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

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

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

On 1 July 2022, the tax authorities in the Netherlands published Decree No. 2022-0000139020 of 14 June 2022 containing local guidance on application of the arm’s length principle. The Decree is based on article 9 of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines and also contains references to local case laws. In the Decree, particular focus is on areas that have been updated in the most recent releases of the OECD Transfer Pricing Guidelines – Legal ownership, DEMPE functions, Services, HTVI and Valuation Methods, Government policies (COVID-19), Remuneration of Procurement activities, Financial transactions etc. Click here for Unofficial English translation Click here for other translation ...

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 ...

“Fertilizer Licence SA” (“A”) transferred its trademarks to “B” in 2013, previously financed the transfer through a cash contribution, and then, following the transfer, paid royalties to “A” in exchange for the ability to use the assets. According to the tax authorities, a situation where an entity transfers its assets to another entity, finances the transfer and then pays for access to use those assets does not reflect the conditions that unrelated parties would establish. An unrelated party, in order to obtain such licence fees from another unrelated party, would first have to incur the costs of manufacturing or acquiring the trademarks and to finance these costs itself without the involvement of the licensee. An independent entity which has finances the creation or purchase of an intangible asset, should not incur further costs for the use of that asset. Furthermore, in determining the licence fee to “B” for the use of trademarks, “A” relied on formal legal ownership, granting “B” a share in the revenues generated by “A” despite the fact that “B” did not take any part in the creation of these revenues. As a result, almost all the profits of “A” were transferred as royalties to company “B”. According to the authority, such an approach is inconsistent with the arm’s length principle. The remuneration of “B” (the legal owner of trademarks) did not take into account the functions performed by entities in creating the value of trademarks nor the risks and assets involved in the creation. The authority concluded that “B” was not entitled to share in the profit of “A”, because “B” was only the legal owner of internally created trademarks in the group and performed no significant DEMPE functions, had not used significant assets nor borne significant risks. This role of “B” entitled only to reimbursement of the costs incurred for the registration and legal protection of trademarks added a arm’s length margin for this type of services. As a result of the findings, the authority of first instance concluded that “A” had overstated tax deductible costs in connection with the disclosure of trademark licence fees as costs. “A” had reported income lower than it would have expected if the above-mentioned relationships had not existed. In the opinion of the authority of the second instance, an independent entity would not have entered, on the terms and conditions set by the company and its affiliates, into transactions leading to the divestment of ownership of valuable assets necessary for its operations, additionally financing their acquisition by another company, taking up shares in return with a nominal value significantly lower than the value of the lost assets (subsequently not receiving any dividends therefrom), and additionally being forced to incur additional costs as a result of the need to pay licence fees for the use of the trademarks held earlier. An appeal was filed by “A”. Judgement of the Court Excerpts “What is important in the case, however, is the conclusion of the authorities that in fact the legal relationship justifying the incurrence of expenses recognised as tax deductible costs is a contract for the provision of services consisting only in the administration of trademarks. The Court notes, however, that this conclusion is in conflict with the position of the authorities, which did not question the validity of the legal transactions resulting in the transfer of the rights to the trade marks to company ‘B’ and thus to another entity. As the applicant rightly submits, it cannot be disregarded in this case that the applicant was not the owner of the trade marks but acquired the right to use them on the basis of a licence agreement, for which it should pay remuneration to company ‘B’ (page […] of the application). In principle, the authorities did not present any arguments showing which interpretation rules they applied to reach the conclusion that this manner of applying the abovementioned provisions is legally possible and justified in the present case. It should be pointed out here that Article 11(1) in fine speaks of the determination of income and tax due without – ‘[…] taking into account the conditions resulting from the link …’, but does not permit the substitution of one legal transaction (a licence agreement) for another (an agreement for the provision of administration services) and the derivation of legal effects from the latter in terms of determining the amount of the tax liability. As the applicant rightly argued, such a possibility exists from 1 January 2019, since Article 11c(4) uses the expression- “[…] without taking into account the controlled transaction, and where it is justified, it determines the income (loss) of the taxpayer from the transaction relevant to the controlled transaction”. This is the so-called recharacterisation, i.e. reclassification of transactions, which was actually done by the tax authorities in this case. The company’s claims that the transfer of the trade mark into a separate entity was motivated by a desire to increase the company’s recognition and creditworthiness, which was a normal practice for business entities at the time, are unconvincing. On that point, it should be noted that, operating under the GKO with the same name, the applicant’s recognition and the name under which it operated were already sufficiently well established. As regards the increase in the creditworthiness or market power of the users of the trade mark, the applicant’s contentions on this point too are empty. Moreover, even if it were to be accepted, at least in the context of the activities of ‘A’, that the creditworthiness of ‘A’ had been increased, the advantage which the applicant derives from such an operation would appear to be of little significance. In fact, it obtained this benefit to a significant extent from the formation of relations with “A”, as a result of which the value of its income taxable income, and thus its tax liability in 2015, was significantly reduced. The benefits, mainly tax ones, are also indirectly pointed out by the applicant herself, indicating, inter alia, that there were no grounds ...

