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 Portugal 2579-16-6 BELRS ORG ...

Institute of International Research España S.L. belongs to the international group Informa Group Brand, of which Informa PLC, a company listed on the London Stock Exchange, is the parent company. In 2006 it had entered into a licence agreement (“for the use of the Licensed Property, Copyright, Additional Property Derived Alwork, the Mark and Name of the Licensor for the sale of Research and Dissemination Services”) under which it paid 6.5% of its gross turnover to a related party in the Netherlands – Institute of International Research BV. Furthermore, in 2007 it also entered into a “Central Support Services Agreement” with its parent Informa PLC according to which it paid cost + 5% for centralised support services: management, finance, accounting, legal, financial, fiscal, audit, human resources, IT, insurance, consultancy and special services. Following an audit, the tax authorities issued assessments of additional income for the FY 2007 and 2008 in which deductions of the licence payments and cost of intra-group services had been disallowed. Not satisfied with the assessment, Institute of International Research España S.L. filed an appeal. Judgement of the Audiencia Nacional The Court decided in favor of Institute of International Research España S.L. and annulled the assessment issued by the tax authorities. Excerpts “The paid nature of the assignment of the use of the trademark in a case such as the one at hand is something that, in the opinion of the Chamber, does not offer special interpretative difficulties. We refer, for example, to the Resolution of the Central Economic-Administrative Court of 3 October 2013 (R.G.: 2296/2012), in which the presumption of onerousness contained in art. 12. 2 of Royal Legislative Decree 5/2004, of 5 March, approving the revised text of the Non-Resident Income Tax Law, to a case of assignment of the use of certain trademarks made in the framework of a complex services contract by a non-resident entity to an entity resident in Spain and in which the reviewing body declared that: “the importance of the trademark is such (and more so the ones we are now dealing with) that it would be difficult to understand in the opinion of the Inspectorate a purely “instrumental” transfer of use of the same and much less free of charge, as the claimant claims”. The differences found by the contested decision, between the case analysed in that decision and the case at issue here, do not affect the above statement. As the complaint states in this respect, ‘it is clear that this rejection of the entire cost of the use of the trademark and the other items included in the licence agreement is not market-based because the IIR group would simply not allow any third party to benefit from using its trademark to provide services without any consideration in return’. Finally, the fact that the appellant did not pay any amount for the assignment of the use of the trademark to the trademark proprietor until the licence agreement does not justify that it should not have paid it, referring on this point to what has just been reasoned. Nor can the signing of the licence agreement be considered sufficient proof, in the manner of the precise and direct link according to the rules of the human standard of proof of presumptions (art. 386.1 of Law 1/2000, of 7 January, on Civil Procedure), that by that circumstance alone it should be ruled out outright that the licence agreement has not brought any benefit or advantage to IIR España or improved its position and prestige with respect to the previous situation.” “It remains, finally, to examine the effective accreditation (or not) of the reality of these complementary services related to the assignment of the use of the trademark. Following the reasoning of the contested decision, in general terms, there would be four reasons why the justification of the reality of those services cannot be admitted. First, the invoices issued by IIR BV refer to the services provided by the parent company in a very generic manner, which makes it impossible to know the benefit or utility received in each case by the Spanish company. Moreover, the way in which these services are valued -simply referring to the turnover of the subsidiaries- does not take into account any rational criteria. Secondly, IIR España has not substantiated the nature of the alleged services received from its Dutch parent company and their differentiation from management support costs. Thirdly, IIR Spain had already been using the brand name ‘IIR’ since its acquisition by the group in 1987 without it being established that it paid a fee for this. Lastly, the Transfer Pricing Report does not serve as evidence of the nature of the costs and their valuation.” “In the Chamber’s view, we are faced with a question of proof. The tax authorities have not considered the reality of the complementary services to be proven (but not the transfer of the use of the trademark, as explained above) and the plaintiff considers that this evidentiary assessment is erroneous in light of the documents submitted to the proceedings. The Board’s assessment of the evidence adduced by the appellant (both in administrative proceedings and in the application) is favourable to the appellant’s arguments, i.e. that it is sufficient evidence to prove the reality of the ancillary services arising from the licence agreement.” “In the light of this documentation, we consider that the reality of the services ancillary to the assignment of the use of the trademark deriving from the licence agreement is sufficiently justified. It is true that, as the Administration basically states in its response, the intensity or completeness of the different services provided in relation to what is set out in the licence agreement can be discussed, but this debate is not exactly the same as the one we are dealing with here, which consists of deciding whether the additional services in question were actually provided or not. In the Board’s view, the documentary evidence cited above proves that they were and that the licence agreement ...

