 2009-2010 to FY 2017-2018, qualifying a portion of the service payments received by Hyatt as royalty and finding that Hyatt had a PE in India. Hyatt appealed the assessment orders to the Income Tax Appellate Tribunal, which later upheld the order of the tax authorities. Aggrieved with the decision, Hyatt filed appeals before the High Court. Judgement of the High Court The High Court set aside in part and upheld in part the decision of the Tribunal. The court set aside the decision of the Tribunal in regards of qualifying the service payments as royalty. The court found that the strategic and incentive fee received by Hyatt International was not a consideration for the use of or the right to use any process or for information of commercial or scientific experience. Instead, these fees were in consideration of the services as set out in SOSA. The fact that the extensive services rendered by Hyatt in terms of the agreement also included access to written knowledge, processes, and commercial information in furtherance of the services could not lead to the conclusion that the fee was royalty as defined under Article 12 of the DTAA. The court upheld the findings of the Tribunal that Hyatt had a permanent establishment in India. According to the court “It is apparent from the plain reading of the SOSA that the Assessee exercised control in respect of all activities at the Hotel, inter alia, by framing the policies to be followed by the Hotel in respect of each and every activity, and by further exercising apposite control to ensure that the said policies are duly implemented. The assessee’s affiliate (Hyatt India) was placed in control of the hotel’s day-to-day operations in terms of the HOSA. This further ensured that the policies and the diktats by the Assessee in regard to the operations of the Hotel were duly implemented without recourse to the Owner. As noted above, the assessee had the discretion to send its employees at its will without concurrence of either Hyatt India or the Owner. This clearly indicates that the Assessee exercised control over the premises of the Hotel for the purposes of its business. Thus, the condition that a fixed place (Hotel Premises) was at the disposal of the Assessee for carrying on its business, was duly satisfied. There is also little doubt that the Assessee had carried out its business activities through the Hotel premises. Admittedly, the Assessee also performed an oversight function in respect of the Hotel. This function was also carried out, at least partially if not entirely, at the Hotel premises.” The Court also confirmed the direction of the Tribunal asking Hyatt to submit the working regarding apportionment of revenue, losses etc. on a financial year basis so that profit attributable to the PE can be determined judicially. According to the High Court profits attributable to a PE are required to be determined considering the permanent establishment as an independent taxable entity, and prima facie taxpayers would be liable to pay tax in India due to profits earned by the permanent establishment notwithstanding the losses suffered in the other jurisdictions. This matter was to be decided later by a larger bench of the Court ...

YOLT Services s.r.o. is active in distribution of TV programmes and paid royalties/license for use of these programmes to its parent company in Romania and subsidiaries in Hungary and Slovakia. These companies were contractually obliged to pay royalties received on to the producers of the programmes. According to the tax authorites, the beneficial owners of the royalties were not the group companies, but rather the producers of the programmes. On that basis the royalty payments were not excempt from withholding taxes. An assessment of additional taxes was issued where withholding taxes had been calculated as 15% of the royalties paid by YOLT services. Judgement of the Regional Court The court upheld the decision of the tax authorities in regards of the producers – and not the group companies – beeing the beneficial owners of the royalties. But the court referred the case back to the to the tax authorities in regards of the withholding tax percentages applied, as these followed from the Double Tax Treaties entered with the relevant jurisdictions of the producers. Excerpt “It follows from the above that the mere forwarding of royalties through an intermediary entity does not imply the impossibility of applying the FTAA concluded by the Czech Republic with the country of tax residence of the beneficial owner of the income. Provided that other conditions are met, the tax authorities may not only apply the international treaty to the matter covered by the treaty, but are obliged to apply such treaty (Article 37 of the Tax Code in the relevant wording; see also the judgment of the Supreme Administrative Court of 25 May 2013, No. 9 Afs 38/2012-40).” Click here for English Translation Click here for other translation ...

This case concerns the application of the beneficial ownership rule to dividends paid by a French corporation to its Luxembourg parent. The Luxembourg parent company was not considered to be the beneficial owner of the dividends because it did not carry out any activity other than the receipt and further distribution of dividends, and it distributed the full amount of the dividend to its Luxembourg parent one day after receipt; all entities in the chain of ownership were wholly owned; and the two Luxembourg entities had common directors. Click here for English translation Click here for other translation ...

