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

Rayonnages de France paid royalties and management fees to a related Portuguese company. Following an audit for FY 2010 – 2012 the French tax authorities denied tax deductions for the payments by reference to the the arm’s length principle. The court of first instance decided in favor of the tax authorities and Rayonnages de France then filed an appeal with the CAA of Douai. Judgement of the CAA The Court of appeal upheld the decision of the court of first instance and decided in favor of the tax authorities. Excerpt “However, as the Minister points out, in order to be eligible for deduction, the management services invoiced by VJ Trans.Fer to SARL Rayonnages de France must necessarily cover tasks distinct from those relating to the day-to-day management of the latter company, which were the responsibility of Mr B. as statutory manager of SARL Rayonnages de France, it being for the latter to determine, where appropriate, the remuneration to be paid to Mr B. in this connection. However, as the Minister points out, SARL Rayonnages de France, whose allegations tend to confirm that the management services invoiced by the company VJ Trans.Fer are the same as the tasks covered by its statutory management, does not provide any evidence to justify the provision of additional or even complementary services by this company, in a situation in which it is not disputed that SARL Rayonnages de France had, in the premises rented by it at the address of its registered office, the necessary means to enable it to keep its accounts and manage its invoicing, and that it had commissioned an accounting firm to assist it. Furthermore, it is not disputed that SARL Rayonnages de France no longer employed any employees after the transfer of its production activity to Portugal in July 2009, so that, as the Minister also points out, it cannot justify any need for management services in respect of the financial years ending in 2011 and 2012. As a result, SARL Rayonnages de France cannot be regarded as providing the proof, which is incumbent on it at this stage, of the existence of a consideration, effective and favourable to its own operation, for the sums it paid, during the two tax years in question, to the company VJ Trans.Fer as fees for management services, regardless of the assessment made by the Portuguese tax authorities as to the nature of those sums and even if they did not constitute additional remuneration for Mr B…. Consequently, C.. was entitled to consider the sums paid in this respect by SARL Rayonnages de France to the company VJ Trans.Fer, established in Portugal and placed under its control, as an indirect transfer of profits. Consequently, it was right to tax these sums in the hands of the company paying them, SARL Rayonnages de France, on the basis of the aforementioned provisions of Articles 57 and 39 of the General Tax Code.” Click here for English translation Click here for other translation ...

Ikea France (SNC MIF) had concluded a franchise agreement with Inter Ikea Systems BV (IIS BV) in the Netherlands by virtue of which it benefited, in particular, as a franchisee, from the right to operate the ‘Ikea Retail System’ (the Ikea concept), the ‘Ikea Food System’ (food sales) and the ‘Ikea Proprietary Rights’ (the Ikea trade mark) in its shops. In return, Ikea France paid Inter Ikea Systems BV a franchise fee equal to 3% of the amount of net sales made in France, which amounted to EUR 68,276,633 and EUR 72,415,329 for FY 2010 and 2011. These royalties were subject to the withholding tax provided for in the provisions of Article 182 B of the French General Tax Code, but under the terms of Article 12 of the Convention between France and the Netherlands: “1. Royalties arising in one of the States and paid to a resident of the other State shall be taxable only in that other State”, the term “royalties” meaning, according to point 2. of this Article 12, “remuneration of any kind paid for the use of, or the right to use, (…) a trade mark (…)”. As the franchise fees paid by Ikea France to Inter Ikea Systems BV were taxable in the Netherlands, Ikea France was not obligated to pay withholding taxes provided for by the provisions of Article 182 B of the General Tax Code. However, the tax authorities held that the arrangement set up by the IKEA group constituted abuse of law and furthermore that Inter Ikea Systems BV was not the actual beneficiary of the franchise fees paid by Ikea France. On that basis, an assessment for the fiscal years 2010 and 2011 was issued according to which Ikea France was to pay additional withholding taxes and late payment interest in an amount of EUR 95 mill. The court of first instance decided in favor of Ikea and the tax authorities then filed an appeal with the CAA of Versailles. Judgement of the CAA of Versailles The Court of appeal upheld the decision of the court of first instance and decided in favor of IKEA. Excerpt “It follows from the foregoing that the Minister, who does not establish that the franchise agreement concluded between SNC MIF and the company IIS BV corresponds to an artificial arrangement with the sole aim of evading the withholding tax, by seeking the benefit of the literal application of the provisions of the Franco-Dutch tax convention, is not entitled to maintain that the administration could implement the procedure for abuse of tax law provided for in Article L. 64 of the tax procedure book and subject to the withholding tax provided for in Article 182 B of the general tax code the royalties paid by SNC MIF by considering them as having directly benefited the Interogo foundation. On the inapplicability alleged by the Minister of the stipulations of Article 12 of the tax convention without any reference to an abusive arrangement: If the Minister maintains that, independently of the abuse of rights procedure, the provisions of Article 12 of the tax treaty are not applicable, it does not follow from the investigation, for the reasons set out above, that IIS BV is not the actual beneficiary of the 70% franchise fees paid by SAS MIF. It follows from all of the above that the Minister is not entitled to argue that it was wrongly that, by the contested judgment, the Versailles Administrative Court granted SAS MIF the restitution of an amount of EUR 95,912,185 corresponding to the withholding taxes payable by it, in duties, increases and late payment interest, in respect of the financial years ended in 2010 and 2011. Consequently, without there being any need to examine its subsidiary conclusions regarding increases, its request must be rejected.” Click here for English translation Click here for other translation ...

