SC (Pty) Ltd (SCL) received remuneration for activities performed for SIL, a related party resident in Mauritius. According to the company, SIL was responsible for trademarks, know-how, and related intangibles, as outlined in the franchise agreements with the non-RSA subsidiaries. Following a transfer pricing audit, the South African Revenue Service (SARS) concluded that it was evident from the conduct of both SIL and SCL, their respective employees and boards, and the general correspondence provided to SARS, that SCL had in fact determined the strategies with respect to the group’s expansion into the African market. SCL set the standard with regard to the development of marketing intangibles in non-RSA jurisdictions. SIL was only responsible for entering into the franchise agreements after they had been drafted and vetted by SCL employees. SARS therefore concluded that the remuneration received by SCL fell below the arm’s length range determined using the CUP method, and adjusted SCL’s taxable income accordingly. SCL objected to the assessment and subsequently appealed against it. They contended that the arrangements did not give rise to non-arm’s length revenue streams, and that the CUP method adopted by SARS was defective and inapplicable. The first issue that the Tax Court had to decide was whether SARS could submit an expert report in support of their assessment order. This was contested by SCL in their appeal. Decision The Tax Court dismissed the appeal of SCL and ruled in favour of SARS. Click here for other translation ...

A Polish fertilizer manufacturer, “Fertilizer TM S.A.”, had transferred legal ownership of its trademarks to its subsidiary “B” and then paid substantial royalties for the use of the same trademarks. The tax authority considered B’s role to be merely “administrative” and recharacterised the licence agreement as a contract for trademark management services. On this basis, the tax deductions taken by “Fertilizer TM S.A.” were significantly reduced and an assessment of the resulting additional taxable income was issued. On appeal, the assessment was upheld by the Court of First Instance and the case was then brought before the Regional Administrative Court. In April 2022 the Regional Administrative Court concluded that, under the provisions of the Income Tax Act in force during the period under review (2013-2014), the tax authority could not lawfully disregard a valid licence agreement or replace it with another type of service agreement. Article 11 of the CIT Act, in its previous version, allowed the authorities to estimate income only if they could prove that the prices set between related entities deviated from arm’s length standards. However, it did not allow the authorities to reclassify legal transactions; such a power was introduced in 2019. The Court stressed that, if the ownership of the trademarks was effectively transferred to B and “Fertilizer TM S.A.” then needed a valid licence to continue using them, the central question was whether the licence fees themselves reflected market conditions. The Court held that, in order to assess whether the amount of the licence fee was at arm’s length, the authorities had to apply recognised transfer pricing methods – comparable uncontrolled price, cost-plus or resale price – and only if these methods could not be used should they resort to transactional profit methods. By relying on the 2017 OECD Guidelines (which significantly changed aspects of transfer pricing analysis and included concepts that had not been translated into Polish at the time of the transaction), the authorities improperly applied principles that were not legally binding in 2013-2014. The court ordered the tax authority to reconsider the matter and correctly assess “Fertilizer S.A”‘s income and allowable licensing costs by valuing the royalty payments under the appropriate transfer pricing methods, rather than rejecting them on the grounds that B was merely a “manager” of the trademarks. An appeal was then filed with the Supreme Administrative Court. Judgment The Supreme Administrative Court upheld the decision of the Regional Administrative Court. Click here for English Translation Click here for other translation ...

“NAILS KtF” is a member of a group engaged in the development, manufacture and sale of artificial nail materials. It sells products to related parties and pays a fee to a related party for the use of trademarks and know-how related to the products. It had also paid a related party in Cyprus for certain services. Following an audit, the tax authorities issued an assessment relating to the pricing of the royalty transaction, the sale of goods and penalties relating to tax evasion through reclassification and lack of documentation for the services. “Nails KtF” filed an appeal, which ended up in the Supreme Administrative Court. Among the arguments put forward by “Nails KtF” in the appeal was the fact that the tax authorities had used an external expert to determine the arm’s length royalty rate, which “Nails KtF” argued was a delegation of power in violation of administrative rules. Judgment The Supreme Administrative Court upheld parts of the first instance court’s decision to impose a 200% tax penalty for wilful tax evasion. It found that the company had falsely accounted for transactions, including fictitious invoices and disguised employment relationships, in order to obtain unjustified tax benefits. However, the Court annulled the part of the judgment relating to the appointment of experts by the tax authority during the administrative procedure. It found procedural irregularities, including insufficient justification for the use of experts and inadequate reasoning by the tax authority and the lower court. The court ordered the court of first instance to conduct a new procedure on this issue, clarifying the legality of the expert evidence and ensuring a proper consideration of the applicant’s arguments. Click here for English translation Click here for other translation ...

In TC opinion of November 18, 2020 and TC opinion of November 8, 2023, the US Tax Court agreed with the US tax authorities (IRS) that Coca-Cola’s US-based income should be increased by $9 billion in a dispute over royalties from its foreign-based licensees. The principal holding was that the Commissioner did not abuse his discretion in reallocating income to Coca-Cola using a “comparable profits method” (TNMM) that treated independent Coca-Cola bottlers as comparable parties. However, one question remained. Coca-Colas’s Brazilian subsidiary paid no actual royalties to Coca-Cola during 2007–2009. Rather, it compensated Coca-Cola for use of its intangibles by paying dividends of $886,823,232. The court held that the Brazilian subsidiary’s arm’s-length royalty obligation for 2007–2009 was actually about $1.768 billion, as determined by the IRS. But the court held that the dividends remitted in place of royalties should be deducted from that sum. This offset reduces the net transfer pricing adjustment to petitioner from the Brazilian supply point to about $882 million. Thus, the issue to be decided is whether this $882 million net transfer-pricing adjustment is barred by Brazilian law. During 2007–2009 Brazil capped the amounts of trademark royalties and technology transfer payments (collectively, royalties) that Brazilian companies could pay to foreign parent companies. Coca Cola contended that Brazilian law blocked the $882 million net transfer-pricing adjustment. IRS contended that the Brazilian legal restriction should be given no effect in determining the arm’s-length transfer price, relying on what is commonly called the “blocked income” regulation (Treas. Reg. § 1.482-1(h)(2)). According to tax authorities the “blocked income” regulation generally provides that foreign legal restrictions will be taken into account for transfer-pricing purposes only if four conditions are met, including the requirement that the restrictions must be “applicable to all similarly situated persons (both controlled and uncontrolled).” Judgment Pursuant to its previous opinions, the Court ordered and decided that there were deficiencies in income tax due from Coca-Cola for FY 2007, 2008, and 2009 in the amounts of $930,822,089; $865,202,130; and $932,972,594, respectively. An appeal has later been filed by Coca-Cola with the 11th US Circuit Court of Appeals ...

At issue was the “royalty-free” use of intangible assets under an agreement whereby PepsiCo’s Singapore affiliate sold concentrate to Schweppes Australia, which then bottled and sold PepsiCo soft drinks for the Australian market. As no royalties were paid under the agreement, no withholding tax was paid in Australia. The Australian Taxation Office (ATO) determined that the payments for “concentrate” from Schweppes to PepsiCo had been misclassified and were in part royalty for the use of PepsiCo’s intangibles (trademarks, branding etc.), and an assessment was issued for FY2018 and FY2019 where withholding tax was determined on that basis. The assessment was issued under the Australian diverted profits tax provisions. The assessment was appealed to the Federal Court, which in November 2023 found in favour of the tax authorities. PepsiCo then appealed to the Full Federal Court. Judgment In a split decision, the Full Federal Court overturned the decision of the Federal Court and found in favour of PepsiCo. Excerpts “In summary, we conclude that the payments made by the Bottler to the Seller were for concentrate alone and did not include any component which was a royalty for the use of PepsiCo/SVC’s intellectual property. The payments were in no part made in ‘consideration for’ the use of that intellectual property and they did not therefore include a ‘royalty’ within the definition of that term in s 6(1) of the ITAA 1936. Further, the payments were received by the Seller on its own account and they cannot be said to have been paid to PepsiCo/SVC. The Commissioner’s attempts to bring PepsiCo/SVC to tax under s 128B(2B) therefore fails for two interrelated reasons: there was no ‘royalty’ as required by s 128B(2B)(b) and the payments made to the Seller by the Bottler cannot constitute ‘income derived’ by PepsiCo/SVC within the meaning of s 128(2B)(a).” “PepsiCo/SVC’s appeals in the royalty withholding tax proceedings should be allowed, the orders made by the trial judge set aside and in lieu thereof there should be orders setting aside the notices of assessment for royalty withholding tax. The Commissioner’s appeals in the Part IVA proceedings should be dismissed. PepsiCo/SVC should have their costs in both sets of appeals as taxed, assessed or otherwise agreed. The parties should bring in a minute of order giving effect to these conclusions within 14 days.” Click here for translation ...

“No Royalty Corp” had a trademark registered in its own name. The trademark was used by other companies in the group, but no royalties or licence payments were received. Following an audit, the tax authorities issued a notice of assessment in which royalties had been added to the taxable income of the company in accordance with the arm’s length principle. “No Royalty Corp” filed an appeal claiming that the trademark was developed and owned by all companies in the group and therefore no payments should be made for there use of the trademark. Decision The Court upheld the assessment issued by the tax authorities. According to the court, it lacked economic rationality for the owner of the trademark to allow other companies to use its trademark without receiving any compensation. Click here for English translation Click here for other translation ...

A tax assessment had been issued to J – G Retalho, SGPS, S.A., regarding an arrangement whereby ownership to intangibles had been transferred to an related party in Switzerland and subsequent royalty payments for use of the intangibles had been deducted in the taxable income. “With regard to the costs of royalties paid by the controlled companies F… and P… to the Swiss entity – J… – with which they are in a situation of special relations, as defined in article 58.4 of the IRC Code, it was found that the costs of royalties were not recognised. In the course of the general external inspections carried out on the accounts of each of these companies, it was concluded that the costs in question derive respectively from a contract for the use of the F… brand, sold to that entity for a period of no less than 30 years, and from a contract for the use of the P… brand, also sold to the same Swiss entity. brand, also sold to the same Swiss entity, for a period of no less than 30 years, with F… and P… continuing to deduct from their income, costs directly related to the management, promotion and development of the brands they transferred, as well as holding all the risks inherent to them. Given that F… and P… have transferred their brands, through an operation that could not be carried out between independent entities, and that they continue to bear the costs associated with managing and developing them, as well as all the risks inherent to them, while additionally bearing a royalty for the use of an asset that in practice remains theirs, we proceed under the terms of article 58 of the CIRC and Portaria do Brasil. Under the terms of article 58 of the CIRC and Ministerial Order 1446-C/2001 of 21 December, a positive adjustment is made to the taxable profit of the controlled company F… in the amount of €4,219,631.00 and a positive adjustment to the taxable profit of the controlled company P… in the amount of €5,383,761.00 (…)’.” The company filed an appeal with the Supreme Administrative Court against a 2023 decision of the Administrative Court of Appeal which upheld the assessment. This appeal was referred to the Administrative Court of Appeal. Judgment The appeal was dismissed by the court. The court first addressed the company’s claim that the judgment was invalid due to a lack of reasoning, concluding that mere insufficient justification does not constitute nullity; instead, an absolute lack of reasoning would be necessary to void the judgment. The court upheld the Tax Authority’s use of the profit split method to analyze the royalty payments, as it deemed this the appropriate method for calculating arm’s-length pricing when dealing with intangible assets. The court agreed with the Tax Authority that these payments were inconsistent with conditions that would have existed between independent parties and thus warranted corrections. Excerpt in English “With regard to determining the price that would be charged between non-bound entities for an operation with the exact contours of the one that was found, the inspection report stated (see page 801 of the instructor’s appendix): ‘The remuneration due by the user of an intangible asset to its holder, in order to ensure that values are obtained that safeguard the legitimate interests of both parties, in compliance with the Principle of Full Competition, is usually calculated using the Profit Split Method (MFL). This is considered the appropriate method whenever there are intangible assets whose value and specificity make it impossible to establish comparability with unrelated operations, as is the case here’. And after explaining the applicability of the method, the tax inspectorate concludes that ‘If the method described had been used in the situation in question, as would have been the case between independent entities, due to the lack of any other suitable method, there would never have been any royalty payable by P… to J…’. And it adjusted its profits accordingly. The profit splitting method is one of the methods for determining transfer prices in accordance with the arm’s length principle – which determines that the terms and conditions contracted in operations between related entities must be identical to those that would normally be practised between independent entities, thus reflecting market conditions – provided for in Ministerial Order no. 1446-C/2001, of 21 December, article 9.1 of which states: ‘The profit splitting method is used to apportion the overall profit derived from complex operations or series of linked operations carried out in an integrated manner between the intervening entities.’ And, in line with what the judgment under appeal states, as the AT rightly understood, in the case of intangible assets, the other methods provided for do not make it possible to obtain the most reliable measure of the terms and conditions that independent entities would normally agree to, accept or practise, as stipulated in the last part of paragraph b) of no. 3 of article 58 of the CIRC, considering the value and specificity of these assets, which make it impossible to establish comparability with linked operations. As stated in the Supreme Administrative Court judgment of 05/12/2021 in case 0766/11.2BEAVR, ‘The determination of the situation of special conditions, different from those that would normally be agreed between independent companies, may be made by the AT with a certain margin of technical discretion provided that it adopts a legitimate and duly substantiated method, and that such a situation falls within the concept of special relationships provided for in article 9(1)(b) of the OECD Model Convention’. To this extent, the choice of transfer pricing method in accordance with the arm’s length principle cannot be validly questioned, unless it is proven to be unreliable or that the method chosen by the taxable person is weak, which was not achieved in the case file by the appellant. Lastly, it should be noted that there is no inconsistency between the above statement that the circumstances of the business described as anomalous by the tax authorities ...

