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 ...

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 ...