In 2016 the European Commission announced that it had opened an in-depth investigation to examine whether tax rulings (unilateral APA’s) granted by the Netherlands had given Nike an unfair advantage over its competitors, in breach of EU State aid rules. The formal investigation concerned the tax treatment in the Netherlands of two Nike group companies, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies develops, markets and records the sales of Nike and Converse products in Europe, the Middle East and Africa (the EMEA region). Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities, which are currently Dutch entities that are “transparent” for tax purposes (i.e., not taxable in the Netherlands). From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property. As a result of these tax rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales. The Commission was concerned that the royalty payments endorsed by the rulings may not reflect economic reality. According to the Commission the payments appeared to be higher than what independent companies negotiating on market terms would have agreed. On 26 September 2019 Nike brought the decision to open the investigation to the European General Court claiming the investigation was in breach of fundamental  EU rights, principles of good administration and equal treatment by (1) erring in law in the preliminary assessment of the aid character of the contested measures. (2) not providing sufficient reasons for finding that the contested measures fulfil all elements of State aid, especially why they should be regarded as selective. (3) prematurely opening a formal investigation and providing insufficient reasoning for the existence of State aid where there were no difficulties to continue the preliminary investigation. Judgement of the Court On 14 July 2021 The General Court dismissed the claims brought by Nike. The Court agreed that the intercompany royalties payments as determined in the tax rulings (unilateral APA’s) issued by the Netherlands left the distribution affiliates with less profits than would have occurred at arm’s length ...

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

The European Commission has opened an in-depth investigation to examine whether tax rulings granted by the Netherlands to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules. Margrethe Vestager, Commissioner in charge of competition policy, said: “Member States should not allow companies to set up complex structures that unduly reduce their taxable profits and give them an unfair advantage over competitors. The Commission will investigate carefully the tax treatment of Nike in the Netherlands, to assess whether it is in line with EU State aid rules. At the same time, I welcome the actions taken by the Netherlands to reform their corporate taxation rules and to help ensure that companies will operate on a level playing field in the EU.” Nike is a US based company involved worldwide in the design, marketing and manufacturing of footwear, clothing, equipment and accessories, in particular in the sports area. The formal investigation concerns the tax treatment in the Netherlands of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies develop, market and record the sales of Nike and Converse products in Europe, the Middle East and Africa (the EMEA region). Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to, respectively, Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities, which are currently Dutch entities that are “transparent” for tax purposes (i.e., not taxable in the Netherlands).The Nike group’s corporate structure itself is outside the remit of EU State aid rules. From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property. As a result of the rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales. At this stage, the Commission is concerned that the royalty payments endorsed by the rulings may not reflect economic reality. They appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordance with the arm’s length principle. In particular, a preliminary analysis of the companies’ activities found that: Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities. In contrast, the recipients of the royalty are Nike group entities that have no employees and do not carry out any economic activity. The Commission investigation will focus on whether the Netherlands’ tax rulings endorsing these royalty payments may have unduly reduced the taxable base in the Netherlands of Nike European Operations Netherlands BV and Converse Netherlands BV since 2006. As a result, the Netherlands may have granted a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid ...