Arditi S.p.A. is an Italian group in the lighting industry. It has a subsidiary in Hong Kong which in turn holds the shares in a Chinese subsidiary where products are manufactured. Following an audit the tax authorities held that the entities in Hong Kong and China had used the trademark owned by the Italian parent without paying royalties, and on the basis of the arm’s length principle a 5% royalty was added to the taxable income of Arditi S.p.A. Arditi appealed against this assessment alleging that it had never received any remuneration for the use of its trademark by the subsidiary, and in any case that the tax authorities had not determined the royalty in accordance with the arm’s length principle. The Court of first instance upheld the appeal of Arditi and set aside the assessment. An appeal was then filed by the tax authorities. The Court of Appeal set aside the decision of the Court of first instance finding the assessment issued by the tax authorities regarding royalties well-founded. An appeal was then filed by Arditi with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court dismissed the appeal of Arditi and upheld the decision of the Court of Appeal and thus the assessment of additional royalty income issued by the tax authorities. Excerpts “1.1. The plea is unfounded. In fact, it should be recalled that “On the subject of the determination of business income, the rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national regulations, does not require the administration to prove the elusive function, but only the existence of “transactions” between related companies at a price apparently lower than the normal price, while it is the taxpayer’s burden, by virtue of the principle of proximity of proof pursuant to art. 2697 of the Civil Code and on the subject of tax deductions, the onus is on the taxpayer to prove that such ‘transactions’ took place for market values to be considered normal within the meaning of Art. 9, paragraph 3, of the same decree, such being the prices of goods and services practiced in conditions of free competition, at the same stage of marketing, at the time and place where the goods and services were purchased or rendered and, failing that, at the nearest time and place and with reference, as far as possible, to price lists and rates in use, thus not excluding the usability of other means of proof” (Cass. 19/05/2021, n. 13571). Now, the use of a trade mark must be presumed not to have a normal value of zero, which can also be expressed, as the judgment under appeal does, by the exceptionality of the relative gratuitousness. This places the onus on the taxpayer to prove that such gratuitousness corresponds to the normal value, that is, to the normality of the fact that such use takes place without consideration.” (…) “3. The third plea alleges failure to examine a decisive fact, in relation to Article 360(1)(5) of the Code of Civil Procedure, since the appeal judges failed to assess the circumstance that a large part of the production of the Chinese subsidiary was absorbed by the Italian parent company. 3.1. This plea is inadmissible, since with it the taxpayer tends to bring under this profile the examination of the exceptional nature of the gratuitousness of the use of the mark, held by the CTR. In fact, the latter was well aware of the null value of the consideration for the use of the trade mark, while the fact that the trade mark itself was the subject of co-use was expressly taken into consideration by the appellate court, and the fact that its transfer free of charge in any case corresponded to a ‘valid economic reason’, constitutes a mere deduction, whereas the failure to mention the circumstance that the majority of the Chinese company’s transactions were directed to another subsidiary (this time a Brazilian one), without entering into the merits of its relevance, constitutes at most an aspect concerning the assessment of a single element of the investigation, which cannot be denounced under the profile under examination (Cass. 24/06/2020, n. 12387).” Click here for English translation Click here for other translation Italy vs Arditi SPA 20221221 n37437 ...

“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 ...

