“Cosmetics sp. z o.o.” is a Polish distributor of cosmetics. It purchases the goods from a related foreign company. The contract concluded between “Cosmetics sp. z o.o.” and the foreign company contained a provision according to which 3% of the price of the goods purchased was to be paid (in the form of royalties) for the right to use the trademarks for the promotion, advertising and sale of the products. However, the invoices issued by the foreign company for the sale of the goods in question did not show the amount paid for the right to use the trademarks as a separate item. The invoices simply stated the price of the goods purchased. “Cosmetics sp. z o.o. requested an “individual interpretation” from the tax authorities as to whether the royalty payments included in the price of the goods were subject to withholding tax in Poland. According to Cosmetics sp. z o.o., the answer should be no, as the “royalty” element was an ancillary part of the main transaction – the purchase of the goods. The tax authority disagreed. According to the authorities, the payment of royalties for the right to use trademarks was not an ancillary element of the main transaction and its importance was not insignificant. Under the CIT Act and the relevant double tax treaty (DTT), the payment of royalties would be subject to withholding tax. Dismissing an appeal filed by Cosmetics sp. z o.o., the Administrative Court held that there were two separate transactions – one for the acquisition of goods and one for the acquisition of the right to use the trademark. Therefore, the tax authority’s interpretation was correct. Judgement of the Supreme Administrative Court. The Supreme Administrative Court upheld the decision of the Administrative Court and dismissed the appeal of “Cosmetics sp. z o.o.”. According to the court, it was clear from the agreement that the fee consisted of two transactions, one of which was a licence fee (royalty). Therefore, the claim that the tax authority was trying to separate this payment from the payment for the goods was not justified. Excerpt “The issue in dispute in the case is the taxation withholding tax on the amount paid by the Appellant to a foreign entity on account of the right to use trademarks, included in the agreement on the purchase of goods from that entity. Instead, the resolution of the above problem depends on whether the fee for the use of trademarks remains an ancillary element of the main consideration – the purchase of goods – and should then share the tax fate of that consideration, or whether it constitutes a separate element of the contract, which is subject to a separate method of taxation. The author of the cassation appeal argued that the elements comprising the subject matter of the contract and making up the price paid should be qualified together, as a single consideration. In the opinion of the Company’s attorney, a transaction transferring the right to use trademarks should not be treated as generating a licence fee, since the right is related only to the possibility of further resale of goods, and thus “the scope of the licence granted to the Applicant was significantly limited”. In support of the above argumentation, the attorney referred to the opinion of a representative of international tax doctrine, Professor Michelle Markham. Referring to the excerpt from the publication quoted on p. 6 of the cassation complaint concerning the issue analysed in the case, the panel finds that it is not relevant to the case at hand. Firstly, it is clear from the full context of the quoted sentence that these are considerations on the basis of US tax law regulations. Secondly, the quoted passage refers specifically to such contracts, the subject of which are at least two services (including one intangible service) covered by a single price, where it could be unreasonable to try to separate them for tax purposes. However, we do not face such a situation in the case, as the Company’s agreement with the Establishment clearly separates the remuneration for the right to use trademarks in the amount of 3% of the value of the purchased goods – even if the above amount is not specified on the invoices. Above all, however, the Supreme Administrative Court draws attention to the introduction in the agreement of a provision concerning the granting of a paid licence for the use of trademarks within the scope presented in the application, which is of fundamental importance in the case under consideration. Pursuant to Article 155 of the Act of 30 June 2000. – Industrial Property Law (Journal of Laws of 2019, item 2309; hereinafter: ‘p.w.p.’), the right of protection for a trademark suffers a significant limitation as a result of the exhaustion of the right to market the goods. “Pursuant to Article 155(1) p.w.p., the right of protection for a trademark does not extend to acts concerning goods with the trademark, consisting in particular in offering them for sale or further marketing of goods bearing the trademark, if the goods have been placed on the market in the territory of Poland by the authorised entity or with its consent. (…) By the act of placing the marked goods on the market, by the rightsholder or a third party acting with his consent, the rightsholder’s competence to use the trade mark in such a manner as to further distribute the goods is deemed to be exhausted. Therefore, the purchaser – as the owner of the goods – may continue to resell the goods and, in doing so, to advertise using the holder’s mark. Exhaustion, however, covers only one exclusive competence of the right holder, which is the right to put the marked goods on the market, and concerns only normal distribution processes of the marked goods, understood as a whole, which do not threaten the loss of connection with the goods.” (U. PromiÅ„ska, Industrial Property Law, 5th edition, LexisNexis 2011, p. 340). Transferring the above considerations to the grounds ...

Intra-group arrangements for rendering services are sometimes linked to arrangements for transferring goods or intangibles (or the licensing thereof). In some cases, such as know-how contracts containing a service element, it may be very difficult to determine where the exact border lies between the transfer of intangibles or rights in intangibles and the provision of services. Ancillary services are frequently associated with the transfer of technology. It may therefore be necessary to consider the principles for aggregation and segregation of transactions in Chapter III where a mixed transfer of services and property is involved ...