“Fiber Corp” was established on November 3, 1966, and engages in the manufacture, processing, sales, import, export, and agency services of chemical fiber products. The tax authoritieis conducted a comprehensive corporate tax audit from May 29, 2013, to October 10, 2013, and determined that: “Fiber Corb” did not collect royalties for use of its trademarks from domestic and overseas related parties for the fiscal years 2008 to 2012. “Fiber Corb” also did not collect royalties for technology/knowhow used by its overseas subsidiary in China for the fiscal years 2010 to 2012. Based on these findings, the tax authorities issued a tax assessments for the fiscal years 2003 to 2012 where an arm’s length royalty had been added to the taxable income of “Fiber Corp”. A complaint was filed that ended up in court. Decision The Court upheld the assessment issued by the tax authorities. According to the court, the affiliated companies benefited from using the trademarks, leading to increased revenue and profit and the claimant corporation did not present sufficient evidence to justify the non-collection of royalties. Click here for English translation Click here for other translation ...

For tax purposes, “Lux Leasing” considered itself the owner of certain intangible assets (trademarks) that it had licensed from a related party in the US under a 25-year renewable agreement and applied the IP exemption regime in Luxembourg. The tax authorities disagreed that “Lux Leasing” was the legal owner of the intangibles and therefore disagreed that the conditions for the application of the IP exemption regime were met. “Lux Leasing” appealed to the Administrative Tribunal, which dismissed the appeal and ruled in favour of the tax authorities. An appeal was then lodged with the Administrative Court. Judgment The Administrative Court upheld the decision of the Administrative Tribunal and ruled in favour of the tax authorities. The court held that “Lux Leasing” had not provided sufficient evidence to prove that economic ownership of the intangibles was transferred under the disputed licence agreement. The court pointed out that the disputed licence agreement clearly stated that the US licensor was the sole owner of the rights to the trademarks. The court considered that the related parties’ intention was clear and unequivocal from the terms of the agreement and that there was no reason to believe that the economic reality should differ from the legal form chosen. Excerpt in English “Consequently, the alleged transfer of economic ownership of the intellectual property rights at issue had not been sufficiently established, so that the Director rightly upheld the tax office’s finding that the conditions for the application of Article 50bis LIR had not been met on the grounds that company (A) was not to be considered the legal or economic owner of the intellectual property rights at issue, with the resulting consequences for the taxation of the assets of company (A) pursuant to paragraph 60bis BewG and for the taxation of the income earned by company (A) as a result of the sub-licence agreements and as a result of the assignment of its rights under the licence agreement, There is no need to consider the appellants’ alternative argument that the Court should find that economic ownership of the Trademarks had been transferred to the beneficiaries of the sub-licence agreements, as this analysis is superfluous. Contrary to what is argued by the appellants in the alternative, the finding that company (A) is not the owner of the economic property in the Trademarks does not imply that Luxembourg loses its right to tax the income declared by it, but only has the consequence that such income does not qualify for the exemption provided for by Article 50bis LIR, the appellants’ related argument being based on the erroneous premise that only the owner of the Trademarks could generate taxable income. For the rest, the Court agrees with the reasoning of the first judges in relation to this plea, which it accepts in its entirety. The related plea must therefore be rejected, in the absence of any further details provided by the appellants. It follows from all of the foregoing that the appeal must be dismissed and the judgment a quo confirmed.” Click here for English translation Click here for other translation ...

SA Compagnie Gervais Danone was the subject of an tax audit at the end of which the tax authorities questioned, among other things, the deduction of a compensation payment of 88 million Turkish lira (39,148,346 euros) granted to the Turkish company Danone Tikvesli, in which the french company holds a minority stake. The tax authorities considered that the payment constituted an indirect transfer of profits abroad within the meaning of Article 57 of the General Tax Code and should be considered as distributed income within the meaning of Article 109(1) of the Code, subject to the withholding tax provided for in Article 119a of the Code, at the conventional rate of 15%. SA Compagnie Gervais Danone brought the tax assessment to the Administrative Court and in a decision issued 9 July 2019 the Court discharged SA Compagnie Gervais Danone from the taxes in dispute. This decision was appealed by the tax authorities and in June 2021 the Administrative Court of Appeal set aside the decision of the administrative court and decided in favor of the tax authorities. An appeal was then filed by SA Compagnie Gervais Danone with the Supreme Court. Judgment of the Conseil d’État The Supreme Court set aside the decision of the Administrative Court of Appeal and decided in favor of SA Compagnie Gervais Danone. Excerpts from the Judgment “3. It is apparent from the documents in the files submitted to the trial judges that Compagnie Gervais Danone entered into an agreement with Danone Tikvesli, a company incorporated under Turkish law, granting the latter the right to use Groupe Danone’s dairy product trademarks, patents and know-how, of which it is the owner, in order to manufacture and sell dairy products on the Turkish market. In order to deal with the net loss of nearly 40 million euros recorded by Danone Tikvesli at the end of the 2010 financial year, which, according to the undisputed claims of the companies before the trial judges, should have led, under Turkish law, to the cessation of its business, Danone Tikvesli was granted the right to use Groupe Danone’s dairy product brands, patents and know-how, Compagnie Gervais Danone paid it a subsidy of EUR 39,148,346 in 2011, which the tax authorities allowed to be deducted only in proportion to its 22.58% stake in Danone Tikvesli. In order to justify the existence of a commercial interest such as to allow the deduction of the aid thus granted to its subsidiary, Compagnie Gervais Danone argued before the lower courts, on the one hand, the strategic importance of maintaining its presence on the Turkish dairy products market and, on the other hand, the prospect of growth in the products that it was to receive from its Turkish subsidiary by way of royalties for the exploitation of the trademarks and intangible rights that it holds. 4. On the one hand, it is clear from the statements in the judgments under appeal that, in ruling out the existence of a commercial interest on the part of Compagnie Gervais Danone in paying aid to its subsidiary, the Court relied on the fact that Danone Hayat Icecek, majority shareholder in Danone Tikvesli, also had a financial interest in preserving the reputation of the brand, which prevented Compagnie Gervais Danone from bearing the entire cost of refinancing Danone Tikvesli. In inferring that Compagnie Gervais Danone had no commercial interest from the mere existence of a financial interest on the part of Danone Tikvesli’s main shareholder in refinancing the company, the Court erred in law. 5. Secondly, it is clear from the statements in the contested judgments that, in denying that Compagnie Gervais Danone had its own commercial interest in paying aid to its subsidiary, the Court also relied on the fact that the evidence produced by that company did not make it possible to take as established the alleged prospects for growth of its products, which were contradicted by the fact that no royalties had been paid to it before 2017 by the Turkish company as remuneration for the right to exploit the trade marks and intangible rights which it held. In so ruling, the Court erred in law, whereas the fact that aid is motivated by the development of an activity which, at the date it is granted, has not resulted in any turnover or, as in the present case, in the payment of any royalties as remuneration for the grant of the right to exploit intangible assets, is nevertheless capable of conferring on such aid a commercial character where the prospects for the development of that activity do not appear, at that same date, to be purely hypothetical.” Click here for English translation Click here for other translation ...

A Dutch company “Tobacco B.V.” belonging to an internationally operating tobacco group was subjected to (additional assessment) corporate income tax assessments according to taxable amounts of €2,850,670,712 (2013), €2,849,204,122 (2014), €2,933,077,258 (2015) and €3,067,630,743 (2016), and to penalty fines for the year 2014 of €1,614,709, for the year 2015 of €363,205 and for the year 2016 of €125,175,082. In each case, the dispute focuses on whether the fees charged by various group companies for supplies and services can be regarded as business-related. Also in dispute is whether transfer profit should have been recognised in connection with a cessation of business activities. One of the group companies provided factoring services to “Tobacco B.V.”. The factoring fee charged annually for this includes a risk fee to cover the default risk and an annual fee for other services. The court concluded that the risk was actually significantly lower than the risk assumed in determining the risk fee, that the other services were routine in nature and that the factoring fee as a whole should be qualified as impractical. “Tobacco B.V.” has not rebutted the presumption that the disadvantage caused to it by paying the factoring fees was due to the affiliation between it and the service provider. In 2016, a reorganisation took place within the tobacco group in which several agreements concluded between group companies were terminated. The court concluded that there had been a coherent set of legal acts, whereby a Dutch group company transferred its business activities in the field of exporting tobacco products, including the functions carried out therein, the risks assumed therein and the entire profit potential associated therewith, to a group company in the UK. For the adjustment related to the transfer profit, the court relies on the projected cash flows from the business and information known at the time the decision to transfer was taken. The conclusions regarding factoring and the termination of business activities in the Netherlands lead to a deficiency in the tax return for each of the years 2014 to 2016. For these years, “Tobacco B.V.” filed returns to negative taxable amounts. For the years 2014 and 2016, a substantial amount of tax due arises after correction, even if the corrections established by application of reversal and aggravation are disregarded. For the year 2015, the tax due remains zero even after correction. Had the return been followed, this would have resulted in “Tobacco B.V.” being able to achieve, through loss relief, that substantially less tax would be due than the actual tax due. At the time the returns were filed, “Tobacco B.V.” knew that this would result in a substantial amount of tax due not being levied in each of these years and the court did not find a pleading position in this regard. The burden of proof is therefore reversed and aggravated. For the year 2013, this follows from the court’s decision of 17 October 2022, ECLI:NL:RBNHO:2022:8937. To finance their activities, the group companies issued listed bonds under the tobacco group’s so-called EMTN Programme, which were guaranteed by the UK parent company. A subsidiary of “Tobacco B.V.” joined in a tax group paid an annual guarantee fee to the UK parent company for this purpose. The court ruled that: – the guarantee fees are not expenses originating from the subsidiary’s acceptance of liability for debts of an affiliated company; – the EMTN Programme is not a credit arrangement within the meaning of the Umbrella Credit Judgment(ECLI:NL:HR:2013:BW6520); – “Tobacco B.V.” has made it clear that a not-for-profit fee can be determined at which an independent third party would have been willing to accept the same liability on otherwise the same terms and conditions; – “Tobacco B.V.” failed to show that in the years in which the guarantee fees were provided, credit assessments did not have to take implied guarantee into account; – “Tobacco B.V.” failed to show that its subsidiary was not of such strategic importance to the group that its derivative rating did not match the group rating, so that the guarantee fees paid are not at arm’s length due to the effect of implied guarantee in their entirety; – “Tobacco B.V.” did not put forward any contentions that could rebut the objectified presumption of awareness that follows from the size of the adjustments (the entire guarantee fee), that the disadvantage suffered by the plaintiff as a result of the payment of the guarantee fees is due to its affiliation with its parent company. A group company charges the claimant, inter alia, a fee corresponding to a percentage of “Tobacco B.V.”‘s profits (profit split) for activities on behalf of the tobacco group that result in cost savings for “Tobacco B.V.”. The court ruled that “Tobacco B.V.” failed to prove that the group company made a unique contribution to the tobacco group that could justify the agreed profit split. The group company also charges “Tobacco B.V.” a fee equivalent to a 12% mark-up on costs for services relating to the manufacture of cigarettes. The court ruled that, in the context of the reversal and aggravation of the burden of proof, it was not sufficient for “Tobacco B.V.” to refer to the functional analysis, as it was based on the incorrect premise that the group company could be compared to a manufacturer. Finally, since April 2012, “Tobacco B.V.” has been paying the group company a 10% fee on the costs excluding raw materials for the production of cigarettes as toll manufacturer, where previously the basis of this fee also included the costs of raw materials. The court noted that the flow of goods remained the same and that “Tobacco B.V.” remained operationally responsible for the production process. The court ruled that it was up to “Tobacco B.V.” to establish and prove facts from which it follows that it was businesslike to change the basis of remuneration, which it did not do sufficiently. Regarding an adjustment made by the tax authorities in relation to reorganisation costs, the court finds that the adjustment was made in error ...

