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. Judgement 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 ...

On 16 June 2022 McDonald’s France entered into an settlement agreement according to which it will pay €1.245 billion in back taxes and fines to the French tax authorities. The settlement agreement resulted from investigations carried out by the French tax authorities in regards to abnormally high royalties transferred from McDonald’s France to McDonald’s Luxembourg following an intra group restructuring in 2009. McDonald’s France doubled its royalty payments from 5% to 10% of restaurant turnover, and instead of paying these royalties to McDonald’s HQ in the United States, going forward they paid them to a Swiss PE of a group company in Luxembourg, which was not taxable of the amounts. During the investigations it was discovered that McDonald’s royalty fees could vary substantially from one McDonald’s branch to the next without any justification other than tax savings for the group. This conclusion was further supported by statements of the managers of the various subsidiaries as well as documentation seized which showed that the 100% increase in the royalty rate was mainly explained by a higher profitability of McDonald’s in France and a corresponding increase in taxes due. The investigations led the French tax authorities to question the overall economic substance of the IP company in Luxembourg and the contractual arrangements setup by the McDonald’s group. After being presented with the findings of the investigations and charged with tax fraud etc. McDonald’s was offered a public interest settlement agreement (CJIP) under Article 41-1-2 of the French Code of Criminal Procedure. The final settlement agreement between McDonald’s and the French authorities was announced in a press release from the Financial Public Prosecutor (English translation below). On 16 June 2022, the President of the Paris Judicial Court validated the judicial public interest agreement (CJIP) concluded on 31 May 2022 by the Financial Public Prosecutor (PRF) and the companies MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L pursuant to Article 41-1-2 of the Criminal Procedure Code. under Article 41-1-2 of the Code of Criminal Procedure. Under the terms of the CJIP, MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L, undertake to pay the French Treasury a public interest fine totalling 508,482,964 euros. Several French companies of the MC DONALD’S group have also signed a global settlement with the tax authorities, putting an end to the administrative litigation. The sum of the duties and penalties due under the overall settlement and the public interest fine provided for under the CJIP amounts to a total of EUR 1,245,624,269. Subject to the payment of the public interest fine, the validation of the CJIP extinguishes the public prosecution against the signatory companies. This agreement follows a preliminary investigation initiated by the PNF on 4 January 2016 after the filing of a complaint by the works council of MC DONALD’S OUEST PARISIEN. Opened in particular on the charge of tax fraud, the investigation had been entrusted to the Central Office for Combating Corruption and Financial and Fiscal Offences (OCLCIFF). This is the 10ᵉ CJIP signed by the national financial prosecutor’s office. The Financial Public Prosecutor Jean-François Bohnert Validated Settlement Agreement of 16 June 2022 English translation of the Validated Settelment Agreement Preliminary Settlement Agreement of 31 May 2022 with statement of facts and resulting taxes and fines English translation of the Preliminary Settlement Agreement of 31 May 2022 ...

97. Company A is the Parent of an MNE group with operations in country X. Company A owns patents, trademarks and know-how with regard to several products produced and sold by the MNE group. Company B is a wholly owned subsidiary of Company A. All of Company B’s operations are conducted in country Y. Company B also owns patents, trademarks and know-how related to Product M. 98. For sound business reasons related to the coordination of the group’s patent protection and anti-counterfeiting activities, the MNE group decides to centralise ownership of its patents in Company A. Accordingly, Company B sells the Product M patents to Company A for a lump-sum price. Company A assumes responsibility to perform all ongoing functions and it assumes all risks related to the Product M patents following the sale. Based on a detailed comparability and functional analysis, the MNE group concludes that it is not able to identify any comparable uncontrolled transactions that can be used to determine the arm’s length price. Company A and Company B reasonably conclude that the application of valuation techniques represents the most appropriate transfer pricing method to use in determining whether the agreed price is consistent with arm’s length dealings. 99. Valuation personnel apply a valuation method that directly values property and patents to arrive at an after-tax net present value for the Product M patent of 80. The analysis is based on royalty rates, discount rates and useful lives typical in the industry in which Product M competes. However, there are material differences between Product M and the relevant patent rights related to Product M, and those typical in the industry. The royalty arrangements used in the analysis would therefore not satisfy the comparability standards required for a CUP method analysis. The valuation seeks to make adjustments for these differences. 100. In conducting its analysis, Company A also conducts a discounted cash flow based analysis of the Product M business in its entirety. That analysis, based on valuation parameters typically used by Company A in evaluating potential acquisitions, suggests that the entire Product M business has a net present value of 100. The 20 difference between the 100 valuation of the entire Product M business and the 80 valuation of the patent on its own appears to be inadequate to reflect the net present value of routine functional returns for functions performed by Company B and to recognise any value for the trademarks and know-how retained by Company B. Under these circumstances further review of the reliability of the 80 value ascribed to the patent would be called for ...