Google Ireland licenses Google AdWords technology to its subsidiary in India and several other countries across the world. The Tax Tribunal in India found that despite the duty of Google India to withhold tax at the time of payment to Google Ireland, no tax was withheld. This was considered tax evasion, and Google was ordered to pay USD 224 million. The case was appealed by Google to the High Court, where the case was remanded to the Income Tax Appellate Authority for re-examination. Judgement of the ITAT After re-examining the matter on the orders of the Karnataka High Court, the Income Tax Appellate Authority concluded that the payments made by the Google India to Google Ireland between 2007-08 and 2012-13 was not royalties and therefore not subject to withholding tax. Excerpts “30. On a consideration of all the above agreements and the facts on record, we find that none of the rights as per section 14(a)/(b) and section 30 of the Copyright Act, 1957 have been transferred by Google Ireland to the assessee in the present case. As held by the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. (supra), mere use of or right to use a computer program without any transfer of underlying copyright in it as per section 14(a)/(b) or section 30 of the Copyright Act, 1957 will not be satisfying the definition of Royalty under the Act / DTAA. Similarly, use of confidential information, software technology, training documents and others are all ‘literary work’ with copyrights in it owned by the foreign entity and there was no transfer or license of copyrights in favour of the assessee company. Hence, the impugned payments cannot be characterised as ‘Royalty’ under the DTAA. 31. The lower authorities have held that the assessee has been granted the use of or right to use trademarks, other brand features and the process owned by Google Ireland for the purpose of distribution of Adwords program and consequently the sums payable to Google Ireland are royalty. As per Article 12 of India – Ireland DTAA, consideration for the use of or right to use any patent, trade mark, design or model, plan, secret formula or process is regarded as royalty. In the present case, as per the distribution agreement, “Google Brand Features” means the Google trade names, trademarks, service marks, logos, domain names, and other distinctive brand features, with some but not all examples at “http://www.google.com/permissions/trademarks.html” (or such other URL that Google may provide from time to time), and such other trade names, trademarks, service marks, logos, domain names, or other distinctive brand features that Google may provide to Distributor for use solely under this Agreement. As per para 6 of the distribution agreement, each party shall own all right, title and interest, including without limitation all Intellectual Property Rights, relating to its Brand Features and Google Irland grants to the assessee / distributor nonexclusive and nonsublicensable licence during the Term to display Google Brand Features solely for the purpose of distributor’s marketing and distribution of AdWords Program under the terms and subject to the conditions set forth in this Agreement. It is thus evident that the trademark and other brand features are not used independently or de hors the distribution agreement but they are incidental or ancillary for the purpose of carrying out the marketing and distribution of Adword program. The Delhi High Court in DIT v Sheraton International Inc [2009] 313 ITR 267 held that when the use of trade mark, trade name etc are incidental to the main service of advertisement, publicity and sales promotion and further when there is no consideration payable for such use of trade mark, trade name etc, the consideration cannot be characterised as royalty. Applying the said principle, in the present case, use of Google Brand Features etc are de hors any consideration payable to Google Ireland and further they are incidental and ancillary for achieving the main purpose of marketing and distributing the Google Adwords Program. Hence, the lower authorities were not right in treating the payments as Royalty. 32. As regards the applicability of ‘use of or right to use industrial, commercial or scientific equipment” the CIT(A) held that the assessee cannot be said to have gained right to use any scientific equipment, since, Google Ireland has not parted with the copyright it holds in the Adwords program and hence it cannot be said that any kind of technical knowhow has been transferred to the assessee company. The CIT(A) was not in agreement with the AO on the above issue without prejudice to his view in holding that the remitted amount is royalty on different grounds. The revenue has not challenged the said finding of CIT(A). Hence, the impugned payments cannot be regarded as made for ‘use of or right to use industrial, commercial or scientific equipment’. The remaining portion of definition of ‘Royalty’ under the India – Ireland DT AA is consideration for information concerning industrial, commercial or scientific experience. The AO has not characterised the impugned payments as a consideration for the above. In any case, CIT(A) has given a finding that it cannot be said that any kind of technical knowhow has been transferred to the assessee company. This has not been challenged by the revenue. 33. Thus on an overall analysis of the entire facts on record, we hold that the impugned payments cannot be regarded as royalty under the India – Ireland DTAA. It is true that the Google Adword program was commercially and profitably exploited in a commercial sense and profitable manner in India to generate revenues from Indian customers or advertisers. This is the business or commercial aspect of the transaction. However, the stand of the lower authorities that the impugned payments are in the nature of Royalty cannot be upheld especially under Article 12 of the India – Ireland DTAA merely because the marketing, distribution and ITES activities are carried out in India and revenues are ...

In view of its purpose and the comments made on Article 12 of the OECD Model Convention, the Conseil d’État found that Article 12(2) of the Franco-New Zealand tax treaty was applicable to French source royalties whose beneficial owner resided in New Zealand, even if the royalties had been paid to an intermediary company established in a third country. The Supreme Court thus set aside the previous 2020 Judgement of the Administrative Court of Appeal. The question of whether the company in New Zealand actually qualified as the beneficial owner of the royalties for the years in question was referred to the Court of Appeal. Excerpt “1. It is clear from the documents in the file submitted to the judges of the court of first instance that the company Planet, which carries on the business of distributing sports programmes to fitness clubs, was subject to reminders of withholding tax in respect of sums described as royalties paid to the companies Les Mills Belgium SPRL and Les Mills Euromed Limited, established in Belgium and Malta respectively, in respect of the financial years 2011 to 2014 in consideration of the sub-distribution of collective fitness programmes developed by the company Les Mills International LTD, established in New Zealand. The Planet company is appealing to the Court of Cassation against the judgment of 15 July 2020 by which the Marseille Administrative Court of Appeal, on appeal by the Minister for Public Action and Accounts, annulled the judgment of 18 May 2018 of the Marseille Administrative Court insofar as it had discharged it from these reminders and reinstated these taxes. 2. If a bilateral agreement concluded with a view to avoiding double taxation can, by virtue of Article 55 of the Constitution, lead to the setting aside, on such and such a point, of national tax law, it cannot, by itself, directly serve as a legal basis for a decision relating to taxation. Consequently, it is up to the tax judge, when he is seized of a challenge relating to such a convention, to look first at the national tax law in order to determine whether, on this basis, the challenged taxation has been validly established and, if so, on the basis of what qualification. It is then up to the court, if necessary, by comparing this classification with the provisions of the convention, to determine – on the basis of the arguments put forward before it or even, if it is a question of determining the scope of the law, of its own motion – whether or not this convention is an obstacle to the application of the tax law. 3. Under Article 12 of the Convention of 30 November 1979 between France and New Zealand for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income: “1. Royalties arising in a State and paid to a resident of the other State may be taxed in that other State / 2. However, such royalties may also be taxed in the State in which they arise and according to the laws of that State, but if the person receiving the royalties is the beneficial owner the tax so charged shall not exceed 10 per cent of the gross amount of the royalties / 3. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films and works recorded for radio or television broadcasting, any patent a trademark, a design or model, a secret plan, formula or process, as well as for the use of or the right to use industrial, commercial or scientific equipment and for information concerning industrial, commercial or scientific experience. In view of their purpose, and as clarified by the comments of the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 12 of the Model Convention drawn up by that organisation, published on 11 April 1977, and as is also clear from the same comments published on 23 October 1997, 28 January 2003 and 15 July 2014 and most recently on 21 November 2017, the provisions of Article 12(2) of the Franco-New Zealand tax treaty are applicable to French source royalties whose beneficial owner resides in New Zealand, even if they have been paid to an intermediary established in a third country. 4. It is clear from the statements in the judgment under appeal that, in order to determine whether the sums in question constituted royalties, the court examined the classification of the sums paid by the company Planet to the Belgian company Les Mills Belgium SPRL in 2011 and to the Maltese company Les Mills Euromed Limited from 2012 to 2014, in the light of the stipulations of the Franco-New Zealand tax convention of 30 November 1979 alone. In limiting itself, in holding that this agreement was applicable to the dispute, to noting that the tax authorities maintained that the New Zealand company Les Mills International LTD should, pursuant to an agency agreement signed on 2 December 1998 between that company and the company Planet, be regarded as the actual beneficiary of the sums in dispute paid by the French company to the Belgian and Maltese companies, without itself ruling on its status as the actual beneficiary of the said sums for the four years in dispute, the court erred in law.” Click here for English translation Click here for other translation ...