The European Commission found that Luxembourg did not grant illegal State aid to McDonald’s as a consequence of the exemption of income attributed to a US branch. “Based on this analysis, the Commission concludes that in this specific case, it is not established that the Luxembourg tax authorities misapplied the Luxembourg – US double taxation treaty. Therefore, on the basis of the doubts raised in the Opening Decision and taking into account its definition of the reference system, the Commission cannot establish that the contested rulings granted a selective advantage to McD Europe by misapplying the Luxembourg – US double taxation treaty.” McDonald’s Corporation is a Delaware public limited company with its principal office located in Oak Brook, Illinois, USA. It operates and franchises McDonald’s restaurants, which serve food and beverages. Of the 37,241 restaurants in over 100 countries approximately 34,108 are franchised and 3,133 are operated by the company. McDonald’s Corporation is therefore primarily a franchisor, with over 80% of McDonald’s restaurants owned and operated by independent franchisees. In 2017, McDonald’s Corporation had around 400 subsidiaries and 235,000 employees and recorded total revenues of USD 22.8 billion, of which USD 12.7 billion was from company-operated sales and USD 10.1 billion from franchised revenues. A Luxembourg group company made a buy-in payment to enter a cost sharing arrangement with a US related company, and thereby acquired beneficial ownership of certain existing and future franchise rights. These rights were allocated to the US branch of the Luxembourg company. The royalty fees due by franchisees would first be paid to a Swiss branch of the Luxembourg company, which provided services associated with the franchise rights. The royalty fees would then be transferred to the US branch, deduction being made of a service fee to the benefit of the Swiss branch consisting of cost coverage, plus a profit mark-up. Although royalty fees was booked in the US no tax was levied. This was due to the fact that the activities carried out in the US did not constitute a trade or business. The income allocated to the US branch was also not taxed in Luxembourg. According to the US-LUX tax treaty the residence State was prevented from taxing as (1) the US activity would constitute a permanent establishment under the Luxembourg interpretation of the treaty and (2) the existence of such a permanent establishment would oblige Luxembourg to apply the article on the elimination of double taxation. In a tax ruling Luxembourg found that the income would be exempt although not taxed in the US. The Commission decided to initiate the formal investigation procedure because it took the preliminary view that the contested tax rulings granted State aid to McDonald’s Europe within the meaning of Article 107(1) of the Treaty and expressed its doubts as to the compatibility of the contested tax measures with the internal market. In particular, the Commission expressed doubts that the revised tax ruling misapplied Article 25(2) of the Luxembourg – US double taxation treaty and thereby granted a selective advantage to McDonald’s Europe. Following the investigation, the Commission concluded that Luxembourg did not give a selective advantage to McDonald’s by exempting the income allocated to the US branch. The conclusions of the European Commission on the issue of state aid does not relate to the arm’s length nature of the transfer pricing setup used by McDonald’s in relation to the European marked ...