1. Premiere is the parent company of an MNE group. Company S is a wholly owned subsidiary of Premiere and a member of the Premiere group. Premiere funds R&D and performs ongoing R&D functions in support of its business operations. When its R&D functions result in patentable inventions, it is the practice of the Premiere group that all rights in such inventions be assigned to Company S in order to centralise and simplify global patent administration. All patent registrations are held and maintained in the name of Company S. 2. Company S employs three lawyers to perform its patent administration work and has no other employees. Company S does not conduct or control any of the R&D activities of the Premiere group. Company S has no technical R&D personnel, nor does it incur any of the Premiere group’s R&D expense. Key decisions related to defending the patents are made by Premiere management, after taking advice from employees of Company S. Premiere’s management, and not the employees of Company S, controls all decisions regarding licensing of the group’s patents to both independent and associated enterprises. 3. At the time of each assignment of rights from Premiere to Company S, Company S makes a nominal EUR 100 payment to Premiere in consideration of the assignment of rights to a patentable invention and, as a specific condition of the assignment, simultaneously grants to Premiere an exclusive, royalty free, patent licence, with full rights to sub-licence, for the full life of the patent to be registered. The nominal payments of Company S to Premiere are made purely to satisfy technical contract law requirements related to the assignments and, for purposes of this example, it is assumed that they do not reflect arm’s length compensation for the assigned rights to patentable inventions. Premiere uses the patented inventions in manufacturing and selling its products throughout the world and from time to time sublicenses patent rights to others. Company S makes no commercial use of the patents nor is it entitled to do so under the terms of the licence agreement with Premiere. 4. Under the agreement, Premiere performs all functions related to the development, enhancement, maintenance, protection and exploitation of the intangibles except for patent administration services. Premiere contributes and uses all assets associated with the development and exploitation of the intangible, and assumes all or substantially all of the risks associated with the intangibles. Premiere should be entitled to the bulk of the returns derived from exploitation of the intangibles. Tax administrations could arrive at an appropriate transfer pricing solution by delineating the actual transaction undertaken between Premiere and Company S. Depending on the facts, it might be determined that taken together the nominal assignment of rights to Company S and the simultaneous grant of full exploitation rights back to Premiere reflect in substance a patent administration service arrangement between Premiere and Company S. An arm’s length price would be determined for the patent administration services and Premiere would retain or be allocated the balance of the returns derived by the MNE group from the exploitation of the patents ...

Also in the case where a local operation disposes of the legal ownership of its intangibles to a foreign associated enterprise and continues to use the intangibles further to the disposal, but does so in a different legal capacity (e.g. as a licensee), the conditions of the transfer should be assessed from both the transferor’s and the transferee’s perspectives. The determination of an arm’s length remuneration for the subsequent ownership, control and exploitation of the transferred intangible should take account of the extent of the functions performed, assets used and risks assumed by the parties in relation to the intangible transferred, and in particular analysing control of risks and control of functions performed relating to the development, enhancement, maintenance, protection, or exploitation of the intangibles ...

The arm’s length principle requires an evaluation of the conditions made or imposed between associated enterprises, at the level of each of them. The fact that centralisation of legal ownership of intangibles may be motivated by sound commercial reasons at the level of the MNE group does not answer the question whether the conditions of the transfer are arm’s length from the perspectives of both the transferor and the transferee ...

MNE groups may have sound business reasons to centralise ownership of intangibles or rights in intangibles. An example in the context of business restructuring is a transfer of legal ownership of intangibles that accompanies the specialisation of manufacturing sites within an MNE group. In a pre-restructuring environment, each manufacturing entity may be the owner and manager of a series of patents – for instance if the manufacturing sites were historically acquired from third parties with their intangibles. In a global business model, each manufacturing site can be specialised by type of manufacturing process or by geographical area rather than by patent. As a consequence of such a restructuring the MNE group might proceed with the transfer of all the locally owned patents to a central location which will in turn give contractual rights (through licences or manufacturing agreements) to all the group’s manufacturing sites to manufacture the products falling in their new areas of competence, using patents that were initially owned either by the same or by another entity within the group. In such a scenario it will be important to delineate the actual transaction and to understand whether the transfer of legal ownership is for administrative simplicity (as in Example 1 of Annex I to Chapter VI), or whether the restructuring changes the identity of the parties performing or controlling functions related to the development, enhancement, maintenance, protection, and exploitation of intangibles ...