P.B. had deducted licence fees paid for the use of the trademark “B” which was owned by a related party. Following an audit, the tax authority issued an assessment where deductions for the fees had been disallowed. The tax authority stated that the transactions carried out by the P.B. in 2015 concerning the trademark, both in terms of the disposal of this asset and in terms of the subsequent acquisition of the right to use it, escape the notion of rational management and that these activities occurred under conditions that were clearly different from market conditions. According to the authority, their undoubted result was an unjustified transfer of income to the related entity B. sp. z o.o. An appeal was filed with the Administrative Court which later upheld the tax assessment, and P.B. then filed an appeal with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Court ruled in favour of P.B. by setting aside the decision of the administrative Court and the tax assessment. Excerpt “It follows from the case file that the authority did not question the effectiveness of the concluded agreements related to the right to use the trademark, but only questioned their tax consequences. There is no doubt that the Company used the trademarks and the expenses incurred in the form of licence fees were necessary to obtain revenue. Since the transaction of disposal of the right to the “B.” trademark was legally effective (the validity of these agreements was not challenged), it means that there was a transfer of ownership of these rights to another entity. The trademark licence agreement concluded between the Company and B. sp. z o.o. should be assessed similarly. In such circumstances, the licence fee documented by the invoice of […] December 2015 was charged to deductible costs and understated the Company’s income and thus the complainant’s tax base in 2015. It is undisputed that, in light of the accepted facts, the exclusive holder of the rights to use the trademark “B.” was the trademark company, and under the undisputed licence agreement, the Company was obliged to pay royalties. Moreover, it is undisputed that it used the right to the trademark in its operations, even in the form of a licence, and therefore the prerequisites for including this expense as a deductible cost were met. The provision of Article 25(1) u.p.d.o.p. authorised the authorities to determine only the conditions (prices) of these activities differently – and thus to replace the prices specified in the parties’ agreements (transactions) with prices that would correspond to hypothetical conditions (prices) agreed by unrelated parties. The occurrence of the prerequisites referred to in Article 25(1) of the u.p.d.o.p. provided the basis for estimating the Company’s income by possibly reducing the amount of its tax costs. However, this provision cannot be used to disregard the tax consequences of the legal actions performed between related parties in 2015, the effectiveness of which was not questioned by the tax authority. In this provision, the legislator exposed the arm’s length principle, which requires that prices in transactions between related parties be determined as if the companies were operating as independent entities, operating at arm’s length. However, in the facts of the case under consideration, the tax authorities and, following him, also the Court of First Instance, relying on the content of Article 25(1) of the u.p.d.o.p., critically assessed the legal transactions performed by related entities, undermining not only their economic sense (with which the Supreme Administrative Court agrees), but also, in essence, reclassified the legal transaction performed, in the form of a valid licence agreement, into an agreement for the provision of low-value services . In the opinion of the Supreme Administrative Court, Article 25(1) of the u.p.d.o.p. could not constitute a self-contained basis for “redefining” the disputed transaction. Challenging the scheme of operation applied by related parties must have a clear legal basis. Tax authorities may not use other provisions as a solution equivalent to a circumvention clause (cf. the NSA judgment of 8 May 2019, ref. II FSK 2711/18). The tax authorities, as well as the Court of first instance, did not present argumentation from which it would follow, by applying what rules of interpretation, they came to the conclusion that such a manner of application of Article 25(1) u.p.d.o.p. is legally possible and justified in the case under consideration. This provision, in fine, provides for the determination of income and tax due without ‘(…) taking into account the conditions resulting from these connections’, and does not allow for the substitution of one legal transaction (trademark licence agreement) for another transaction (provision of low-value services) and deriving from this second transaction legal consequences in terms of determining the amount of tax liability. It should be emphasised that the statutory determination of the subject of taxation, resulting from Article 217 of the Constitution of the Republic of Poland, is unquestionable. Therefore, the provisions from which the powers of tax authorities to change (reclassify) the subject of taxation are derived should be approached with great caution. The transfer pricing regulations (chapter 4b of the u.p.d.o.p.), introduced by the amending act of 23 October 2018 and effective as of 1 January 2019, constitute in some aspects a significant novelty. Although the content of Article 25(1) corresponds to the content of Article 23o(2), the regulations contained in Article 23o(4) u.p.d.o.p. do not find their counterpart in the previous provisions. The provision of Article 23o Paragraph 4 contains the wording “(…) without taking into account the controlled transaction, and where justified, determines the income (loss) of the taxpayer from the transaction relevant to the controlled transaction”. This is the explicitly expressed competence of the tax authorities to carry out the so-called recharacterisation (reclassification), i.e. reclassification of the transaction, which is what the tax authorities actually did in the present case. Even more so, such powers were not granted to the authorities by the Transfer Pricing Ordinance. Pursuant to Paragraph 9(2) of this regulation, the terms and conditions of the agreement ...

On 1 February 2010, E.K. and its subsidiary, E. S.A, concluded an agreement on the transfer of E.K.’s trade marks to E. S.A. Following the transfer (on the same day), E.K. concluded with E. S.A. an agreement to grant a licence for the use of the marks in return for payment to the licensor (E. S.A.) of a monthly remuneration. In 2011, E.K. recognised as a deductible expense the royalties paid to E. S.A. According to the tax authorities this resulted in E.K. understating its corporate income tax liability for 2011. According to the tax authorities, E. S.A. did not participate in any way in the creation of revenue, with the result that the profits generated by E.K. were ‘passed on’ in the form of royalties to a related company – E. S.A. The remuneration payable to the legal owner of the trademarks did not take into account the very limited functions performed by that entity in creating the value of the trademarks. The only function performed by E. S.A. in 2011 was to manage the legal protection of the trade marks, for which it would be entitled to a limited remuneration appropriate to its function. After receiving the resulting assessment of additional taxable income, a complaint was then filed by E.K. with the Director of the Tax Chamber which was later dismissed. An appeal was then filed by E.K. with the Administrative Court. Judgment of the Administrative Court. The Administrative Court set aside the Decision of the Tax Chamber and referred the case back to the Tax Chamber. Excerpts “… In the Court’s view, the faulty application of Article 11(1) and (4) of the u.p.d.o.p. affected the manner in which the applicant’s income was estimated and the estimation method adopted by the authorities, based on the erroneous assumption that the transaction analysed by the authorities consisted in the provision of trade mark administration services on behalf of the economic owner of those trade marks. In making that assumption, the authorities applied the net transaction margin method in order to determine the market level of the remuneration payable to the company for its trade mark administration functions. Meanwhile, the applicant provided the tax authority with the data that formed the basis for the calculation of the royalties, as well as the licence agreement. In view of the repetitive nature of such transactions on the market, the applicant used the comparable uncontrolled price method as the correct approach. The Court notes that the estimation of income by the methods indicated in Article 11(2) of the u.p.d.o.p. (comparable uncontrolled price method, reasonable margin method, selling price method) should be considered first, and only when it is not possible to apply these methods, the methods indicated in Article 11(3) of that Act (net transaction margin method, profit sharing method) will be applied. Furthermore, the applicant reasonably pointed out that in the comparability analysis the authorities should have taken into account the fact that intangible assets of significant value (trademarks) were involved in the examined transaction, being the only significant asset analysed by the parties to the examined transaction. As a result, the authorities incorrectly conducted the comparability analysis of the transaction involving the licence for the use of trademarks granted to the applicant by the limited partnership, which prejudges the validity of the allegation of a breach of Article 11(1)-(3) of the u.p.d.o.p. in conjunction with § 3, § 7, § 8, § 10 and § 11 of the MF Regulation. In the opinion of the Court, the basis for the decision in this case was not the provision of Article 11c(4) of the u.p.d.o.p. in the 2019 wording, hence the allegation of violation of this provision contained in the complaint does not merit consideration. In the opinion of the Court, the evidence gathered in the case allowed it to be resolved and, in this respect, the authorities did not fail to comply with Article 122 in conjunction with Article 187 § 1 of the Tax Ordinance. On the other hand, the allegation of a breach of Article 191 of the Tax Ordinance, consisting in the authorities’ faulty assessment of the market nature of the examined legal transactions, is justified. In the context of this allegation, however, it should be stipulated that the reclassification of a legal action by the authorities is not so much the result of a defective assessment of the evidence gathered, but results from the interpretation and manner of application of substantive law provisions adopted by the authorities (Article 11(1) and (4) of the u.p.d.o.p.). As aptly pointed out in the case law, in such a situation the state of facts was not so much established, but adopted by the tax authority. This is because the tax authority determines the factual state not on the basis of established circumstances, but reconstructs it, taking as a directional guideline the taxpayer’s intention to achieve the intended fiscal goal (unauthorised tax benefit). Thus, the state of facts adopted by the tax authorities does not so much result from the evidence gathered in the case, but from the assumption that if the taxpayer was guided only by economic and economic rationale and not by the intention to achieve an unauthorised tax benefit, it is precisely in the way the tax authority wants him to arrange his relations (judgment of the NSA of 8 May 2019, II FSK 2711/18). On the other hand, the consequence of the violation of substantive law is the legitimacy of the allegations of violation of Articles 120 and 121 § 1 of the Tax Ordinance by the authorities. On the other hand, due to the voluminous nature of the complaint, the Court referred to the allegations contained therein and their justification to the extent necessary to conduct a review of the appealed decisions (judgment of the Supreme Administrative Court of 26 May 2017, I FSK 1660/15). When re-examining the case, the authority will take into account the legal assessment presented above as to the interpretation and application, in the ...