By judgment of 22 May 2020, the Administrative Court set aside a tax assessment in which CBS International Netherlands B.V. had been denied reimbursement of withholding tax in the amount of BGN 156 830,27 related to royalties and license payments. An appeal was filed by the tax authorities with the Supreme Administrative Court. In the appeal the tax authorities held that the beneficial owner of the licence and royalty payments was not CBS International Netherlands B.V. but instead CBS CORPORATION, a company incorporated and domiciled in New York, USA. According to the tax authorities the main function of CBS International Netherlands B.V. was that of an intermediary between the end customers and the beneficial owner. This was further supported by the transfer pricing documentation, according to which the US company that bears the risk of the development activity, the market risk is borne equally by the two companies, and the only risks borne by the Dutch company are the currency, operational and credit risks, which in turn are not directly related to the development activity. Judgement of the Supreme Administrative Court The court upheld the decision of the court of first instance and decided in favour of CBS International Netherlands B.V. Excerpt “The activity from which the income is derived is that of granting rights under underlying television licence contracts. Corresponding to this activity is the risk identified in the transfer pricing documentation – development risk, market risk, currency risk, operational risk, credit risk. Neither CBS International Netherlands B.V. nor the Administration have alleged that the Dutch company was involved in the creation of the rights from the grant of which the income arose. Nor did the tax authorities deny that company’s right to grant the Bulgarian company the use of the copyright objects in return for consideration constituting the income on which the withholding tax was levied. To the contrary, there would be an assertion that there was no basis for the exchange of property and, accordingly, no object of taxation. “CBS International Netherlands B.V. is not a company for the purpose of channelisation of income under section 136A(2) of the ITA. It has not been shown to be controlled by a person not entitled to the same type or amount of relief on direct receipt of income. Control of CBS International Netherlands B.V. is exercised by another Dutch company which is within the personal scope of the Netherlands DTT. There are no sources of information that control is exercised by the ultimate parent company, CBS Corporation, based in New York, USA. The trial court was correct in finding that C.B.S. International Netherlands B.V. had assets, capital, and its own specialized personnel, and a comparison of the 2016 and 2017 C.B.S. figures showed that the company’s employees, offices, and profits were increasing, and therefore it was not a company that did not have assets, capital, and personnel consistent with its business. The existence of control over the use of the rights from which the income was earned is indicated by the content of the underlying contracts, which provide for penalties for non-performance and Fox Networks’ obligation to submit monthly reports. Insofar as the grounds under Article 136 of the VAT Code for the application of the Netherlands DTT are met, CBS International Netherlands B.V. is also entitled to the relief under Article 12(1) of the Netherlands DTT. 1 of the Royalty Income Tax Treaty in its country of residence. There is therefore also a right to a refund of the withholding tax under Art. 195 para. In concluding that the refusal to refund the tax withheld and paid by the contested APV was unlawful, the first instance court made a correct decision which should be upheld.” 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. Judgement 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. Judgement 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 ...