Business restructurings sometimes involve the transfer of the legal ownership of intangibles or rights in intangibles that were previously owned by one or more local operation(s) to a central location situated in another tax jurisdiction (e.g. a foreign associated enterprise that operates as a principal or as a so-called “IP company”). In some cases the transferor continues to use the intangible transferred, but does so in another legal capacity (e.g. as a licensee of the transferee, or through a contract that includes limited rights to the intangible such as a contract manufacturing arrangement using patents that were transferred; or a limited risk distribution arrangement using a trademark that was transferred). In accordance with the guidance in Chapter VI, it is important to remember that the legal ownership of an intangible by itself does not confer any right ultimately to retain returns derived by the MNE group from exploiting that intangible (see 6.42). Instead, the compensation required to be paid to associated enterprises performing or controlling functions related to the development, enhancement, maintenance, protection, or exploitation of intangibles may comprise any share of the total return anticipated to be derived from the intangibles (see 6.54). Therefore, the change in legal ownership of an intangible in a business restructuring may not affect which party is entitled to returns from that intangible ...

Also in the case where a local operation disposes of the legal ownership of its intangibles to a foreign associated enterprise and continues to use the intangibles further to the disposal, but does so in a different legal capacity (e.g. as a licensee), the conditions of the transfer should be assessed from both the transferor’s and the transferee’s perspectives. The determination of an arm’s length remuneration for the subsequent ownership, control and exploitation of the transferred intangible should take account of the extent of the functions performed, assets used and risks assumed by the parties in relation to the intangible transferred, and in particular analysing control of risks and control of functions performed relating to the development, enhancement, maintenance, protection, or exploitation of the intangibles ...

The arm’s length principle requires an evaluation of the conditions made or imposed between associated enterprises, at the level of each of them. The fact that centralisation of legal ownership of intangibles may be motivated by sound commercial reasons at the level of the MNE group does not answer the question whether the conditions of the transfer are arm’s length from the perspectives of both the transferor and the transferee ...

MNE groups may have sound business reasons to centralise ownership of intangibles or rights in intangibles. An example in the context of business restructuring is a transfer of legal ownership of intangibles that accompanies the specialisation of manufacturing sites within an MNE group. In a pre-restructuring environment, each manufacturing entity may be the owner and manager of a series of patents – for instance if the manufacturing sites were historically acquired from third parties with their intangibles. In a global business model, each manufacturing site can be specialised by type of manufacturing process or by geographical area rather than by patent. As a consequence of such a restructuring the MNE group might proceed with the transfer of all the locally owned patents to a central location which will in turn give contractual rights (through licences or manufacturing agreements) to all the group’s manufacturing sites to manufacture the products falling in their new areas of competence, using patents that were initially owned either by the same or by another entity within the group. In such a scenario it will be important to delineate the actual transaction and to understand whether the transfer of legal ownership is for administrative simplicity (as in Example 1 of the Annex to Chapter VI), or whether the restructuring changes the identity of the parties performing or controlling functions related to the development, enhancement, maintenance, protection, and exploitation of intangibles ...

Business restructurings sometimes involve the transfer of the legal ownership of intangibles or rights in intangibles that were previously owned by one or more local operation(s) to a central location situated in another tax jurisdiction (e.g. a foreign associated enterprise that operates as a principal or as a so-called “IP company”). In some cases the transferor continues to use the intangible transferred, but does so in another legal capacity (e.g. as a licensee of the transferee, or through a contract that includes limited rights to the intangible such as a contract manufacturing arrangement using patents that were transferred; or a limited risk distribution arrangement using a trademark that was transferred). In accordance with the guidance in Chapter VI, it is important to remember that the legal ownership of an intangible by itself does not confer any right ultimately to retain returns derived by the MNE group from exploiting that intangible (see 6.42). Instead, the compensation required to be paid to associated enterprises performing or controlling functions related to the development, enhancement, maintenance, protection, or exploitation of intangibles may comprise any share of the total return anticipated to be derived from the intangibles (see 6.54). Therefore, the change in legal ownership of an intangible in a business restructuring may not affect which party is entitled to returns from that intangible ...