In TC opinion of 18 November 2020 the US Tax Court agreed with the US tax authorities (IRS) that Coca-Cola’s US-based income should be increased by $9 billion in a dispute over royalties from its foreign-based licensees. The principal holding was that the Commissioner did not abuse his discretion in reallocating income to Coca-Cola using a “comparable profits method” (TNMM) that treated independent Coca-Cola bottlers as comparable parties. However, one question remained. Coca-Colas’s Brazilian subsidiary paid no actual royalties to Coca-Cola during 2007–2009. Rather, it compensated Coca-Cola for use of its intangibles by paying dividends of $886,823,232. The court held that the Brazilian subsidiary’s arm’s-length royalty obligation for 2007–2009 was actually about $1.768 billion, as determined by the IRS. But the court held that the dividends remitted in place of royalties should be deducted from that sum. This offset reduces the net transfer pricing adjustment to petitioner from the Brazilian supply point to about $882 million. Thus, the issue to be decided is whether this $882 million net transfer-pricing adjustment is barred by Brazilian law. During 2007–2009 Brazil capped the amounts of trademark royalties and technology transfer payments (collectively, royalties) that Brazilian companies could pay to foreign parent companies. Coca Cola contended that Brazilian law blocked the $882 million net transfer-pricing adjustment. IRS contended that the Brazilian legal restriction should be given no effect in determining the arm’s-length transfer price, relying on what is commonly called the “blocked income” regulation (Treas. Reg. § 1.482-1(h)(2)). According to tax authorities the “blocked income” regulation generally provides that foreign legal restrictions will be taken into account for transfer-pricing purposes only if four conditions are met, including the requirement that the restrictions must be “applicable to all similarly situated persons (both controlled and uncontrolled).” Judgment of the tax court The Tax Court sustained the transfer pricing adjustment in full. Excerpts “Allocation of Value Between Grandfathered Intangibles and Those Not Grandfathered Petitioner has shown that eight of TCCC’s trademarks were li-censed to the supply point before November 17, 1985. Those are the only intangibles in commercial use during 2007–2009 that were covered by the grandfather clause. We find that petitioner has failed to carry its burden of proving what portion of the Commissioner’s adjustment is at-tributable to income derived from this (relatively small) subset of the licensed intangibles. And the record does not contain data from which we could make a reliable estimate of that percentage.” “Because the supply point sold concentrate to preordained buyers, it had no occasion to use TCCC’s trademarks for economically significant marketing purposes. By contrast, the bottlers and service companies were much heavier users of TCCC’s trademarks. The bottlers placed those trademarks on every bottle and can they manufactured and on every delivery truck in their fleet. See id. at 264. And the service com-panies, which arranged consumer marketing, continuously exploited the trademarks in television, print, and social media advertising. See id. at 240, 263–64.” “We conclude that all non-trademark IP exploited by the Brazilian supply point was outside the scope of the grandfather clause. The blocked income regulation thus applies to that portion of the transfer-pricing adjustment attributable to exploitation of those intangible as-sets. We further find that this non-trademark IP represented the bulk of the value that the Brazilian supply point derived from use of TCCC’s intangibles generally. Petitioner has supplied no evidence that would enable us to determine, or even to guess, what percentage of the overall value was attributable to the residual intangible assets, i.e., the trademarks.” “In sum, petitioner has failed to satisfy its burden of proof in two major respects. It has offered no evidence that would enable us to determine what portion of the transfer-pricing adjustment is attributable to exploitation of the non-trademark IP, which we have found be the most valuable segment of the intangibles from the Brazilian supply point’s economic perspective. And petitioner has offered insufficient evidence to enable us to determine what portion of the transfer-pricing adjustment is attributable to exploitation of the 8 original core-product trademarks, as opposed to the 60 other core-product trademarks and the entire universe of non-core-product trademarks. Because petitioner has failed to establish what portion of the aggregate transfer-pricing adjustment might be attributable to exploitation of the eight grandfathered trademarks, we have no alternative but to sustain that adjustment in full.” ...

K.P. is active in retail sale of computers, peripheral equipment and software. In December 2013 it had transfered valuable trademarks to its subsidiary and in the years following the transfer incurred costs in form of licence fees for using the trademarks. According to the tax authorities the arrangement was commercially irrationel and had therfore been recharacterised. Not satisfied with the assessment an appeal was filed. Judgment of the Provincial Administrative Court. The Court decided in favor of K.P.  According to the Court recharacterization of controlled transactions was not possible under the Polish arm’s length provisions in force until the end of 2018. Click here for English translation Click here for other translation ...

“IP-owner Corp” had subsidiaries which used its intangibles in their distribution and manufacturing activities. The subsidiaries did not paid royalty. The tax authorities considered that they should have paid for use of the intangibles and added an arm’s length royalty to the taxable income of “IP-owner Corp”. An appeal was filed with the Seoul Appeals Commission. Decision The Appeals Commission dismisse the appeal and upheld the tax assessment issued by the authorities. Excerpt in English “1) Issue 1 a) A trademark holder has the exclusive and unrestricted right to use a trademark, and therefore, unless the trademark is economically worthless, the use of another’s registered trademark is considered to be an economic benefit in itself. It is economically reasonable for a trademark holder to receive consideration for allowing the use of its trademark, and it is an abnormal trade practice that lacks reasonableness to allow the use of a trademark without consideration. b) The applicant corporation is 20○○.○. After applying and registering the trademark, it has been registered as the sole trademark holder of the trademark in question. However, although it was necessary to collect royalties for the use of the trademark, the applicant corporation refused to collect royalties without economic rationality, which is subject to adjustment of normal price taxation under Article 4(1) of the International Taxation Adjustment Act or denial of calculation of wrongful acts under Article 52(1) of the Corporate Tax Act. c) Accordingly, we find no error in the original decision of the HMRC to deny the applicant a corporate tax credit. 2) Regarding Issue 2 a) The applicant company argues that the technical fees at issue should not be disallowed to the applicant company. b) The manufacturing technology of ○○○○, which the Applicant has developed for a long period of time by establishing a research and development team, constitutes non-public technical information, and the head of the research and development team and then the factory manager of the Chinese subsidiary stated that the research and development team’s findings played an important role for the Chinese subsidiary. The internally drafted contract stipulates the provision of drawings, etc. as technical information, and the amount of royalties to be received from the PRC corporation was considered to be about 3 to 4 per cent of the PRC corporation’s sales. c)The fact that the applicant transferred technical information and technical know-how related to the ○○○○ product to the PRC corporation and did not receive royalties in return is subject to taxation adjustment under Article 4(1) of the Law on International Taxation Adjustment, and the arm’s length price was reasonably calculated in light of the substance and practice of the transaction. d) Accordingly, we find no error in the original decision of the tax authorities to deny the claim for corporate tax credit to the applicant.” Click here for English translation“ Click here for other translation ...

K. S.A. had made an in-kind contribution to a subsidiary (a partnership) in the form of previously created or acquired and depreciated trademark protection rights for individual beer brands. The partnership in return granted K. S.A. a licence to use these trademarks (K. S.A. was the only user of the trademarks). The partnership made depreciations on these intangible assets, which – due to the lack of legal personality of the partnership – were recognised as tax deductible costs directly by K. S.A. According to the tax authorities the role of the partnership was limited to the administration of trademark rights, it was not capable of exercising any rights and obligations arising from the licence agreements. Therefore the prerequisites listed in Article 11(1) of the u.p.d.o.p. were met, allowing K. S.A.’s income to be determined without regard to the conditions arising from those agreements. The assessment issued by the tax authorities was later set aside by the Provincial Administrative Court. An appeal and cross appeal was then filed with the Supreme Administrative Court. Judgment of the Supreme Administrative Court. The Supreme Administrative Court upheld the decisions of the Provincial Administrative Court and dismissed both appeals as neither of them had justified grounds. The Provincial Administrative Court had correctly deduced that Article 11(1) of the u.p.d.o.p. authorises only adjustment of the amount of licence fees, but not the nature of the controlled transactions by recognising that instead of a licence agreement for the use of the rights to trademarks, an agreement was concluded for the provision of services for the administration of these trademarks. Excerpts “The tax authorities, in finding that the applicant had not in fact made an in-kind contribution of trademark rights to the limited partnership, but had merely entrusted that partnership with the duty to administer the marks, referred to Article 11(1) of the u.p.d.o.p. (as expressed in the 2011 consolidated text. ), by virtue of which the tax authorities could determine the taxpayer’s income and the tax due without taking into account the conditions established or imposed as a result of the links between the contracting entities, with the income to be determined by way of an estimate, using the methods described in paragraphs 2 and 3 of Article 11 u.p.d.o.p. However, these are not provisions creating abuse of rights or anti-avoidance clauses, as they only allow for a different determination of transaction (transfer) prices. The notion of ‘transaction price’ is legally defined in Article 3(10) of the I.P.C., which, in the wording relevant to the tax period examined in the case, stipulated that it is the price of the subject of a transaction concluded between related parties. Thus, the essence of the legal institution regulated in Article 11 of the u.p.d.o.p. is not the omission of the legal effects of legal transactions performed by the taxpayer or a different legal definition of those transactions, but the determination of their economic effect expressed in the transaction price, with the omission of the impact of institutional links between counterparties”  “For the same reasons, the parallel plea alleging infringement of Articles 191, 120 and 121(1) of the P.C.P. by annulling the tax authority’s legal rulings on the grounds of a breach of the aforementioned rules of evidence in conjunction with Articles 11(1) and 11(4) of the u.p.d.o.p. and holding that the tax authority did not correct the amount of royalties and the marketability of the transaction, but reclassified the legal relationship on the basis of which the entity incurred the expenditure, is also inappropriate. In fact, the assessment of the Provincial Administrative Court that such a construction of the tax authority’s decision corresponds to the hypothesis of the 2019 standard of Article 11c(4) of the u.p.d.o.p. is correct, but there was no adequate legal basis for applying it to 2012/2013 and based on Article 11(1) and (4) of the u.p.d.o.p. in its then wording. Failure to take into account a transaction undertaken by related parties deemed economically irrational by the tax authority violated, in these circumstances, the provisions constituting the cassation grounds of the plea, as the Provincial Administrative Court reasonably found.” “Contrary to the assumption highlighted in the grounds of the applicant’s cassation appeal, in the individual interpretations issued at its request, the applicant did not obtain confirmation of the legality of the entire optimisation construction, but only of the individual legal and factual actions constituting this construction, presented in isolation from the entire – at that time – planned future event. Such a fragmentation of the description of the future event does not comply with the obligation under Article 14b § 3 of the Code of Civil Procedure to provide an exhaustive account of the actual state of affairs or future event, and therefore – as a consequence – the applicant cannot rely on the legal protection provided under Article 14k § 1 or Article 14m § 1, § 2 (1) and § 3 of the Code of Civil Procedure.” Click here for English translation Click here for other translation ...

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 Sport 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 Sport O.B. SA which was dismissed by the Administraive Court. An appeal was then filed with the Supreme Administrative Court. Judgment The Supreme Administrative Court overturned the decision and the case was referred back for reconsideration to the Administrative Court. Click here for English Translation Click here for other translation ...