Intra-group arrangements for rendering services are sometimes linked to arrangements for transferring goods or intangibles (or the licensing thereof). In some cases, such as know-how contracts containing a service element, it may be very difficult to determine where the exact border lies between the transfer of intangibles or rights in intangibles and the provision of services. Ancillary services are frequently associated with the transfer of technology. It may therefore be necessary to consider the principles for aggregation and segregation of transactions in Chapter III where a mixed transfer of services and property is involved ...

The applicant, ARROW International CR, a.s., seeks a judgment of the Supreme Administrative Court annulling the judgment of the Regional Court, and referring the case back to that court for further proceedings. The question of whether the applicant carried out business transactions in the tax year 2005/2006 with a related party (Arrow International, Inc., hereinafter referred to as ‘Arrow US’) in a manner which did not comply with the principles of normal business relations and whether, as a result, the applicant’s basis for calculating the corporate income tax rebate was unjustifiably increased and the special condition for applying the tax rebate under Article 35a(2)(d) of Act No 586/1992 Coll. was breached is decisive for the assessment of the merits of the present case, on income taxes, as in force until 31 December 2006 (‘the Income Tax Act’). Pursuant to Section 35(6) of the same Act, such an act has the effect that the entitlement to the discount ceases and the taxpayer is obliged to file additional returns for all tax periods in which the discount was claimed. The applicant was therefore also under that obligation in respect of the tax year 2002, for which it was additionally assessed by the decisions of the administrative authorities in the amount of CZK 7 505 031 (‘the tax’). According to the contents of the administrative file, the Financial Directorate concluded that the part of the applicant’s activities which consisted in the distribution of medical devices from the Arrow group to customers in the Czech Republic, whereby the goods distributed by the applicant were purchased from Arrow US, did not comply with the principles of normal business relations. On this distribution, the applicant achieved a gross profit margin of 171,45 % in the tax year 2005/2006, whereas other distributors of similar goods found by the tax authority achieved average gross profit margins ranging from 28,40 % to 80,60 %. In each case, the tax authorities found that the goods which the applicant had purchased for redistribution in the Czech Republic from Arrow US at a certain price had previously been sold by the applicant itself – as goods manufactured by it – to Arrow US at a higher price than the price at which it then bought them from Arrow US. Furthermore, the tax authorities found that the applicant’s gross profit margin in 2005/2006, the last period of the investment incentive, had increased significantly compared to the previous and subsequent tax periods, roughly three to four times. The Financial Directorate found that the distribution of Arrow medical devices in the Czech Republic was an activity separable from the applicant’s other activities (production of medical devices for the Arrow group or central purchasing of medical devices for the Arrow group from other manufacturers in the Czech Republic) from an economic point of view. The conclusion that the distribution of Arrow medical devices in the Czech Republic is separable from the applicant’s other activities was also reached by the Financial Directorate taking into account the fact that this activity is significantly less important for the applicant from an economic point of view than the other activities (the two types of distribution activities together accounted for only 6 % of the applicant’s total turnover, while the rest of the turnover was accounted for by the production of medical devices for the Arrow group). Thus, the Directorate of Finance treated the distribution of medical devices of the Arrow group in the Czech Republic as a separate activity for the applicant and as such assessed it separately in terms of the prices negotiated between the applicant and Arrow US in the context of that activity, which differed from the prices (and the gross profit margins based thereon) of other distributors of medical devices in the Czech Republic according to the criterion of the gross profit margins achieved therein. Thus, in considering whether the applicant had breached the special conditions for the application of the tax rebate pursuant to Article 35a(2)(d) of the Income Tax Act, the Financial Directorate considered only the prices (and the markups based thereon) achieved in the context of that one of the applicant’s activities, since it considered that it should be regarded as an economically relatively separate activity, not sufficiently linked to the applicant’s other activities and, on the contrary, separable from them in those respects. It therefore did not accept that the applicant’s activities should be considered as a whole (the sum of all their activities taken together) in the sense that, for the purposes of examining whether there has been a breach of the conditions of that provision, it is possible for significant profits from one activity to be offset by smaller profits from other activities, so that the overall profitability of the applicant’s business remains within the limits of what is normal for other comparable operators. The Regional Court agreed with those conclusions of the tax authorities and therefore dismissed the action brought by ARROW International CR, a.s. as unfounded. An appeal was then filed with the Supreme Administrative Court Judgement of the Court The Court dismissed the appeal and decided in favour of the tax authorities. “In the present case, the tax authority bore its burden of proof to establish that the complainant’s business operations involved transactions with the persons referred to in section 23(7) of the Income Tax Act which, by their specific objectively identifiable features, appeared outwardly, on the basis of rational consideration, not to correspond to the economic principles of normal business relations. First of all, it established that the three types of activity of the applicant, which could be regarded as relatively independent of each other in terms of the conditions of their technical implementation (independent in the sense that, in principle, each of them could be carried out independently in such a way that – in the abstract – it could make economic sense in itself, and that none of them necessarily required, in itself, either for production or commercial reasons, legal or otherwise, to operate ...