In 2016 the British company Avon Cosmetics Limited (ACL) became the sole licensor of intellectual property rights for Europe, Africa and the Middle East within the Avon Cosmetics Group and was authorised to issue sub-licences to other group companies, including the Czech subsidiary, Avon Cosmetics spol. s r.o.. ACL charged a fee for issuing a sub-licence equal to an agreed-upon percentage of net sales but was then contractually obliged to pay a similar fee to the US companies, Avon Products Inc. and Avon Internetional Operations Inc. ACL applied for relief from WHT on the royalty payments from the Czech subsidiary. The tax authorities concluded that ACL was not the beneficial owner of the royalty income but only an conduit or intermediary. The legal conditions for granting the exemption were not met. ACL did not obtain any real benefit from the royalty fees and was not authorised to freely decide on use of the income as it was contractually obliged to pay on a similar amount to the US companies. On that basis the application for relief was denied. An appeal was filed by ACL. Judgement of the Municipal Court The court upheld the decision of the tax authorities and dismissed the appeal of ACL. Excerpts “In accordance with the Czech statutory framework enshrined in the Income Tax Act and also with EU legislation, namely Council Directive 2003/49/EC, which is implemented into Czech law by the Income Tax Act, a beneficial owner is not an entity which receives royalty payments for another person as an intermediary. Thus, the real owner of the said income must be the entity whose income increases its assets and enriches it. The beneficial owner uses the income without restriction and does not pass it on, even in part, to another person. The Court of Justice of the European Union came to the same conclusion in its judgment of 26 February 2019 in Joined Cases C-115/16, C-118/16, C-119/16 and C-299/19, where it stated that ‘The concept of “beneficial owner of interest” within the meaning of the Directive must therefore be interpreted as referring to the entity which actually benefits from the interest paid to it. Article 1(4) of the same directive supports that reference to economic reality by specifying that a company of a Member State is to be regarded as the beneficial owner of interest or royalties only if it receives them for itself and not for another person as an intermediary, such as an agent, trustee or principal’, to which the applicant referred in its application. The Supreme Administrative Court also commented on this issue in its decision of 12 November 2019, No. 10 Afs 140/2018-32, where it stated that “The recipient of (sub)royalties is the beneficial owner of the royalties only if he can use and enjoy them without limitation and is not obliged by law or contract to pass the payments to another person (Article 19(6) of Act No. 586/1992 Coll., on Income Taxes)”. Although the applicant refers to those decisions in support of its argument, in the Court’s view those decisions support the interpretation relied on by the defendant and the court in this case. Nowhere in the reasoning of the decisions does it appear that the applicant’s conclusion, which is strongly simplistic, is that the only criterion is whether the recipient of the royalties has an obligation to pass them on to another person.” “In so far as the applicant argues that it exercised other rights and obligations vis-à-vis the individual local companies after taking over the licence rights, which also involved the applicant’s liability for the acts and omissions of the sub-licence holders, and that it is not merely a ‘flow-through’ company, and then ties its argumentation to a possible abuse of rights, the Court observes that the above-mentioned decision of the Court of Justice of the European Union cannot be interpreted as meaning that, unless an abuse of rights is proved, the defendant is obliged to grant the applicant an exemption from royalty tax. Both the law and the above-mentioned case-law define the concept of beneficial owner, which the applicant has failed to prove in the proceedings (the Court refers in detail to the detailed reasoning of the contested decision). Thus, it is not relevant whether the applicant legitimately carries on an economic activity in the more general sense or whether it receives royalties on its own account, but whether it is the beneficial owner of the royalties (it benefits from them itself), which are two different facts. It is therefore relevant to the assessment of the case what the nature of the applicant’s activity is, not whether an abuse of rights is established. In the Court’s view, the applicant’s activity does not satisfy the condition of beneficial owner of the royalties as defined by the case-law referred to above.” “The applicant further points out that it collects royalties from Avon Cosmetics spol. s r.o. in the amount of xxxxx % of net sales for the grant of the sub-licence, whereas it only pays to Avon Products Inc. and Avon International Operations Inc. an amount equivalent to xxxxx % of net sales. In assessing this point of claim, the Court agrees with the defendant, which concludes that the applicant does not derive any real benefit from the royalty income and is not entitled to take a free decision on it, since it is obliged to pay almost all of it to the above-mentioned companies. That conclusion is also supported by other facts on which the defendant bases its conclusion, which are based on the contractual documentation submitted and with the assessment of which the Court agrees (e.g. the payability of the royalty received and the sub-licence fee paid, which is set at a similar level; the fact that ownership of the property rights remains with Avon Products Inc. and Avon International Operations Inc., which, moreover, have reserved the right to carry out inspections not only of the applicant but also of the sub-licence holders). What is relevant for this ...

The guidance contained in this chapter is intended to address transfer pricing matters exclusively. It is not intended to have relevance for other tax purposes. For example, the Commentary on Article 12 of the OECD Model Tax Convention contains a detailed discussion of the definition of royalties under that Article (paragraphs 8 to 19). The Article 12 definition of “royalties” is not intended to provide any guidance on whether, and if so at what price, the use or transfer of intangibles would be remunerated between independent parties. It is therefore not relevant for transfer pricing purposes. Moreover, the manner in which a transaction is characterised for transfer pricing purposes has no relevance to the question of whether a particular payment constitutes a royalty or may be subjected to withholding tax under Article 12. The concept of intangibles for transfer pricing purposes and the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention are two different notions that do not need to be aligned. It may occur that a payment made between associated enterprises may be regarded as not constituting a royalty for purposes of Article 12, and nevertheless be treated for transfer pricing purposes as a payment to which the principles of this chapter may apply. Examples could include certain payments related to goodwill or ongoing concern value. It may also occur that a payment properly treated as a royalty under Article 12 of a relevant Treaty may not be made in remuneration for intangibles for purposes of this chapter. Examples could include certain payments for technical services. Similarly, the guidance in this chapter is not intended to have relevance for customs purposes ...