The French tax authorities had issued an assessment for the fiscal years 2002, 2003 and 2004 related to royalty fees paid by IKEA France to foreign group companies. It was claimed that the royalty fees paid were excessive. The Court reject the position of the authorities. It had not been proven that the fees paid by IKEA France to foreign IKEA companies were excessive based on the arm’s length principle and on Article 57 of the CGI. The Court stresses the irrelevance of the comparables presented by the administration: “Considering that the nine trademarks used as comparables by the administration relate to the French market, the furniture sector and distribution methods similar to that of Ikea; that, however, as the company Ikea Holding France argues, the Minister does not give any precise indication on the content of the services rendered to the franchisees of these trademarks in return for their royalty; these trademarks are notoriously inferior to Ikea’s and they are not comparable in terms of concept, business strategy and range of products; that, furthermore, it is not disputed that the profitability of the DSIF and MIF companies is much higher than that of their competitors and that of the trademarks used as comparables by the administration; Lastly, the documents produced by Ikea Holding France show that, in the few cases where Ikea stores are not managed by Ikea group companies but by third-party franchisees, they pay the 3% franchise fee and get their supplies from wholesalers of the Ikea group; that, when purchasing directly from Ikea suppliers without going through a wholesaler of the group, they pay the 2% commission for the development and design of Ikea products and the commission of 5.5% for supplier management; that if it is not established that, in this case, they also pay the 1% commission for the coordination of supplies, this commission remunerates a service which benefits in the first place wholesalers, and not distributors;” Click here for translation ...

LG India is a wholly owned subsidiary of LG Korea, a multinational manufacturer of electronic products and electrical appliances. LG Korea and LG India entered into a technical assistance and royalty agreement in 2001 where LG India, as a licensed manufacturer, would pay a 1% royalty to LG Korea for the use of various rights for the manufacture and sale of products in India. The agreement also gave LG India a royalty-free use of the LG brand name and trademarks. The tax tribunal in 2013 held that the advertising, marketing and promotion (AMP) expenditure in excess of the arm’s length range helps to promote the brand of the foreign associated enterprise and that the Indian associated enterprise should necessarily be compensated by the foreign one. In reaching the above conclusion, the special bench applied the “bright line” test used by a US Court in DHL Corp v Commissioner. The 2014 Appeal Case The Prior 2013 Judgement from the ITA ...

In this case, the royalty payments of Accenture Norway was at issue. The Norwegian tax authorities held that the royalty payments to Accenture Global Services in Switzerland had been excessive. The Court disagreed and found in favor of Accenture. Click here for translation ...

the Supreme Court of Appeal held that royalty payments are tax deductible in terms of s 11(a) of the Income Tax Act. It accordingly upheld an appeal by BP Southern Africa (Pty) Ltd against a judgment of the Income Tax Special Court. During 1997 BP Southern Africa (Pty) Ltd concluded a written trade mark licence agreement with its parent company BP plc in terms whereof it was granted authorisation to use and display the licensed marks and licensed marketing indicia of the latter against payment of royalties. For the tax years 1997, 1998 and 1999 the royalty fee payments were respectively R 40.190.000, R 45.150.000 and R 42.519.000. BP Southern Africa (Pty) Ltd subsequently claimed those payments as deductions in terms of section 11(a) of the Income Tax Act 58 of 1962 in the determination of its taxable income. The South African Revenue Services disallowed those deductions. BP Southern Africa (Pty) Ltd’s objection to the disallowance was overruled by the Revenue Services and its subsequent appeal to the Income Tax Special Court was dismissed. The Supreme Court of Appeal reasoned that the annual royalty payment procured for BP Southern Africa (Pty) Ltd the use – not ownership – of the intellectual property of its parent company. The recurrent nature of the payment which neither created nor preserved any asset in the hands of BP Southern Africa (Pty) Ltd was to all intents and purposes indistinguishable from recurrent rent paid for the use of another’s property. The Supreme Court of Appeal concluded that the expenditure in issue was so closely linked to the appellant’s income-earning operations during the tax years in question as to constitute revenue expenditure in respect of each of those tax years. The Supreme Court of Appeal accordingly declared those amounts to be deductible under section 11(a) of the Act and directed that South African Revenue Services alter the assessments for each of those tax years accordingly ...

At issue in this case were (the lack of) royalties payments to Hyatt and Hyatt International from foreign subsidiaries. Hyatt US had not recieved royalties from its foreign Subsidiaries. The IRS had determined a 1.5 % rate of hotel gross revenues for foreign subsidiaries use of Hyatt trade names and trademarks. The Tax Court found the 1,5 % rate unreasonable, but did not accept taxpayer’s argument that no royalties were due either. The Tax Court instead found that 0,4 % of hotel gross revenues was an arm’s length charge ...