Following an audit of Oracle Technology Systems (Kenya) Limited, a distributor of Oracle products in Kenya, the tax authority issued an assessment for FY2015-2017 relating to controlled transactions. In assessing the income, the tax authority had used a CUP method instead of the TNMM. Dissatisfied with the assessment, Oracle Technology Systems (Kenya) Limited appealed to the Tax Appeals Tribunal on the basis that the return on its related party transactions was at arm’s length and did not require adjustment. Judgement of Tax Appeals Tribunal The Tribunal referred the case back to the tax authority for an appropriate reassessment. Excerpts “The question that arises is which method was the most suitable one. The OECD TP Guidelines state that the preferred method is CUP. But this only applies where there are appropriate comparables. Internal comparables are of course always preferred where they are reliable or can be reliably adjusted. From our understanding, the TP Policy implied that the reason internal comparables could not be used was due to differences in the functions of the independent distributors as compared with those of the Appellant. 127. We however note that during the hearing and in its submissions, the Appellant went out of its way to show that its functions are routine and not much different from those carried out by other distributors. The Appellant for example states in Paragraph 76 of its Statement of Facts as follows:- ‘The Appellant would like to note that the IT industry itself is a very competitive market and that the Appellant’s functional profile is not different from other value-added distributors in the same competitive market … ”  128. Similarly, the expert witness Dr Neighbour stated in his review of the Appellant’s role as a distributor as thus:- “In my experience, these are standard functions that would be expected of a typical distributor, i.e one that provides some local sales and marketing activity to support the sales as well as provision of customer support and services in respect of the distributed products … “ 129. The arguments offered by the Appellant seem to imply its functions are no different from any other distributor. This seems to contradict what its TP Policy suggests that the reasons it could not use the internal comparables was because the functions carried out by the Appellant and the  independent distributors were different and could not be reliably adjusted. 130. If indeed as the Appellant and its expert witness suggests its functions are routine and much in line with those of other distributors in the industry, we are at a loss as to why the internal comparables could not be used, and where such internal comparables were available why the CUP method which as both parties have admitted is the preferred method could not be used. (…) 132. It is unclear to the Tribunal both from the Appellant’s and the Respondent’s arguments and the documentation made available whether the Appellant is indeed a routine distributor as it averred during the hearing or if the services it offers are distinct as stated in the TP Policy. 133. Accordingly, we are of the view that the matter ought to be referred back to the Respondent to carry out a proper audit and in particular a functional analysis to determine what the exact functions of the Appellant are and if these are fundamentally different from those of independent distributors. Only then is it possible to determine the proper method to be applied.” ”Oracle_Systems_Limited_(Kenya_Branch)_v…Taxes-_TAT_149_of_2019_[2021”] ...

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 VwGH_2019150162_20201127L00 ...

LCF Zimbabwe LTD manufactures cement and similar products from limestone extracted at a mine in Zimbabwe. It also manufactures adhesives and adhesive paints and decorative paints, construction chemicals and agricultural lime. It is a wholly owned subsidiary of a large European group, which manufactures and sells building and construction materials. The issues in this case concerned tax deductibility of “master branding fees”, consumable spare parts not utilised at the tax year end, quarry overburden expenses and computer software. Furthermore there were also the question of levying penalties. Judgement of the Tax Court The Court decided in favour of the tax authorities. Excerpts: “The corollary to the finding of indivisibility is that the disallowance by the Commissioner of the 1.5% master branding fees of US$ 863 252.70 in the 2012 tax year and US$ 1 140 000 in the 2013 tax year was correct while the split of the 2% rate in respect of the first franchise agreement was wrong. I will direct the Commissioner to deduct the amounts he added back to income on the basis that they constituted non-deductible master branding fees, the sum of US$ 212 356.13 from the 2009 tax year, US$ 312 636 from the 2010 tax year and US$370 913.85 from the 2011 tax year.” “Accordingly, the Commissioner correctly disallowed the deduction of the amortised quarry development costs of US$ 3 782 791 claimed by the appellant in the 2013 tax year.” “I, therefore, hold that the appellant improperly claimed for the deductions of the special initial allowances in each of the 3 years in question.” “In the exercise of my own discretion I would impose the same penalty as the Commissioner in the present matter. Accordingly, the 60% penalty imposed by the Commissioner stands.” Click here for translation 2020-zwhhc-227 ...

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 Poland vs P SA SAC II FSK 1550-19 ...