SA SACLA, which trades in protective clothing, footwear and small equipment, was the subject of a tax audit covering the financial years 2007, 2008 and 2009. In 2008, Sacla had sold a portfolio of trademarks to a related party, Involvex SA, a company incorporated under Luxembourg law, for the sum of 90,000 euros. In a proposed assessment issued in 2011, the tax authorities increased Sacla’s taxable income on the basis of Article 57 of the General Tax Code, taking the view that Sacla had made an indirect transfer of profits in the form of a reduction in the selling price by selling a set of brands/trademarks held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime. The tax authorities had estimated the value of the trademarks at €20,919,790, a value that was reduced to €11,288,000 following interdepartmental discussions. In a February 2020, the Lyon Administrative Court of Appeal, after rejecting the objection of irregularity of the judgment, decided that an expert would carry out a valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation was to take into account an agreed exemption from the payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert’s report was filed on 8 April 2021 and, upon receipt of the report, SA SACLA asked the court to modify the judgment by considering that the value of the transferred trademarks should be set at between EUR 1.3 million and EUR 2.1 million and that the penalties for wilful infringement should be waived. By judgment of 19 August 2021, the court rejected SACLA’s request and set the value of the trademarks – in accordance with the expert’s report – at 5,897,610 euros. “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” SACLA then appealed to the Supreme Administrative Court, which by decision no. 457695 of 27 October 2022 set aside articles 3 and 6 of the judgment from the Administrative Court of Appeal and remanded the case for further considerations. “2. In a judgment before the law of 13 February 2020, the Lyon Administrative Court of Appeal decided that, before ruling on the Sacla company’s request, an expert appraisal would be carried out in order to determine whether the sale price of the trademarks sold by that company corresponded to their value, taking into consideration, in particular, the waiver of payment of royalties for a period of five years granted by the purchasing company, Involvex, to the Sacla company. In order to fulfil the mission entrusted to them by the court, the expert and his assistant first considered four methods, then abandoned the method of comparables and the method of capitalisation of royalties, and finally retained only two methods, the method of historical costs and the method of discounting future flows, from which they derived a weighted average. It follows from the statements in the judgment under appeal that the court, after considering that the historical cost method did not allow the effect of corporation tax to be taken into account with any certainty and led to a valuation almost eight times lower than the discounted cash flow method, rejected the former method and adopted only the latter and considered that there was no need to carry out a weighting, since, in its view, the discounted cash flow method proved to be the most accurate. 3. It follows from the statements in the judgment under appeal that the court, after fixing the value of the trade marks transferred by Sacla at EUR 8 733 348 exclusive of tax, an amount also retained by the administrative court, intended to apply the discount recommended by the expert report of 7 April 2021 in order to take account of the exemption from payment of royalties granted for five years by the purchaser of the trade marks. In fixing the amount of that discount at EUR 2 400 000 exclusive of tax, whereas the expert report which it intended to apply estimated it, admittedly, at that amount in absolute terms, but by applying a rate of 37% to a value of the trade marks transferred estimated at EUR 6 500 000, the Court distorted that expert report and gave insufficient reasons for its judgment.” Judgment of the Administrative Court of Appeal The Court ruled as follows “…by selling on 19 October 2008 a set of trademarks held by it at a reduced price to Involvex, a company incorporated under Luxembourg law, had carried out an indirect transfer of profits. In a judgment of 10 October 2017, the Lyon Administrative Court, after finding that there was no need to rule on the claims for suspension of payment submitted at first instance, granted partial discharge of the additional corporation tax and social security contributions to ...

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. Judgment 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. Judgment of the Court The Court of Appeal revoked the judgment 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 judgment under appeal was an error of judgment and should therefore be replaced by a decision dismissing the challenge.” Click here for English translation. Click here for other translation ...

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. Judgment 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 ...

“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. Judgment 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. Promińska, Industrial Property Law, 5th edition, LexisNexis 2011, p. 340). Transferring the above considerations to the grounds ...

The tax authorities had issued a notice of assessment in which royalty payments had been adjusted on the basis of the arm’s length principle. “I_ 3.1.8 – 9,027,469.67 euros – Transfer prices – Royalties After verifying all documentation submitted by dependent companies F…Hipermercados, SA and P…Distribuição Alimentar, SA, at the request of the Tax Administration during external inspections of a general scope carried out on the books of each of the said companies, relative to royalty costs paid by them to a Swiss entity – J… -, it was possible to conclude that the costs in question derived respectively from a contract for the use of the F. . to that entity for a period of no less than 30 years and of a usage contract of the trademark P… to the same Swiss entity, for a period of no less than 30 years, with F…and P…continuing to deduct from their income, charges directly related with the management, promotion and development of the trademarks assigned by them, as well as bearing all the inherent risks. Due to the fact that F…and P.. have assigned their brands, by means of an operation that could not be carried out between independent entities, and continue to bear the costs associated with the management and development of these brands, as well as all the inherent risks, additionally bearing a royalty for the use of an asset that in practice continues to be theirs, a positive adjustment is made to the taxable profit of the subsidiary F.. Hipermercados, SA, to the amount of 4,116,392.00 euros and to a positive adjustment of the taxable profit of the subsidiary P… – Distribuição Alimentar, SA, to the amount of 4,911,077.67 euros (cf. item 111-1.8 of this document).” An appeal was filed by the company and the assessment was later annulled in the Tax Court. The tax authorities then filed an appeal with the Administrative Court of Appeal claiming that the decision of the Tax Court should be annulled due to lack of reasoning. Judgment of the Court The Administrative Court of Appeal upheld the appeal brought by tax authorities and declared the nullity of the judgment appealed against for failure to specify the factual grounds of the decision. The case was remanded to the Court of First Instance for a new decision to be issued therein, including the grounds of fact, proven and unproven, as well as an analysis of the evidence produced. Extracts from the judgment “Having examined the case-file, it can be seen that some of the listed witnesses were questioned (cf. minutes on pages 9036 and 9043) and that, with regard to the remaining witnesses, use was made of the witness evidence provided in another case (nº 137/08), which involved the same RIT and the same corrections, but with regard to the 2003 financial year (cf. order on pages 8997). It is also noted, from the content of the minutes of the examination of the witnesses in the present case-file, that they replied as to the matter contained in points 130 to 169 and 716 to 719 of the legal document. And, as to the evidence used in case nº 137/08, the witnesses therein responded as to the matter identified in the request on pages 8994 of the records. However, a careful reading of the contested decision shows that the evidence contains no reference to the statements of the witnesses examined. It is not even mentioned that the witnesses were questioned, nor is there any reference to the reasons for not taking their statements into consideration. In addition to the above, there is the circumstance that the sentence mentions, in the assessment of the law, that the Impugner joined to the file various documents relating to the expenses under analysis, which it claims support the effectuation of the expenses in question. However, the list of evidence does not make any reference to these documents and the facts on which they are based. The sentence further mentions that the documentation was corroborated by testimonial evidence. Further on, the sentence mentions that the inquired witnesses demonstrated to have knowledge of the way the Impugner operates, having highlighted some specific statements. Moreover, also in the assessment of the law, the sentence bases its understanding on documents whose existence was not proven, such as, among others, the trademark assignment contract, the Licence Agreement and the study that establishes the comparison with independent entities. The vicissitudes described above lead this Court to conclude that, in effect, the sentence appealed against suffers from the nullity found against it.” “With this appeal, the appellant claims that this Court should decide on the validity of the request formulated by her but, in order for this to happen, it is essential that the decision appealed against should state the reasons why it was decided not to take into account the testimonial evidence produced on the same matter that is now considered relevant. The CPC has the power to change the factual decision made by the “a quo” court provided that the prerequisites set out in Article 712(1) of the CPC (now 662) are met, and it is therefore incumbent on the CPC to re-examine the evidence on which the contested decision which is the object of the controversy was based, as well as to assess, of its own motion, other evidential elements which have served as a basis for the decision on the disputed factual points? Going back to what we have been saying above about the extent of the appellate court’s powers of cognition on the matter of fact, we note that these do not imply a new trial of fact, since, on the one hand, this possibility of cognition is confined to the points of fact that the appellant considers to have been incorrectly judged and provided that he meets the requirements set out in Article 690-A nos. 1 and 2 of the Civil Procedure Code. On the other hand, the control of fact, on appeal, based on the recording and/or transcription ...

A local manufacturer – BASF Argentina S.A. – belonging to the German multinational group – BASF – specialized in chemical products which it produced and sold. For these activities it used imported and national inputs that it transformed through licensed industrial procedures owned by companies of the same group. It had signed 6 technology transfer and trademark use license agreements (CTT) with three related companies, under which it paid a fee for the sale of products manufactured in the country with the licensed technologies and trademarks. BASF Argentina S.A. also imported finished products with the same brands, but only for resale in the country. It claimed that no royalties were paid for these products. The customs authority objected to the non-inclusion of royalties in the import value. Judgment of the Tax Court The Court found that the royalties paid were also part of the value of the imported goods. Excerpt “…In this state of affairs, it is clear that the percentages of 99%, in both charges, allow to conclude, with a reasonable degree of certainty, that the universe of import shipments whose value adjustment was challenged and subject of the proceedings, correspond to inputs acquired from companies of the same economic group whose corporate name includes the name “BASF”, so it is in line with reality to induce that such products carry the ”BASF” technology and, therefore, the “BASF” brand of its manufacturer. And it is precisely the circumstance of inseparability which adds commercial value to the product, bringing certainty to the consumer as to the production process involved in its manufacture. Indeed, over the four years under study, the inputs imported by the plaintiff have been manufactured by more than thirty different companies, located in different parts of the world, which share the characteristic of including the name “BASF” in their corporate name. From this perspective, it is unequivocal that the inputs are manufactured with BASF’s intellectual property and licensed to the Argentine buyer, who, when acquiring them, necessarily imports the product plus the intangible (BASF trademark), guarantee of the manufacturing technology of the tangible. This hypothesis is reinforced by an analysis of the absurd: it is contrary to all logic to suppose that BASF Argentina carries out in 4 years more than 14,000 purchases from more than 30 BASF suppliers all over the world, of inputs manufactured by them, and to suppose that all of them do not have in their real implicit commercial value the BASF technology that assures the buyer – BASF ARGENTINA – a certain quality/prestige/guarantee that comes with knowing, precisely, that it was manufactured by the BASF economic group. And it is this added value that corresponds to the denomination “brand”. In view of the foregoing, the tax representatives are right when they state, in relation to the non-connection maintained by the plaintiff, that what is said does not reflect the commercial reality of the economic group since, according to the declaration of the import dispatches analysed above, the companies supplying the products bear the word “BASF” in their names, from which it is reasonably certain that they would form part of the same economic group with BASF ARGENTINA S. A. A. And, it is worth noting that this conclusion was not undermined by the appellant with evidence sufficiently convincing to remove all doubt. In short, in order for imported inputs to be entitled to a certain intangible, they do not need to be subjected to any industrial process in the national territory, since such circumstance involves another type of taxable event. On the other hand, the generating event in question refers to the importation of goods for consumption for an indefinite period of time; and everything that forms part of the product that enters through customs will form part of the taxable value. Thus, neither the process to which the product was subjected abroad -whose consequence does affect the taxable value of the imported good- nor the process that could affect it while nationalised is under discussion; only the state of the product at the time the HI is perfected, i.e. at the time of release for free circulation -regular imports- is of interest. In short, it is concluded that all the transactions carried out by BASF ARGENTINA and for which it imported BASF branded inputs, must include in the taxable value the real value of the product, understood as the aggregate of the tangible and intangible value. …” Click here for English Translation Click here for other translation ...