Following a business restructuring, rights in a trademark developed and used by O.B SA was transferred to a related party “A”. The newly established company A had no employees and all functions in the company was performed by O.B. SA. Anyhow, going forward O.B SA would now pay a license fee to A for using the trademark. The payments from O.B SA were the only source of income for “A” (apart from interest). According to the O.B. group placement of the trademark into a separate entity was motivated by a desire to increase recognition and creditworthiness of the group, which was a normal practice for business entities at the time. In 2014 and 2015 O.B. SA deducted license fees paid to A of PLN 6 647 596.19 and PLN 7 206 578.24. The tax authorities opened an audited of O.B. SA and determined that the license fees paid to A were excessive. To establish an arm’s length remuneration of A the tax authorities applied the TNMM method with ROTC as PLI. The market range of costs to profits for similar activities was between 2.78% and 19.55%. For the estimation of income attributable to “A”, the upper quartile, i.e. 19.55 %, was used. The arm’s length remuneration of A in 2014 and 2015 was determined to be PLN 158,888.53 and PLN 111,609.73. On that basis the tax authorities concluded that O.B. SA had overstated its costs in 2014 and 2015 by a total amount of PLN 13 583 676.17 and an assessment of additional taxable income was issued. A complaint was filed by O.B. SA. Judgement of the Court The Court dismissed the complaint of OB SA and upheld the decision of the tax authorities Excerpts “….the dependence of “A” on the applicant cannot be in any doubt. Nor can it be disputed that the abovementioned dependence – the relationship between ‘A’ and the applicant as described above – influenced the terms agreed between the parties to the licence agreement. Invoices issued by “A” to the company for this purpose amounted to multi-million amounts, and all this took place in conditions in which “A” did not employ any workers, and performed only uncomplicated administrative activities related to monitoring of possible use of the trademark by other, unauthorised entities. All this took place in conditions in which licence fees were, in principle, the main and only source of revenue for “A” (apart from interest), while the trade mark itself in fact originated from the applicant. It was also to it that the mark eventually came in 2017, after the incorporation of “A”. The company’s claims that the hive-off of the trade mark into a separate entity was motivated by a desire to increase the company’s recognition and creditworthiness, which was a normal practice for business entities at the time, are unconvincing. On that point, it should be noted that, operating under the GKO with the same name, the applicant’s recognition and the name under which it operated were already sufficiently well established. As regards the increase in the creditworthiness or market power of the users of the trade mark, the applicant’s contentions on this point too are empty. Moreover, even if it were to be accepted, at least in the context of the activities of ‘A’, that the creditworthiness of ‘A’ had been increased, the advantage which the applicant derives from such an operation would appear to be of little significance. In fact, it obtained this benefit to a significant extent from the formation of relations with “A”, as a result of which the value of its income taxable income, and thus its tax liability in 2015, was significantly reduced. The benefits, mainly tax ones, are also indirectly pointed out by the applicant herself, indicating, inter alia, that there were no grounds for the authorities to question the tax optimisations, prior to 15 July 2016. This only confirms the position of the authority in the discussed scope.” “The authority carefully selected appropriate comparative material, relying on reliable data concerning a similar category of entrepreneurs. Contrary to the applicant’s submissions, the authority analysed the terms and conditions of the cooperation between the applicant and ‘A’ when it embarked on the analysis of the appropriate estimation method in the circumstances of the case. In doing so, it took into account both the specific subject-matter of the cooperation and the overall context of the cooperation between the two entities. As for the method itself, the authority correctly found that “A” carried out simple administrative activities, and therefore took into account the general costs of management performed by this entity. In this respect it should be noted that the Head of the Customs and Tax Office accepted the maximum calculated indicator of transaction margin amounting to 19.55%. The applied method, which should be emphasised, is an estimation method, which allows only for obtaining approximate values by means of it. Moreover, it is based on comparative data obtained independently of the circumstances of the case, therefore it is not possible to adjust the results obtained on the basis of its principles by the costs of depreciation, as suggested by the applicant, alleging, inter alia, that § 18(1) of the Regulation was infringed by the authority. Moreover, the costs of depreciation of the trade mark by ‘A’ related strictly to its business and therefore did not affect its relations with the applicant. The company also unjustifiably alleges that the authority breached Article 23(3) of the Regulation by failing to take account of the economic reasons for the restructuring of its business in the context of the GKO’s general principles of operation. For, as already noted above, there is no rational basis for accepting the legitimacy of carrying out such restructuring, both in 2015 and thereafter. And the fact of the return of the trademark right to the Applicant only supports this kind of conclusion. Nor can there be any doubt as to the availability to the applicant, in 2015, of an adequate range of data relating to aspects ...