Seven Seas Technologies under a software license agreement purchased software from a US company – Callidus software – for internal use and for distribution to local customers. Following an audit, the tax authorities found that Seven Seas Technologies had not been paying withholding taxes on payments in respect of the software license agreement with Callidas. An assessment was issued according to which these payments were found to by a “consideration for the use and right to use copyright in the literary work of another person” as per section 2 of the Income Tax Act, thus subject to withholding tax under Section 35 (1)(b) of the Kenyan Income Tax Act. Seven Seas Technologies contested the assessment before the Tax Appeals Tribunal where, in a judgement issued 8 December 2016, the tribunal held that Seven Seas Technologies had acquired rights to copyright in software that is commercially exploited and that the company on that basis should have paid withholding tax. A decision was issued in favor of the tax authorities. Unsatisfied with the decision of the tribunal Seven Seas Technologies Ltd moved the case to the High Court. In the appeal filed in 2017 Seven Seas Technologies Ltd argues that a payment may only be deemed a royalty where it results in the transfer of copyrights which grants rights as set out in Section 26 (1) of Copyright Act 2001. In the case at hand, a transfer of such rights had not taken place under the software license agreement and the payments are therefore not subject to withholding tax. Judgement of the High Court The High Court granted the appeal and decided in favor of Seven Seas Technologies Ltd. The additional tax assessment and the decision of the tribunal – was set aside. During the proceedings the High Court sought additional evidence, including evidence of experts. The expert witness for the Appellant pointed to the decision in the case of Tata Consultancy Services vs State of Andhra Pradesh (277ITR 401) 2004 Pg 99-122 wherein the Indian Supreme Court held that software, when put in a medium, is goods for sale, not copyright. The High Court relied on the Indian Supreme Court decision of 2 March 2021 in the case of Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax. The Court extracted the finding that “What is licensed by the foreign, non-resident supplier to the distributor and resold to the end-user or directly supplied to the resident end-user is, in fact, the sale of a physical object which contains an embedded computer program and is, therefore, the sale of goods.” Excerpt “The upshot of the above excerpts and the case is that the Appellant in this case paid the license fee did not acquire any partial rights in copyright and thus not subject to royalty as argued by the Respondent. In addition to the above, the OECD Model Tax Convention on Income and on Capital provides that in such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Therefore, payments in these types of transactions should be dealt with as business profits and not as royalties. The Tribunal erred in failing to consider that the Appellant is a vendor of copyrighted material and not the user of a copyright and in this regard does not receive any right to exploit the copyright. Disposition It is therefore right to conclude that the Appellant was not subject to pay royalties and in turn not liable to pay Withholding tax to the Respondent with regard to the distribution of the computer software. For these reasons the Appeal is allowed and the decision of the Tribunal set aside.” ...

AES SUL Distribuidora Gaúcha de Energia S/A is active in footwear industry. It had paid for services to related foreign companies in South Africa, Argentina, Canada, China, South Korea, Spain, France, Holland, Italy, Japan, Norway, Portugal and Turkey. The tax authorities were of the opinion that withholding tax applied to these payments, which they considered royalty, and on that basis an assessment was issued. Not satisfied with this assessment AES filed an appeal, which was allowed by the court of first instance. An appeal was then filed by the tax authorities with the Superior Tribunal. Judgement of the Superior Tribunal de Justiça The court upheld the decision of the court of first instance and dismissed the appeal of the tax authorities. Excerpts “Therefore, the income from the rendering of services paid to residents or domiciled abroad, in the cases dealt with in the records, is not subject to the levy of withholding income tax. The refund of amounts proved to have been unduly paid, therefore, may be requested by the plaintiff, as she would have borne such burden, according to article 166 of the CTN.” “This Superior Court has a firm position according to which IRRF is not levied on remittances abroad arising from contracts for the provision of assistance and technical services, without transfer of technology, when there is a treaty to avoid double taxation, and the term “profit of the foreign company” must be interpreted as operating profit provided for in arts. 6, 11 and 12 of Decree-law 1.598/1977, understood as “the result of the activities, main or accessory, that constitute the object of the legal entity”, including income paid in exchange for services rendered, as demonstrated in the decisions summarized below” “1. The case laws of this Superior Court guide that the provisions of the International Tax Treaties prevail over the legal rules of Domestic Law, due to their specificity, subject to the supremacy of the Magna Carta. Intelligence of art. 98 of the CTN. Precedents: RESP 1.161.467/RS, Reporting Justice CASTRO MEIRA, DJe 1.6.2012; RESP 1.325.709/RJ, Reporting Justice NAPOLEÃO NUNES MAIA FILHO, DJe 20.5.2014. 2. The Brazil-Spain Treaty, object of Decree 76.975/76, provides that the profits of a company of a Contracting State are only taxable in this same State, unless the company performs its activity in the other State by means of a permanent establishment located therein. 3. The term profit of the foreign company must be interpreted not as actual profit, but as operating profit, as the result of the activities, main or accessory, that constitute the object of the legal entity, including, the income paid as consideration for services rendered.” “Article VII of the OECD Model Tax Agreement on Income and Capital used by most Western countries, including Brazil, pursuant to International Tax Treaties entered into with Belgium (Decree 72.542/73), Denmark (Decree 75.106/74) and the Principality of Luxembourg (Decree 85. 051/80), provides that the profits of a company of a contracting state are only taxable in that same state, unless the company carries on its activities in the other contracting state through a permanent establishment situated therein (branch, agency or subsidiary); moreover, the Vienna Convention provides that a party may not invoke the provisions of its domestic law to justify breach of a treaty (art. 27), in reverence for the basic principle of good faith. 7. In the case of a controlled company, endowed with its own legal personality, distinct from that of the parent company, under the terms of the International Treaties, the profits earned by it are its own profits, and thus taxed only in the Country of its domicile; the system adopted by the national tax legislation of adding them to the profits of the Brazilian parent company ends up violating the International Tax Pacts and infringing the principle of good faith in foreign relations, to which International Law does not grant relief. 8. Bearing in mind that the STF considered the caput of article 74 of MP 2158-35/2001 to be constitutional, the STF adheres to this stand and considers that the profits earned by a subsidiary headquartered in Bermuda, a country with which Brazil has no international agreement along the lines of the OECD, must be considered to have been made available to the parent company on the date of the balance sheet on which they were ascertained. 9. Art. 7, § 1 of IN/SRF 213/02 exceeded the limits imposed by the Federal Law itself (art. 25 of Law 9249/95 and 74 of MP 2158-35/01) which it was intended to regulate; in fact, upon analysis of the legislation supplementing art. 74 of MP 2158-35/01, it may be verified that the prevailing tax regime is that of art. 23 of DL 1. 598/77, which did not change at all with respect to the non-inclusion, in the computation of the taxable income, of the methods resulting from the evaluation of investments abroad by the equity accounting method, that is, of the counterparts of the adjustment of the value of the investment in controlled foreign companies. 10. Therefore, I hereby examine the appeal and partially grant it, partially granting the security order claimed, in order to affirm that the profits earned in the Countries where the controlled companies headquartered in Belgium, Denmark, and Luxembourg are established, are taxed only in their territories, in compliance with article 98 of the CTN and with the Tax Treaties (CTN). The profits ascertained by Brasamerican Limited, domiciled in Bermuda, are subject to article 74, main section of MP 2158-35/2001, and the result of the contra entry to the adjustment of the investment value by the equity accounting method is not part of them.” “Therefore, I hereby examine the appeal and partially grant it, partially granting the security order claimed, in order to affirm that the profits earned in the Countries where the controlled companies headquartered in Belgium, Denmark, and Luxembourg are established, are taxed only in their territories, in compliance with article 98 of the CTN and with the Tax Treaties (CTN). The profits ascertained by Brasamerican ...