Italien fashion group, Dolce & Gabbana s.r.l. (hereinafter DG s.r.l.), the licensee of the Dolce&Gabbana trademark, entered into a sub-licensing agreement with its subsidiary Dolce&Gabbana Industria (hereinafter DG Industria or Industria) whereby the former granted to the latter the right to produce, distribute and sell products bearing the well-known trademark throughout the world and undertook to carry out promotion and marketing activities in return for royalties. DG s.r.l., in order to carry out promotion and marketing activities in the U.S.A., made use of the company Dolce&Gabbana Usa Inc. (hereinafter DG Usa) with contracts in force since 2002; in particular, on March 16, 2005, it entered into a service agreement whereby DG Usa undertook to provide the aforesaid services in return for an annual fee payable by DG s.r.l.; this consideration is determined on the basis of the costs analytically attributable to the provision of the agreed services in addition to a mark up, i.e. a mark-up, determined in a variable percentage based on the amount of the cost. In order to verify the fairness of the consideration, the parties have provided for the obligation of analytical reporting as well as an amicable settlement procedure through an auditing company. Lastly, DG s.r.l., DG Usa and DG Industria entered into another agreement, supply agreement, whereby DG Industria appointed DG Usa as its distributor for the USA in mono-brand shops, DG Usa committed to DG s.r.l. to adapt the shops to its high quality standards functional to increasing brand awareness, and DG s.r.l. committed to pay a service fee. The service contribution was recognised in relation to the costs exceeding a percentage of the turnover realised through the mono-brand sales outlets. In the course of an audit, the Italian Revenue Agency made the following findings in relation to the tax year 1 April 2004 to 31 March 2005: first, it denied the deductibility from the taxable income for IRES and IRAP purposes of part of the fees paid by DG s.r.l. to DG USA under the service contract and precisely: a) of the costs of certain services (in particular, it recognised the costs for commercial sales, executive consultant, advertising Madison sales, advertising all others and not the others), because, provided that these were generic services, falling within the normal activity of the reseller of goods, remunerated by the resale margin, and that the reimbursable costs were defined generically, without provision of a ceiling, a reporting method and prior approval by DG s.r.l., it pointed out that it could only recognise the costs rendered in the interest >>also of the parent company<<; b) the portion corresponding to the chargeback of the mark-up, referring to Revenue Agency Circular No. 32/80 on intra-group services, where it provides that the mark-up in favour of the service provider is recognisable only where the services constitute the typical activity of the service provider and not for those services rendered by the parent company that have no market value or are attributable to the general management or administrative activity of the parent company; secondly, it denied the deductibility of the consideration paid by DG s.r.l. to DG Usa under the supply agreement, pointing out that the costs to be considered for the purposes of the contribution would be generically identified, there would be no obligation of adequate reporting or prior approval, which would in fact transfer to DG s.r.l. the risk of substantial inefficiencies of DG Usa, a risk that no independent third party would have assumed, and that the party had not adequately demonstrated that the costs corresponded to the normal value of the costs inasmuch as the documentation produced, relating to other fashion groups, concerned persons who were also owners of the mark, directly interested in its development and promotion. DG s.r.l. brought an appeal before the Provincial Tax Commission of Milan, which rejected it. An appeal was then brought before the Regional Tax Commission of Lombardy which was likewise rejected. In particular, the Regional Tax Commission, for what is relevant herein rejected the preliminary objections (failure to contest the recovery by means of a report; insufficiency and contradictory motivation); reconstructed the subject matter of the dispute, pointing out that the Agency had contested some costs of the service agreement, excluding their inherent nature; for the costs deemed inherent, it had recalculated the amount, excluding the mark-up; for the supply agreement, it had re-taxed the costs, excluding their deductibility due to lack of inherent nature in relation to the service agreement, it confirmed that the costs for the excluded services were not inherent, because: a) DG Usa also carried out activities pertaining to the retailer DG Industria, distributor of Dolce&Gabbana branded products in the U.S. and the costs were connected to this marketing activity; b) the correlation deducted by the company between the costs recharged to DG s.r.l. and the revenues that the latter obtains as a result of the royalties paid by DG Industria, because the costs connected to services intended to increase sales are those of the retailer and not of the licensee of the trademark, to which are inherent only the costs intended to increase the prestige of the trademark itself; c) the costs incurred in the interest of both DG s.r.l. and DG Usa is not relevant and the only cost items recognisable in favour of the former are those pertaining exclusively to its relevance; d) for the purpose of proving congruity, the expert’s report by Prof. Lorenzo Pozza and the certification by Mahoney Cohen & company were irrelevant, since they were mere opinions that were not binding on the administration; (e) the mark up was not deductible since the services rendered by DG USA were rendered in the interest of both DG s.r.l., licensee of the mark, and DG Industria, reseller, and it was not possible to take into consideration the actions of the latter in favour of Itierre s.p.a., reseller and therefore different from DG s.r.l.; (f) the recharging of costs to DG s.r.l. was formally obligatory in the antero but largely ...

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. Judgment 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 ...

SA SACLA, which trades in protective clothing and footwear as well as small equipment, was subject of a tax audit covering the FY 2007, 2008 and 2009. In a proposed assessment issued in December 2011, the tax authorities increased its taxable income on the basis of Article 57 of the General Tax Code, by considering that SACLA, by selling, a set of brands/trademarks held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime, had carried out an indirect transfer of profits in the form of a reduction in the selling price. In a ruling of February 2020, the Lyon Administrative Court of Appeal, after dismissing the plea of irregularity in the judgment, decided that an expert would carry out an valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation should take into consideration an agreed exemption from payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert report was filed on 8 April 2021 and after receiving the report SA SACLA asked the court to change the judgment by considering that the value of the transferred trademarks should be set at a sum of between 1.3 and 2.1 million euros and that penalties for deliberate breach should be discharged. By judgment of 19 August 2021 the court dismissed the request filed by SACLA and determined the value of the trademarks – in accordance with the expert report – to be 5,897,610 euros. “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” An appeal was then filed by SACLA with the Supreme Administrative Court Judgment of the Supreme Court The Supreme Court set aside articles 3 and 6 of the Judgment from the Administrative Court of Appeal. “Article 3: The judgment of the Lyon Administrative Court of 10 October 2017 is reversed insofar as it is contrary to the present judgment. … … Article 6: The remainder of the parties’ submissions is rejected.” Excerpts “2. In a judgment before the law of 13 February 2020, the Lyon Administrative Court of Appeal decided that, before ruling on the Sacla company’s request, an expert appraisal would be carried out in order to determine whether the sale price of the trademarks sold by that company corresponded to their value, taking into consideration, in particular, the waiver of payment of royalties for a period of five years granted by the purchasing company, Involvex, to the Sacla company. In order to fulfil the mission entrusted to them by the court, the expert and his assistant first considered four methods, then abandoned the method of comparables and the method of capitalisation of royalties, and finally retained only two methods, the method of historical costs and the method of discounting future flows, from which they derived a weighted average. It follows from the statements in the judgment under appeal that the court, after considering that the historical cost method did not allow the effect of corporation tax to be taken into account with any certainty and led to a valuation almost eight times lower than the discounted cash flow method, rejected the former method and adopted only the latter and considered that there was no need to carry out a weighting, since, in its view, the discounted cash flow method proved to be the most accurate. (3) It follows from the statements in the judgment under appeal that the court, after fixing the value of the trade marks transferred by Sacla at EUR 8 733 348 exclusive of tax, an amount also retained by the administrative court, intended to apply the discount recommended by the expert report of 7 April 2021 in order to take account of the exemption from payment of royalties granted for five years by the purchaser of the trade marks. In fixing the amount of that discount at EUR 2 400 000 exclusive of tax, whereas the expert report which it intended to apply estimated it, admittedly, at that amount in absolute terms, but by applying a rate of 37% to a value of the trade marks transferred estimated at EUR 6 500 000, the Court distorted that expert report and gave insufficient reasons for its judgment. (4) It follows from the foregoing that, without needing to rule on the other grounds of appeal, Articles 3 to 6 of the contested judgment should be set aside and, in the circumstances of the case, the State should be ordered to pay the sum of EUR 3 000 to Coverguards Sales under Article L. 761-1 of the Code of Administrative Justice.” Click here for English translation Click here for other translation ...

For use of a trademark “TM Corp” paid the trademark owner a royalty of 0.2 per cent of its consolidated sales plus additional royalties on sales of its overseas subsidiaries. However, no royalty was received from the overseas sales subsidiaries for their use of the trademark. The tax authorities issued an assessment, where royalties had been added to the taxable income of “TM Corp”. Not satisfied with the assessment, an appeal was filed with the Seoul Appeals Commission. In its appeal, TM Corp stated (a) Under the transfer pricing policy of “TM Corp”, the overseas sales subsidiary is only compensated for the price within the normal profit margin, and all excess profits related to overseas business are attributed to the claimant, so the economic benefits of using the trademark are also attributed to the claimant. (b) The Overseas Sales Entity is acting as a mere distributor, purchasing and selling the Products from “TM Corp” under the control and direction of “TM Corp” , while maintaining margins within the normal profitability range, and all major functions, including product research and development, purchasing, production and marketing strategy formulation, are performed by “TM Corp”. (c) Trademark royalties are paid in exchange for the economic benefits of using the trademark, and in practice, the trademark royalty rate is calculated based on the present value of the brand attributable portion of the future excess profits of the trademark (d) It is reasonable that “TM Corp” that enjoys excess profits should bear the trademark royalty rate in light of this method of calculating the trademark royalty rate. Decision The Appeals Commission was of the opinion that “TM Corp”‘s overseas sales subsidiaries are not mere distributors, but general wholesalers, and that “TM Corp” should receive royalties from the overseas sales subsidiaries for the use of the trademark rights at issue. In view of the fact that the personnel composition of “TM Corp”‘s overseas sales subsidiaries is relatively small, ranging from 6 (OOO subsidiary) to 21 (OOO subsidiary), making it difficult to consider them as general wholesalers, and that the transfer pricing reports of the OOO group alone do not indicate that “TM Corp”‘s overseas sales subsidiaries are in the same position as the overseas production subsidiaries that pay “TM Corp” the royalties for the use of the trademark in question, the decision to deduct the OOO on the grounds that the claimant did not receive the royalties for the use of the trademark in question from the overseas sales subsidiaries is erroneous.” In its decision reference was made to the paragraphs in the OECD TPG para 6.4, 6.10, 6.11, 6.13 and para. 41 in the annex to chapter 6. Click here for English translation Click here for other translation ...