“Drinks Distributor S.A.” was involved in purchase, sale and distribution of alcoholic beverages in Mexico. “Drinks Distributor s.a” had entered into a non-exclusive trademark license agreement with a related party for the sale of its product. Following a restructuring process, the related party moved to Switzerland. Following an audit the Mexican tax administration, determined that deductions for marketing and advertising costs related to brands and trademarks used under the licensing agreement, were not “strictly indispensable” and therefore not deductible, cf. requirement established by the Income Tax Law in Mexico. Drinks Distributor S.A on its side held that the marketing and advertising costs were strictly indispensable and that the tax deductions should be accepted. The dispute ended up in the Federal Court of Administrative Justice. Judgement: The Court determined what should be understood as “strictly indispensable“. To establish this concept the purposes of the specific company and the specific costs must first be determined – in particular that the costs are directly related to the activity of the enterprise the costs are necessary to achieve the aims of its activity or the development of this activity; in the absence of the costs, the commercial activity of the taxpayer will be hindered. “ADVERTISING AND PUBLICITY EXPENSES. THE DEDUCTION IS INAPPROPRIATE, AS THEY ARE NOT STRICTLY INDISPENSABLE FOR THE COMPANY SELLING PRODUCTS UNDER TRADEMARKS WHOSE USE AND EXPLOITATION WERE GRANTED TO IT BY MEANS OF A NON-EXCLUSIVE LICENSE AGREEMENT. Article 31, section I of the Income Tax Law provides that the deductions must comply with various requirements, including that they are strictly indispensable for the purposes of the taxpayer’s activity; the latter being understood to mean that said expenses are directly related to the activity of the company, that they are necessary to achieve the purposes of its activity or the development thereof and that if they do not occur they could affect its activities or hinder its normal operation or development. Therefore, in order to determine whether such expenditure satisfies that requirement, account must be taken of the aims of the undertaking and the specific expenditure itself. Therefore, if a company has as its object the sale of a certain product, and to this end has entered into a non-exclusive license agreement for the use and exploitation of intangibles, which grants it the use and exploitation of a brand name to sell this product; The latter is prevented from deducting advertising and publicity expenses, since, as it does not own the trademark it uses to sell its product, the aforementioned expenses – understood as the acts through which something is made known in order to attract followers or buyers through the means used to disseminate or spread the news of things or facts – are not strictly indispensable for the development of its activity, as they increase the value of the trademark for the benefit of a third party; That is to say, the owner of the trade mark, since they are not aimed at the article, but at positioning the trade mark on the market, in order to give it notoriety, fame and recognition among the consumer public.” Click here for English Translation Click here for other translation Mexico 2019 ...

“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 Poland Case I SA-Lu 48-19 - Wyrok ...

The Hungarian company “Trademark Ltd” was involved in distribution of trademark rights. Trademark Ltd obtained the trademark rights from affiliated companies in Luxembourg and Barbados and then also passed trademark rights on to other affiliated company. For the purpose of determining the remuneration, only one company in the group had a transfer price record. According to this, the basis for calculating the remuneration was the turnover achieved. The tax authorities examined the nature of the prices charged between the parties and found that they were not the normal market price. The consideration for the trademark rights was therefore assessed by applying a weighted average cost of capital to the net profit margin. For FY 2006 this rate was set at 12% applied at the group level. On that basis, the amount of the trademark payments was reduced, thereby increasing the tax base of Trademark Ltd by HUF 209,357,000. Trademark Ltd disagreed with the assessment. The judgement of the Court On the basis of the evidence obtained by the court the WACC indicator approach was not appropriate for determining the arm’s length profit margin of Trademark Ltd. The count noted that a WACC indicator is not suitable for measuring the company’s market profit, measuring short-term one-year returns. The Court further stated that the transfer price is a price range, not a specific abstract price, thus there is no specific price from which to deviate. The court decided that the remuneration of Trademark Ltd should be determined by application of TNM method. According to the decision of the Curia, it is the responsibility of Trademark Ltd to apply the calculation based on the net profit margin of the transaction referred to in Article 18 (2) (d). Click here for translation A Kúria Kfv 774-2014 ...