At issue in the case of India vs. Engineering Analysis Centre of Excellence Private Limited, was whether payments for purchase of computer software to foreign suppliers or manufacturers could be characterised as royalty payments. The Supreme Court held that such payments could not be considered payments for use of the underlying copyrights/intangibles. Hence, no withholding tax would apply to these payments for the years prior to the 2012. Furthermore, the 2012 amendment to the royalty definition in the Indian tax law could not be applied retroactively, and even after 2012, the definition of royalty in Double Tax Treaties would still override the definition in Indian tax law. Excerpt from the conclusion of the Supreme Court “Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment , it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.” ...

By judgment of 22 May 2020, the Administrative Court set aside a tax assessment in which CBS International Netherlands B.V. had been denied reimbursement of withholding tax related to royalties and license payments. An appeal was filed by the tax authorities with the Supreme Administrative Court. In the appeal the tax authorities held that the beneficial owner of the licence and royalty payments was not CBS International Netherlands B.V. but instead CBS CORPORATION, a company incorporated and domiciled in New York, USA. According to the tax authorities the main function of CBS International Netherlands B.V. was that of an intermediary between the end customers and the beneficial owner. This was further supported by the transfer pricing documentation, according to which the US company that bears the risk of the development activity, the market risk is borne equally by the two companies, and the only risks borne by the Dutch company are the currency, operational and credit risks, which in turn are not directly related to the development activity. Judgement of the Supreme Administrative Court The court canceled the 2019 tax assessment and returns the case to the competent authority to issue decision in accordance with the instructions on the interpretation and application of the law given by this decision. Excerpt “There is no information source for the fact that CBS International Netherlands B.V. has no right to dispose of the income and to assess its use. Conversely, according to article 13 of the company’s articles of association, the decision to distribute the result for the year is to be made by the general meeting of shareholders. This disqualifies the company as the nominee instead of the owner of the income /refer to the Commentary to Article 12 of the Organisation for Economic Co-operation and Development Model DTT/. The Dutch company does not have the limited powers of a formal owner – it does not direct the income to another person who actually receives the benefit; it does not act as a fiduciary or administrator on behalf of the stakeholders /see Commentary/. The activity from which the income is derived is that of granting rights under underlying television licence contracts. Corresponding to this activity is the risk identified in the transfer pricing documentation – development risk, market risk, currency risk, operational risk, credit risk. Neither the applicant nor the administration have alleged that the Dutch company was involved in the creation of the rights from the grant of which the income arose. Nor did the tax authorities deny that company’s right to grant the Bulgarian company the use of the copyright objects in return for consideration constituting the income on which the withholding tax was levied. To the contrary, there would be an assertion that there was no basis for the exchange of property and, accordingly, no object of taxation. The appellant is not an income directing company under Section 136A(2) of the Income-tax Act. It has not been shown to be controlled by a person not entitled to the same type or amount of relief on direct receipt of income. The control of CBS International Netherlands B.V. is exercised by another Dutch company which is within the personal scope of the Netherlands DTT. There are no sources of information that control is exercised by the “ultimate parent company” CBS Corporation based in New York, USA. It is unclear what type and amount of assets the Dutch company is expected to own beyond the USD 72,000 in property, plant and equipment listed in the APA and with a staff of 22 employees given the intellectual property rights management activities carried out. The existence of control over the use of the rights from which the income was earned is indicated by the content of the underlying contracts, which provide for penalties for non-performance and Fox Networks’ obligation to submit monthly reports. In so far as the grounds laid down in Article 136 of the VAT Code for the application of the Netherlands DTT are met, the applicant is also entitled to the relief provided for in Article 12(1) of the VAT Code. 1 of the Royalty Income Tax Treaty in the country of residence. There is therefore also a right to a refund of the withholding tax under Article 195(1) of the Treaty. The refusal to refund the tax withheld and deposited as provided for in the APA challenged before the ACCA is unlawful and the dismissal of the challenge to the refusal is incorrect. The first instance decision and the APV must be annulled in accordance with the rule of Article 160 para. 3 of the Code of Administrative Offences, the case file should be returned to the competent revenue authority at the Directorate General of the National Revenue Service, GDO, Sofia. Sofia to issue an APV in accordance with the instructions on the interpretation and application of the law given by this decision.” Click here for English Translation Click here for other translation ...