“XZ Insurance SA” is the parent company in a group engaged in insurance activities in its various branches, both life and non-life, finance, investment property and services. An audit was conducted for FY 2013-2016 and in 2020 an assessment was issued in relation to both controlled transactions and other transactions. Among outher issued the tax authorities determined that “XZ Insurance SA” did not receive any royalty income from the use of the XZ trademark by to other entities of the group, both domestic and foreign. In the assessment the tax authorities determined the arm’s length royalty percentage for use of the trademarks to be on average ~0,5%. “In order to estimate the market royalty, the first aspect to be studied is the existence of an internal comparable or comparable trademark assignment contracts. And we have already stated that the absence of valid internal and external comparables has led us to resort to the use of other generally accepted valuation methods and techniques. In this respect, it should be noted that this situation is frequent when valuing transactions related to intangibles, and the Guidelines have expressly echoed this situation (in particular, in paragraphs 6.138, 6.153, 6.156, 6.157 and 6.162, which are transcribed in section 6.2 of this Report).” A complaint was filed by “XZ Insurance SA” Judgment of the TEAC The TEAC dismissed the complaint of “XZ Insurance SA” and upheld the tax assessment. Excerpts from the decision concerning the assessment of income for use of the trademarks by other group companies “On this issue, it is worth pointing out an idea that the complainant uses recurrently in its written submissions. The complainant considers that if there is no growth in the number of policies and premiums, it should not be argued that the use of the XZ brand generates a profit in the subsidiaries. However, as the Inspectorate has already replied, it is not possible to identify the increase in the profit of the brand with the increase in premiums, nor that the growth, in certain countries, of the entities is exclusively due to the value of the brand. Logically, increases and decreases in premiums are due to multiple factors, including the disposable income of the inhabitants of each country, tax regulations, civil liability legislation, among others, and we cannot share the complainant’s view that the brand does not generate a profit in the event of a decrease in premiums in the market. Furthermore, insofar as the enforceability of the royalty is conditioned by the fact that the assignment produces a profit for the company using the brand, there is greater evidence as to the usefulness of the brand in the main markets in which the group operates and in which it is most relevant: Spain, COUNTRY_1, Latin American countries, COUNTRY_2, COUNTRY_3, COUNTRY_4 and COUNTRY_5. Finally, one aspect that draws the attention of this TEAC is the contrast between what the complainant demands that the administration should do and the attitude of the administration in the inspection procedure. On the one hand, it demands that the administration carry out a detailed analysis of the valuation of the profit generated by the trademark for the group, but, on the other hand, there is a total lack of contribution on the part of the entity in providing specific information on the valuation of the trademark that could facilitate the task it demands of the administration. In fact, this information was requested by the Inspectorate, to which it replied that “there are no studies available on the value or awareness and relevance of the XZ brand in the years under inspection” (…) “It follows from the above that it has not been proven that the different entities of the group made direct contributions or contributions that would determine that, effectively, the economic ownership of the trademark should be shared. Therefore, this TEAC must consider, given the existing evidence, that both the legal and economic ownership of the trademark corresponds to the entity XZ ESPAÑA. In short, it is clear from the facts set out above that certain entities of the group used, and use, for the marketing of their services and products, a relevant and internationally established trademark, the “XZ” trademark, which gives them a prestige in the market that directly and undoubtedly has an impact on their sales figures, with the consequent increase in their economic profit. It is clear from the above that there was, in the years audited, a transfer of use of an established, international brand, valued by independent third parties (according to the ONFI report, according to …, between … and …. million euros in the years under review) and maintained from a maintenance point of view (relevant advertising and promotional expenses). Therefore, it is reasonable to conclude, as does the Inspectorate, that, in a transaction of this type – the assignment of the “XZ” trademark – carried out at arm’s length, a payment for the use of the intangible asset would have been made to its owner, without prejudice to the fact that the value assigned to the assignment of use of the aforementioned trademark may be disputed; but what seems clear, and this is what the TEAC states, is that it is an intangible asset whose assignment of use has value. In conclusion, the TEAC considers that the entity owning the trademark (XZ SPAIN) had an intangible asset and transferred its use, for which it should receive income; by transferring the use of the asset to group entities, both domiciled in Spain and abroad, it is appropriate to calculate that income for XZ SPAIN by applying the regime for related-party transactions.” (…) “In section 6 of the report, as we have already analysed, ONFI attempts to find external comparables, insofar as there are no internal comparables within the group, reaching the conclusion that they cannot be identified in the market analysed. Consequently, it proceeds to estimate the royalty that XZ Spain should receive, by applying other methodologies that allow an approximation to the arm’s length price, based ...

(i) Facts. FP, a foreign producer of wristwatches, is the registered holder of the YY trademark in the United States and in other countries worldwide. FP enters into an exclusive, five-year, renewable agreement with its newly organized U.S. subsidiary, USSub. The contractual terms of the agreement grant USSub the exclusive right to re-sell YY trademark wristwatches in the United States, obligate USSub to pay a fixed price per wristwatch throughout the entire term of the contract, and obligate both FP and USSub to undertake without separate compensation specified types and levels of marketing activities. (ii) The consideration for FP’s and USSub’s marketing activities, as well as the consideration for the exclusive right to re-sell YY trademarked merchandise in the United States, are embedded in the transfer price paid for the wristwatches. Accordingly, pursuant to paragraph (f)(4)(i) of this section, ordinarily no separate allocation would be appropriate with respect to these embedded contributions. (iii) Whether an allocation is warranted with respect to the transfer price for the wristwatches is determined under §§ 1.482-1, 1.482-3, and this section through § 1.482-6. The comparability analysis would include consideration of all relevant factors, including the nature of the intangible property embedded in the wristwatches and the nature of the marketing activities required under the agreement. This analysis would also take into account that the compensation for the activities performed by USSub and FP, as well as the consideration for USSub’s use of the YY trademark, is embedded in the transfer price for the wristwatches, rather than provided for in separate agreements. See §§ 1.482-3(f) and 1.482-9(m)(4) ...

Comparability under this method is less dependent on close physical similarity between the products transferred than under the comparable uncontrolled price method. Substantial differences in the products may, however, indicate significant functional differences between the controlled and uncontrolled taxpayers. Thus, it ordinarily would be expected that the controlled and uncontrolled transactions involve the production of goods within the same product categories. Furthermore, significant differences in the value of the products due, for example, to the value of a trademark, may also affect the reliability of the comparison. Finally, the reliability of profit measures based on gross profit may be adversely affected by factors that have less effect on prices. For example, gross profit may be affected by a variety of other factors, including cost structures (as reflected, for example, in the age of plant and equipment), business experience (such as whether the business is in a start-up phase or is mature), or management efficiency (as indicated, for example, by expanding or contracting sales or executive compensation over time). Accordingly, if material differences in these factors are identified based on objective evidence, the reliability of the analysis may be affected ...

The facts are the same as in Example 5, except that Product X is branded with a valuable trademark that is owned by P. A, B, and C distribute unbranded competing products, while D and E distribute products branded with other trademarks. D and E do not own any rights in the trademarks under which their products are sold. The value of the products that A, B, and C sold are not similar to the value of the products sold by S. The value of products sold by D and E, however, is similar to that of Product X. Although close product similarity is not as important for a reliable application of the resale price method as for the comparable uncontrolled price method, significant differences in the value of the products involved in the controlled and uncontrolled transactions may affect the reliability of the results. In addition, because in this case it is difficult to determine the effect the trademark will have on price or profits, reliable adjustments for the differences cannot be made. Because D and E have a higher level of comparability than A, B, and C with respect to S, pursuant to § 1.482-1(e)(2)(ii), only D and E may be included in an arm’s length range ...

Effect of Trademark. The facts are the same as in Example 1, except that USM affixes its valuable trademark to the property sold in the controlled transactions, but does not affix its trademark to the property sold in the uncontrolled transactions. Under the facts of this case, the effect on price of the trademark is material and cannot be reliably estimated. Because there are material product differences for which reliable adjustments cannot be made, the comparable uncontrolled price method is unlikely to provide a reliable measure of the arm’s length result. See § 1.482-3(b)(2)(ii)(A) ...

Contractual terms imputed from economic substance. (i) FP, a foreign producer of athletic gear, is the registered holder of the AA trademark in the United States and in other countries worldwide. In year 1, FP enters into a licensing agreement that affords its newly organized United States subsidiary, USSub, exclusive rights to certain manufacturing and marketing intangible property (including the AA trademark) for purposes of manufacturing and marketing athletic gear in the United States under the AA trademark. The contractual terms of this agreement obligate USSub to pay FP a royalty based on sales, and also obligate both FP and USSub to undertake without separate compensation specified types and levels of marketing activities. Unrelated foreign businesses license independent United States businesses to manufacture and market athletic gear in the United States, using trademarks owned by the unrelated foreign businesses. The contractual terms of these uncontrolled transactions require the licensees to pay royalties based on sales of the merchandise, and obligate the licensors and licensees to undertake without separate compensation specified types and levels of marketing activities. In years 1 through 6, USSub manufactures and sells athletic gear under the AA trademark in the United States. Assume that, after adjustments are made to improve the reliability of the comparison for any material differences relating to marketing activities, manufacturing or marketing intangible property, and other comparability factors, the royalties paid by independent licensees would provide the most reliable measure of the arm’s length royalty owed by USSub to FP, apart from the additional facts in paragraph (ii) of this Example 4. (ii) In years 1 through 6, USSub performs incremental marketing activities with respect to the AA trademark athletic gear, in addition to the activities required under the terms of the license agreement with FP, that are also incremental as compared to those observed in the comparables. FP does not directly or indirectly compensate USSub for performing these incremental activities during years 1 through 6. By year 7, AA trademark athletic gear generates a premium return in the United States, as compared to similar athletic gear marketed by independent licensees. In year 7, USSub and FP enter into a separate services agreement under which FP agrees to compensate USSub on a cost basis for the incremental marketing activities that USSub performed during years 1 through 6, and to compensate USSub on a cost basis for any incremental marketing activities it may perform in year 7 and subsequent years. In addition, the parties revise the license agreement executed in year 1, and increase the royalty to a level that attributes to FP substantially all the premium return from sales of the AA trademark athletic gear in the United States. (iii) In determining whether an allocation of income is appropriate in year 7, the Commissioner may consider the economic substance of the arrangements between USSub and FP and the parties’ course of conduct throughout their relationship. Based on this analysis, the Commissioner determines that it is unlikely that, ex ante, an uncontrolled taxpayer operating at arm’s length would engage in the incremental marketing activities to develop or enhance intangible property owned by another party unless it received contemporaneous compensation or otherwise had a reasonable anticipation of a future benefit. In this case, USSub’s undertaking the incremental marketing activities in years 1 through 6 is a course of conduct that is inconsistent with the parties’ adoption in year 7 of contractual terms by which FP compensates USSub on a cost basis for the incremental marketing activities that it performed. Therefore, the Commissioner may impute one or more agreements between USSub and FP, consistent with the economic substance of their course of conduct, which would afford USSub an appropriate portion of the premium return from the AA trademark athletic gear. For example, the Commissioner may impute a separate services agreement that affords USSub contingent-payment compensation for the incremental activities it performed during years 1 through 6, which benefited FP by contributing to the value of the trademark owned by FP. In the alternative, the Commissioner may impute a long-term, exclusive United States license agreement that allows USSub to benefit from the incremental activities. As another alternative, the Commissioner may require FP to compensate USSub for terminating USSub’s imputed long-term United States license agreement, a license that USSub made more valuable at its own expense and risk. The taxpayer may present additional facts that could indicate which of these or other alternative agreements best reflects the economic substance of the underlying transactions, consistent with the parties’ course of conduct in this particular case ...

Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company. An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark. The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies. In 2017 the Administrative Court decided in favour of Ferragamo and dismissed the assessment issued by the tax authorities. According to the Court the tax administration had not demonstrated the existence of an advantage granted by Ferragamo France to the Italien parent, Salvatore Ferragamo SPA, nor the amount of this advantage. This decision was later upheld by the Administrative Court of Appeal. An appel was then filed by the tax authorities with the Supreme Court. The Supreme Court (Conseil d’Etat) overturned the decision and remanded the case back to the Administrative Court of Appeal for further considerations. “In ruling that the administration did not establish the existence of an advantage granted to the Italian company on the grounds that the French company’s results for the financial years ending from 2010 to 2015 had been profitable without any change in the company’s transfer pricing policy, whereas it had noted that the exposure of additional charges of wages and rents in comparison with independent companies was intended to increase, in a strategic market in the luxury sector, the value of the Italian brand which did not yet have the same notoriety as its direct competitors, the administrative court of appeal erred in law. Moreover, although it emerged from the documents in the file submitted to the trial judges that the tax authorities had established the existence of a practice falling within the provisions of Article 57 of the General Tax Code, by showing that the remuneration granted by the Italian company was not sufficient to cover the additional expenses which contributed to the value of the Salvatore Ferragamo trade mark incurred by the French subsidiary and by arguing that the latter had been continuously loss-making since at least 1996 until 2009, the court distorted the facts and documents in the file. By dismissing, under these conditions, the existence of an indirect transfer of profits to be reintegrated into its taxable income when the company did not establish, by merely claiming a profitable situation between 2010 and 2015, that it had received a consideration for the advantage in question, the court incorrectly qualified the facts of the case.” Judgment of the Administrative Court of Appeal The Administrative Court of Appeal issued a final decision in June 2022 in which the 2017 decision of the Paris Administrative Court was annulled and the tax assessment issued by the tax authorities reinstated. “Firstly, Ferragamo France argued that the companies included in the above-mentioned panel were not comparable, since most of their activities were carried out in the provinces, whereas its activity was concentrated in international tourist areas, mainly in Paris, and their workforce was less than ten employees, whereas it employed 68 people, that they are mere distributors whereas it also manages a network of boutiques and concessions in department stores, and that some of them own their premises whereas it rents its premises for amounts much higher than the rents in the provinces, the relationship between external charges and turnover thus being irrelevant. However, most of the comparables selected by the administration, which operate as multi-brand distributors in the luxury ready-to-wear sector, were proposed by Ferragamo France itself. Moreover, the company does not indicate the adjustments that should be made to the various ratios of salary and external costs used to obtain a result that it considers more satisfactory, even though it has been established that additional costs in the area of salaries and property constitute an advantage granted to Salvatore Ferragamo Spa. Furthermore, apart from the fact that it has not been established that some of the companies on the panel own their premises, Ferragamo France does not allege that excluding the companies in question from the calculation of the ratios would result in a reduction in the amount of the adjustments. Lastly, as regards the insufficient consideration of the management of a network of department stores’ boutiques and concessions, Ferragamo France does not provide any specific information in support of its allegations, whereas the comparison made by the administration is intended to assess the normality of the remuneration of its retail activity.” … It follows from all of the above that the Minister of the Economy, Finance and Recovery is entitled to argue that it was wrong for the Administrative Court of Paris, in the judgment under appeal, to discharge, in terms of duties and increases, the supplementary corporate tax assessment to which Ferragamo France was subject in respect of the financial year ended in 2010, of the withholding tax charged to it for 2009 and 2010 and of the supplementary minimum business tax and business value added contribution charged to it for 2009 and 2010 respectively. This judgment must therefore be annulled and the aforementioned taxes, in duties and increases, must be remitted to Ferragamo France.” Click here for English Translation Click here for other translation ...