The Local Tax Court found that the arm’s-length principle requires a licence to be paid for the use of group name where the name/trademark has value in itself. The decision of the Local Court was later overturned by the Supreme Tax Court ruling in Case no. I R 22 14  Click here for English translation Click here for other translation FG Münster Urteil vom 14 02 2014 - 4 K 1053-11 E ...

“H-trademark S.A.” applied for a ruling on the tax rules governing a business restructuring where trademarks were transferred to another group company and licensed back – whether Polish arm’s length provisions would apply to the transaction. The company was of the opinion that Polish arm’s length provision (article 11) would not apply, since the arrangement was covered by special Polish provisions related to financial leasing (article 17b-g). Judgement of the Court The Court found that the Polish arm’s length provisions applied to the transaction. Excerpts “In the present case, the legal problem boils down to the correct identification of the nature of the norms arising from Article 11 of the A.p.d.o.p. and its relationship with the provisions on leasing raised by the applicant (Articles 17b – 17g of the A.p.d.o.p.). Indeed, the applicant takes the view that the leasing provisions themselves introduce derogations from market conditions and that, consequently, it is not possible to examine certain activities governed by the leasing provisions on the basis of the criteria provided for in Article 11 of the A.p.d.o.p.” “Therefore, it should be stated that the norm of Article 11 of the A.l.t.d.o.p. constitutes lex specialis in relation to the norms concerning taxation of leasing agreements (Article 17a et seq. of the A.l.d.o.p.). It may therefore also be applied in the case concerning taxation of such agreements. Thus, the Court does not share the view of the Appellant Company that it is the provisions concerning the leasing agreement that constitute lex specialis in relation to Article 11 of the discussed Act. It is also of no significance for the position of the Court that the agreement presented in the description of the future event is not a commonly occurring agreement, and therefore, as the appellant claims, it will not be possible to make determinations on the basis of Article 11 of the A.l.t.d.o.p. This is because the very demonstration that the price would have been different if certain connections on the basis of the aforementioned provision had not occurred is already an element of establishing the facts and conducting tax proceedings in a specific case. Meanwhile, the subject of the present proceedings, was the answer to the question whether the aforementioned provision is excluded in the case of taxation of leasing agreements. In addition, it should be noted that, contrary to the assertions in the application, it was not in the description of the future event, but in the position presented by the party that it stated that: “(…) the initial value of the rights to be used will be determined on the basis of a valuation prepared by an independent entity and will therefore correspond to their market value”.” Click here for English translation Click here for other translation I SA_Po 827_11 - Wyrok WSA w Poznaniu z 2012-02-16 ...

A German company on behalf of its Austrian Parent X-GmbH distributed products manufactured by the Austrian X-KG. By a contract of 28 May 1992, X-GmbH granted the German company the right to use the trade mark ‘X’ registered in Austria. According to the agreement the German company paid a license fee for the right to use the trade mark. In 1991, X-GmbH had also granted X-KG a corresponding right. By a contract dated 1 July 1992, X-KG was granted exclusive distribution rights for the German market. In the meantime, the mark ‘X’ had been registered as a Community trade mark in the Internal Market. The tax authorities dealt with the payment of royalties to X-GmbH for the years in question as vGA (hidden profit distribution). Click here for English translation Click here for other translation K 578-06 ...

In Cap Gemini, the Court concluded that the tax administration did not demonstrate the “indirect transfer of benefit” in the absence of a comparability study. The transaction in question consisted of a licence of the Cap Gemini trademark and logo. The French subsidiaries were charged with a 4% royalty, whereas European and American subsidiaries were charged no or lower royalty. The court found that the value of a trademark and logo may differ depending on each situation and market. In the ruling, the court reaffirmed that a transfer pricing assessment must be based on solid evidence. Click here for translation France vs SA Cap Gemini 7 Nov 2005 No 266436 ...