The tax authorities had issued an assessment according to which royalty payments from Colgate Palmolive España S.A (CP España) to Switzerland were not considered exempt from withholding taxes under the Spanish-Swiss DTA since the company in Switzerland was not the Beneficial Owner of the royalty-income. The assessment was set aside by the National Court in a decision issued in November 2018. The Supreme court were to clarify the conformity with the law of the judgement of the Audiencia Nacional, following in the wake of the order of admission which, in a similar manner to that proposed in appeal no. 5448/2018, ruled in favour of the taxpayer on 3 February last, asks the following questions. a) to clarify the objective and temporal limits of the so-called dynamic interpretation of the DTAs signed by the Kingdom of Spain on the basis of the OECD Model Convention – as in this case the Spanish-Swiss DTA – when, despite the fact that the concept of beneficial owner is not provided for in article 12 of the DTA, this figure is applied in accordance with the Commentaries to the OECD Model Convention (drawn up at a date subsequent to the initial formalisation of the Convention), despite the fact that the beneficial owner was not introduced in Article 12 (relating to royalties) in subsequent amendments to the DTA, but was introduced in other provisions (Articles 10 and 11) for other concepts such as dividends or interest. b) Whether dynamic interpretation, if possible, allows the applicator of the rule, including the Court in proceedings, to correct the actual meaning or literal tenor of the rules agreed in the Convention, which occupies a preferential place in our system of sources (Article 96 EC), in order to avoid treaty overriding or unilateral modification. c) Clarify whether the Commentaries to the OECD Model Convention (here drawn up at a date subsequent to the signing of the Convention) constitute a source of law in their own right (Articles 117 EC and 1. 6 of the Civil Code), as they are not, as we have stated – STS of 19 October 2016, pronounced in appeal no. 2558/2015-, as they are not strictly speaking legal rules that are binding on the Courts of Justice and which, therefore, can be the basis for a ground for cassation in their hypothetical infringement and whether, consequently, the Courts can rely on their indications or opinions to stop applying a double taxation Convention and directly apply the national law, which results in a qualitatively higher taxation. These questions coincide substantially, with slight variations in formulation, with those examined in appeal no. 5448/2018, which gave rise to the favourable judgment -for the taxpayer- of 3 February 2020. This leads us to specify the neuralgic points of the problem raised here, as far as they coincide, for the decision of the appeal in cassation and the formation of jurisprudential doctrine in this matter: a) what is the dynamic interpretation of the Conventions and whether it is an expression that can find equivalents in our legal tradition; b) whether the OECD model agreements or their commentaries, by their origin and nature, are legal rules that the courts of justice must take into account when interpreting the rules agreed in the Conventions, in accordance with the provisions of Articles 94 and 96 of our EC; c) whether such commentaries, guidelines or interpretative models can take precedence over the hermeneutical rules, either those agreed between the signatory states or in other conventions and treaties, or those of their respective domestic legal systems, and by virtue of what source of legitimacy; d) whether this dynamic interpretation can be used to interpret an article of the Convention on the basis of the content of other subsequent rules of the same Convention, in any event not in force at the time of application of the withholdings required here; and e) whether Spain can unilaterally interpret, on the basis of this rule, the concept of royalties, as well as that of beneficial owner, in order to deny that it is present in the paying company. Judgement of the Supreme Court The court held in favour of Colgate and set aside the decision of the tax authorities. Excerpts “The provisions of paragraph 1 shall not apply if the beneficial owner of the interest, who is a resident of a Contracting State, carries on a business in the other Contracting State from which the interest arises through a fixed establishment situated in that other State and the debt-claim giving rise to the interest is effectively connected with that fixed establishment. In such a case the provisions of Article 7 shall apply”. As already indicated, it should be stressed that the wording of Article 12 (royalties) did not include any reference to the concept of beneficial owner (despite having had the opportunity at the time of the amendment of the Convention). Moreover, to date, the concept of “beneficial owner” has not been introduced in Article 12 either, despite the fact that there has been a second amendment of the Spain-Switzerland DTA through the Protocol made in Madrid on 27 July 2011 (BOE of 11 June 2013) – “Protocol of 2011”. That is to say, without prejudice to the incorporation of the concept of “beneficial owner” in the 1977 and 1995 Model Conventions and the subsequent amendments made to the conventional text that came to reflect this and other modifications introduced in the Model Convention, the fact is that the literal wording of the sections that interest us here in Article 12 of the Spain-Switzerland DTA maintains, to date, its original wording. That is to say, the States have agreed to modify and adapt the CDI to the new standards set out in the Model, but only in those provisions expressly agreed by both States and among which the provision relating to royalties was not included […]”. “By their very nature, the above considerations lead us to the need to annul and set aside the lower court judgment, on the ...