When funding is provided to a party for the development of an intangible, the relevant decisions relating to taking on, laying off or declining a risk bearing opportunity and the decisions on whether and how to respond to the risks associated with the opportunity, are the decisions related to the provision of funding and the conditions of the transaction. Depending on the facts and circumstances, such decisions may depend on an assessment of the creditworthiness of the party receiving the funds and an assessment of how the risks related to the development project may impact the expectations in relation to the returns on funding provided or additional funding required. The conditions underlying the provision of the funding may include the possibility to link funding decisions to key development decisions which will impact the funding return. For example, decisions may have to be made on whether to take the project to the next stage or to allow the investments in costly assets. The higher the development risk and the closer the financial risk is related to the development risk, the more the funder will need to have the capability to assess the progress of the development of the intangible and the consequences of this progress for achieving its expected funding return, and the more closely the funder may link the continued provision of funding to key operational developments that may impact its financial risk. The funder will need to have the capability to make the assessments regarding the continued provision of funding, and will need to actually make such assessments, which will then need to be taken into account by the funder in actually making the relevant decisions on the provision of funding ...

Legal ownership and contractual relationships serve simply as reference points for identifying and analysing controlled transactions relating to the intangible and for determining the appropriate remuneration to members of a controlled group with respect to those transactions. Identification of legal ownership, combined with the identification and compensation of relevant functions performed, assets used, and risks assumed by all contributing members, provides the analytical framework for identifying arm’s length prices and other conditions for transactions involving intangibles. As with any other type of transaction, the analysis must take into account all of the relevant facts and circumstances present in a particular case and price determinations must reflect the realistic alternatives of the relevant group members. The principles of this paragraph are illustrated by Examples 1 to 6 in the Annex I to Chapter VI ...

While determining legal ownership and contractual arrangements is an important first step in the analysis, these determinations are separate and distinct from the question of remuneration under the arm’s length principle. For transfer pricing purposes, legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by the MNE group from exploiting the intangible, even though such returns may initially accrue to the legal owner as a result of its legal or contractual right to exploit the intangible. The return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it uses, and the risks it assumes, and upon the contributions made by other MNE group members through their functions performed, assets used, and risks assumed. For example, in the case of an internally developed intangible, if the legal owner performs no relevant functions, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, the legal owner will not ultimately be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than arm’s length compensation, if any, for holding title ...

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

PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent and paid royalties for use of IP owned by the parent. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to Intellectual Property by the Japanese parent. Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making. The Company disagreed and brought the case to court. The Court of Appeal ruled in favor of the tax authorities. Existence and ownership to the Intellectual Property in question had not been sufficiently documented by the Japanese parent company. The Supreme Court dismissed the request for review filed by PK Co. Ltd. Click here for translation ...

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

“Brewery S.A.” had transferred its trademarks to a subsidiary in Cyprus and in subsequent years paid royalties/licences for the use of the trademarks. The tax authorities disregarded the deductions of the royalty/licence payments, and issued an assessment of additional taxable income. An appeal was filed by “Brewery S.A.” Judgement of the District Administrative Court The court dismissed the appeal of “Brewery S.A.” and upheld the assessment issued by the tax authorities. “It should be emphasised that the tax authorities have not questioned the already well-established view that sub-licence fees are, in principle, deductible costs. They did not question either their incurrence by the company or their amount. However, in the specific circumstances, they pointed out that these fees were not purposeful and have no connection to revenue. On the other hand, if, in a specific case, an analysis of the entity’s conduct in the light of the principles of logic and life experience leads to the conclusion of an obvious and complete lack of sense of the actions taken, aiming, in principle, not at the desire to actually achieve a given revenue, but to artificially, solely for tax purposes, generate costs, one may speak of the lack of a cause and effect relationship referred to in Article 15(1) of the CIT Act. This is because then the taxpayer’s purpose is different – instead of generating revenue, he or she seeks only to avoid paying tax” Click here for English Translation Click here for other translation ...

PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent and paid royalties for use of IP owned by the parent. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to Intellectual Property by the Japanese parent. Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making. The Company disagreed and brought the case to court. The Court of Appeal ruled in favor of the tax authorities. Existence and ownership to the Intellectual Property in question had not been sufficiently documented by the Japanese parent company. Part 1 – Click here for translation Part 2 – Click here for translation ...

In this case “Indonesia Ltd” paid royalties for use of IP owned by the Japanese parent. Following an audit, the tax authorities issued an assessment where the royalty payments were disallowed. Judgement of the Court The Court ruled in favour of the taxpayer. According to the court “Indonesia Ltd” had been able to prove that services had actually been rendered. Click here for translation ...

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