The Pharmatique Industrie case shows the high comparability standard required by the courts of France. The tax authorities used five similar license agreements in the same pharmaceutical sector, as comparables in a transfer pricing dispute regarding payments of royalties for the use of knowhow and trademarks. Judgement of the Court The court ruled in favour of the tax authorities. Excerpt “.., is not confirmed by a reading of the contracts attached to the file not only the granting of trademarks for the specialities in question, but also, as in the grants put forward by way of comparison by the administration, of manufacturing processes or know-how, the service must be regarded as providing proof of the exaggerated nature and therefore non-deductible nature of the said royalties in the above-mentioned proportion; that in any case, and without it being necessary to examine whether the royalties are deductible in principle, it follows that the company PHARMATIQUE INDUSTRIE is not entitled to maintain that it is wrongly that, by the judgement in question, which is sufficiently reasoned, the Administrative Court of Paris rejected the request of the company Laboratoires Schoum for discharge of the supplements to corporation tax…” Click here for English translation Click here for other translation Société Pharmatique Industrie, July 1994, CCA, No 92PA01392 ...

An Australian subsidiary of Estee Lauder paid a licence fees to licensor on sales of cosmetics in Australia whether imported or made locally. At issue is whether this fees should be taken into account in determining price and thus “transaction value” of goods for purposes of assessing customs duty. Judgement of the Federal Court The Court found that the fee should not be included. “The royalties will also be part of the price of the goods if it were open to a Collector to conclude that the licence agreement was so closely connected with the contracts of sale pursuant to which the goods were imported and to the goods that together they formed a single transaction. I do not think there is any basis for the taking of such a view. The licence agreement was made in 1969 and appointed the applicant exclusive licensee of the relevant trade marks in Australia. The agreement entitled the applicant to use the trade marks on goods manufactured in Australia as well as upon finished goods imported here. The applicant’s manufacturing operations in Australia were and are extensive so that its sales comprise substantial quantities of cosmetics manufactured here in addition to those which are imported. Then there is the fact that the licence fees are calculated on sales. For this purpose locally manufactured cosmetics and imported cosmetics are treated indistinguishably. There is also the circumstance that not all goods imported or manufactured by the applicant are sold. Some are given away either in the course of promotions or for reasons not so directly connected with the applicant’s advertising and marketing activities. All these factors lead, in my opinion, to the conclusion that it could not be correct to say that either of the contracts pursuant to which the goods were imported and the licence agreement together formed a single transaction. The question, in relation to “price related costs”, is, firstly, whether the royalties paid under the agreement are paid directly or indirectly by or on behalf of the purchaser to the vendor or to another person “under the import sales transaction”. If they are, the further question arises whether the only relationship which the royalties have to the imported goods is insubstantial or incidental. In order for the Comptroller to succeed, the royalties must be paid “under” each of the import sales transactions. “Under” in this context is synonymous with “pursuant to”. In my opinion the royalties were not paid pursuant to either of the import sales transactions. The transactions stood separately and apart from the licence agreement which entitled the Canadian company to a royalty in respect of all sales – not imports or purchases – of Estee Lauder products. If I be wrong in this conclusion, then I do not think that the relationship of the royalties to the imported goods is otherwise than insubstantial or incidental. I do not think it possible to take any other view of the matter when one considers what is involved in the licence agreement and considers it in relation to the import transactions and the surrounding facts and circumstances. The explanatory memoranda earlier referred to show that a principal purpose of the amendments which were made to the legislation in 1989 was to overcome what was referred to as “transaction split”. To the extent that the new sections were designed to overcome the mischief of transaction splitting, it has to be said that no such considerations affected the transactions which are in question here. The evidence shows a long standing licence agreement and a continuing business relationship in which goods bearing the Estee Lauder trade marks were imported by the applicant and, independently of those importations, royalties being paid to the Canadian company. I mention this matter only because of the emphasis placed upon it in argument. I do not think it has any ultimate bearing on the outcome of the case because it would not be right to limit the operation of the provisions of the new Division 2 to transactions which, although not properly characterised as transaction splitting, nevertheless fell within the words of the relevant sections. In the result neither the Comptroller nor the Collector was, in my opinion, entitled to take into account the royalties paid by the applicant to the Canadian company when the transaction values of the goods were assessed. The applicant is thus entitled to succeed. In its application it claimed injunctive as well as declaratory relief. I do not think this is a case where it is appropriate to grant injunctive relief. The applicant will be sufficiently protected by the making of appropriate declarations. The respondents are to pay the applicant its costs of the application.” ”Australia FCA 359″] ...