“TELE SA” had applied a 15% withholding tax rate to lease payments for telecommunications equipment purportedly provided by a Chilean company that had been established by the Mexican parent of the “TELE” group. TELE SA claimed the payments qualified as royalties under Article 12 of the Peru-Chile double tax treaty. The Peruvian Tax Authority found the reduced 15 % rate did not apply to the lease payments because the Chilean entity was not the beneficial owner of the royalty payments. Hence an assessment was issued where withholding taxes had been calculated using a 30% rate under Peruvian domestic tax legislation. An appeal was filed with the Tax Court. Judgement of the Tax Court The Tax Court upheld the decision of the tax authorities and dismissed the appeal of “TELE SA”. The 15% withholding tax rate for royalty provided for in Article 12 of the double tax treaty between Peru and Chile did not apply to the payments as the Chilean company was not the beneficial owner, but a mere conduit. Click her for English Translation Click here for other translation ...

The Administrative Court of Appeal (CAA) set aside a judgement of the administrative court and upheld the tax authorities claims of withholding taxes on royalties paid by Société Planet to companies in Belgium and Malta irrespective of the beneficial owner of those royalties being a company in New Zealand. Hence, Article 12(2) of the Franco-New Zealand tax treaty was not considered applicable to French source royalties whose beneficial owner resided in New Zealand, where they had been paid to an intermediary company established in a third country. Click here for English translation Click here for other translation ...

The tax authorities had issued an assessment according to which royalty payments from Colgate Palmolive España S.A. (CP España) to Switzerland were not considered exempt from withholding taxes under the Spanish-Swiss DTA since the company in Switzerland was not the Beneficial Owner of the royalty-income. Judgement of the National Court The court held in favour of Colgate and set aside the decision of the tax authorities. SP vs Palmolive SAN_1128_2018 ENG NW”>Click here for English Translation Click here for other translation ...

The guidance contained in this chapter is intended to address transfer pricing matters exclusively. It is not intended to have relevance for other tax purposes. For example, the Commentary on Article 12 of the OECD Model Tax Convention contains a detailed discussion of the definition of royalties under that Article (paragraphs 8 to 19). The Article 12 definition of “royalties” is not intended to provide any guidance on whether, and if so at what price, the use or transfer of intangibles would be remunerated between independent parties. It is therefore not relevant for transfer pricing purposes. Moreover, the manner in which a transaction is characterised for transfer pricing purposes has no relevance to the question of whether a particular payment constitutes a royalty or may be subjected to withholding tax under Article 12. The concept of intangibles for transfer pricing purposes and the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention are two different notions that do not need to be aligned. It may occur that a payment made between associated enterprises may be regarded as not constituting a royalty for purposes of Article 12, and nevertheless be treated for transfer pricing purposes as a payment to which the principles of this chapter may apply. Examples could include certain payments related to goodwill or ongoing concern value. It may also occur that a payment properly treated as a royalty under Article 12 of a relevant Treaty may not be made in remuneration for intangibles for purposes of this chapter. Examples could include certain payments for technical services. Similarly, the guidance in this chapter is not intended to have relevance for customs purposes ...

The Dutch company, Velcro Holdings BV (“VHBV”), licensed IP from an affiliated company in the Dutch Antilles, Velcro Industries BV (“VIBV”), and sublicensed this IP to a Canadian company, Velcro Canada Inc. (VCI). VHBV was obliged to pay 90% of the royalties received from VCI. within 30 days after receipt to VIBV. At issue was whether VHBV qualified as Beneficial Owner of the royalty payments from VCI and consequently would be entitled to a reduced withholding tax – from 25% (the Canadian domestic rate) to 10% (the rate under article 12 of the treaty between Canada and the Netherlands). The tax authorities considered that VHBV did not qualify as Beneficial Owner and denied application of the reduced withholding tax rate. Judgement of the Tax Court The court set aside the decision of the tax authorities and decided in favor of VCI. Excerpts: “VHBV obviously has some discretion based on the facts as noted above regarding the use and application of the royalty funds. It is quite obvious that though there might be limited discretion, VHBV does have discretion. According to Prévost, there must be “absolutely no discretion” – that is not the case on the facts before the Court. It is only when there is “absolutely no discretion” that the Court take the draconian step of piercing the corporate veil.” “The person who is the beneficial owner is the person who enjoys and assumes all the attributes of ownership. Only if the interest in the item in question gives that party the right to control the item without question (e.g. they are not accountable to anyone for how he or she deals with the item) will it meet the threshold set in Prévost. In Matchwood, the Court found that the taxpayer did not have such rights until the deed was registered; likewise, VIBV is not a party to the license agreements (having fully assigned it, along with its rights and obligations, to VHBV). It no longer has such rights and thus does not have an interest that amounts to beneficial ownership.” “For the reasons given above I believe that the beneficial ownership of the royalties rests in VHBV and not in VIBV and as such, the appeal is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on that basis and further, the 1995 assessment dated October 25, 1996 is referred back to the Minister for reconsideration and recalculation on the basis that VIBV was a resident of the Netherlands in 1995 and therefore entitled to the benefit of that treaty.” ...