The French Accor hotel group was the subject of an tax audit related to FY 2010, during which the tax authorities found that Accor had not invoiced a fee for the use of its trademarks by its Brazilian subsidiary, Hotelaria Accor Brasil, in an amount of 8,839,047. The amount not invoiced was considered a deemed distribution of profits and the tax authorities applied a withholding tax rate of 25% to the amount which resulted in withholding taxes in an amount of EUR 2.815.153. An appeal was filed by Accor with the Administrative Court. In a judgment of 7 July 2020, the Administrative Court partially discharged Accor from the withholding tax up to the amount of the application of the conventional reduced rate of 15% (related to dividends), and rejected the remainder of the claim. The Administrative Court considered that income deemed to be distributed did not fall within the definition of dividends under article 10 of the tax treaty with Brazil and could not, in principle, benefit from the reduced rate. However in comments of an administrative instruction from 1972 (BOI 14-B-17-73, reproduced in BOI-INT-CVB-BRA, 12 August 2015) relating to the Franco-Brazilian tax treaty, it was stated, that the definition of dividends used by the agreement covers “on the French side, all products considered as distributed income within the meaning of the CGI”. The Administrative Court noted that such a definition would necessarily include distributed income within the meaning of the provisions of Article 109 of the CGI”. The tax authorities appealed against this judgment. Judgment of the Administrative Court of Appeal The Court allowed the appeal of the tax authorities and set aside the judgment in which the Administrative Court had partially discharged Accor from the withholding tax to which it was subject in respect of the year 2010. “Under the terms of Article 10 of the tax treaty concluded between the French Republic and the Federative Republic of Brazil on 10 September 1971: “1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. / 2. However, dividends may be taxed in the State in which the company paying the dividends has its tax domicile and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the dividends / (…) 5. (a) The term “dividend” as used in this Article means income from shares, “jouissance” shares or “jouissance” warrants, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate units which is assimilated to income from shares by the taxation law of the State of which the company making the distribution is resident. (…) “. It follows from these stipulations that the dividends mentioned in Article 10 of the Franco-Brazilian Convention must be defined as the income distributed by a company to its members by virtue of a decision taken by the general meeting of its shareholders or unit holders under the conditions provided for by the law of 24 July 1966, as amended, on commercial companies, which does not include income deemed to be distributed within the meaning of Article 109(1) of the French General Tax Code. Neither these stipulations, nor any other clause of the Franco-Brazilian agreement, prevent the taxation in France of income considered as distributed to Hotelaria Accor Brasil by Accor, according to French tax law, at the common law rate set, at the date of the taxation in dispute, at 25% of this income by Article 187 of the General Tax Code.” “The Accor company claims, on the basis of Article L. 80 A of the Book of Tax Procedures, of the instruction of 8 December 1972 referenced BOI n° 14-B-17-72 relating to the tax treaty concluded between France and Brazil on 10 September 1971, which provides that: “According to paragraph 5 of Article 10, the term dividends means income from shares, jouissance shares or warrants, mining shares, founders’ shares or other profit shares with the exception of debt claims and, in general, income assimilated to income from shares by the tax legislation of the State of which the distributing company is resident. / This definition covers, on the French side, all income considered as distributed income within the meaning of the Code général des Impôts (art. 10, paragraph 5b). “However, this interpretation was brought back by an instruction referenced 4 J-2-91 of July 2, 1991, published in the Bulletin officiel des impôts n° 133 of July 11, 1991, relating to the impact of international treaties on the withholding tax applicable to income distributed outside France, according to which: “the advantages which benefit [the partners and the persons having close links with the partners] and which are considered as distributed income in domestic law retain this character in treaty law when the applicable treaty refers to dividends and gives a definition similar to that of the OECD model. On the other hand, when they benefit persons other than the partners, these benefits are subject to the treaty provisions relating to “undesignated” income, i.e. income that does not fall into any of the categories expressly defined by the applicable treaty”. Annex 1 to this instruction specifically states, with regard to Brazil, that income paid to a beneficiary who is not a shareholder of the distributing company is subject to withholding tax at the ordinary law rate of 25%. These statements must be regarded as having reported, on this particular point, the administrative interpretation contained in paragraph 2351 of the instruction of 8 December 1972. In this respect, it is irrelevant that the instruction of 8 December 1972 was fully reproduced and published by the BOFIP on 12 September 2012 under the reference BOI-INT-CVB-BRA, after the tax year in question. It follows that Accor cannot claim the benefit of the reduced conventional tax rate.” Click here for English translation Click here for other translation ...

At issue was whether the acquisition value of an inventory acquired from a related company should be adjusted on the basis of Swedish arm’s length provisions or alternatively tax avoidance provisions According to the arm’s length rule in Chapter 18, Section 11 of the Income Tax Act, the acquisition value is to be adjusted to a reasonable extent if the taxpayer or someone closely related to the taxpayer has taken steps to enable the taxpayer to obtain a higher acquisition value than appears reasonable and it can be assumed that this has been done in order to obtain an unjustified tax advantage for one of the taxpayer or someone closely related to the taxpayer. Company (A) acquired a trademark from another company (B) in the same group for a price corresponding to its market value and used the acquisition value as the basis for depreciation deductions totalling approximately SEK 827 million. At B, the tax value of the trademark amounted to SEK 6 000 and B thus made a taxable capital gain. In connection with the transfer of the trademark, the shares in B were sold to a company in another group. Gains from the sale of shares was tax-free. In the group to which B belonged, the taxable capital gain on the trademark was set off against existing losses. The tax authorities adjusted the acquisition value of the trademark to SEK 6 000 and refused company A a depreciations in excess of that amount. The reason given was that the intra-group transactions had resulted in the trademark being valued higher by A than by B, without any taxation of the difference within the group, and that this had resulted in A receiving an unjustified tax advantage. The Tax Agency imposed a tax surcharge. Both the Administrative Court and the Court of Appeal rejected A’s appeals. In the Court of Appeal, the Tax Agency had, in the alternative, requested that the Tax Avoidance Act be applied to the proceedings. Judgment of the Supreme Administrative Court The Court set aside the Court of Appeal’s decisions on income tax and the tax surcharge and referred the cases back to Court of Appeal for consideration of the tax authorities alternative claim to apply the Tax Avoidance provisions to the proceedings. The Court found that only two measures could be examined in detail when assessing whether arm’s length provisions applied to A’s acquisition of the trademark: B’s sale of the trademark to A and the parent company’s external sale of the shares in B. According to the Court the first measure resulted in the entire capital gain being taxed in B and that the fact that the purchase price exceeded the taxable value did not mean that the acquisition value did not appear reasonable. The second measure was unrelated to the acquisition of the trademark by A. There were therefore no grounds for applying the arm’s length rule. Click here for English Translation Click here for other translation ...

“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”. Judgment 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. Judgment 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 ...

On 30 November 2012, X sold its trademarks to subsidiary C which in turn sold the trademarks to subsidiary D. X and D then entered into a trademark license agreement according to which X would pay license fees to D. These license fees were deducted by X in its 2013 tax return. The tax authorities claimed that X had understated its taxabel income as the license fees paid by X to D for the use of trademarks were not related to obtaining or securing a source of revenue. The decision stated that in the light of the principles of logic and experience, the actions taken by the taxpayer made no sense and were not aimed at achieving the revenue in question, but instead at generating costs artificially – only for tax purposes. An appeal was filed by X. Judgment of the Administrative Court The court set aside the assessment of the tax authorities and decided in favor of X. According to the court taxpayers are not obliged to conduct their business in such a way as to pay the highest possible taxes, and gaining benefits from so-called tax optimization not prohibited by law, was allowed in 2013. The Polish anti-avoidance clause has only been in force since 15 July 2016. Furthermore, although it may have been possible to set aside legal effects of the transactions under the previous provision in Article 24b § 1 of the C.C.P., the Constitutional Tribunal in its verdict of 11 May 2004, declared this provision to be inconsistent with the Constitution of the Republic of Poland. Excerpts “In the Court’s view, the authorities’ findings fail to comply with the provisions applied in the case, including in particular Article 15 of the CIT Act. The legal transactions described in the appealed decision indeed constitute an optimisation mechanism. However, the realised transaction scheme is not potentially devoid of economic as well as tax rationales. The actions performed were undoubtedly also undertaken in order to achieve the intended tax result, i.e. optimisation of taxation. It should be strongly emphasised that none of the actions taken were ostensible. All of the applicant’s actions were as real as possible. Noticing the obvious reality of the above transactions, the tax authorities did not even attempt to apply the institution regulated in Article 199a of the CIT Act. The omission of legal effects of the transactions performed would probably have been possible in the former legal order, under Article 24b § 1 of the C.C.P., but this provision is no longer in force. The Constitutional Tribunal in its verdict of 11 May 2004, ref. no. K 4/03 (Journal of Laws of 2004, no. 122, item 1288) declared this provision to be inconsistent with the Constitution of the Republic of Poland. On the other hand, the anti-avoidance clause introduced by the Act of 13 May 2016 amending the Tax Ordinance Act and certain other acts (Journal of Laws 2016, item 846) has been in force only since 15 July 2016. Pursuant to the amended Article 119a § 1 o.p. – an act performed primarily for the purpose of obtaining a tax benefit, contradictory in given circumstances to the object and purpose of the provision of the tax act, does not result in obtaining a tax benefit if the manner of action was artificial (tax avoidance). Issues related to the application of the provisions of this clause in time are regulated by Article 7 of the Amending Act, according to which the provisions of Articles 119a-119f of the Act amended in Article 1 apply to the tax advantage obtained after the date of entry into force of this Act. Thus, the anti-avoidance clause applies to tax benefits obtained after the date of entry into force of the amending law, i.e. from 15 July 2016, which, moreover, was not in dispute in the present case. Considering the above, it should be pointed out that the tax authorities in the case at hand had no authority to use such argumentation as if the anti-avoidance clause applied. In the legal state in force in 2013. (applicable in the present case) the general anti-avoidance clause was not in force. This state of affairs amounts to a prohibition on the tax authorities disregarding the tax consequences of legal transactions carried out primarily for the purpose of obtaining a tax advantage.” Click here for English translation. Click here for other translation ...

One assessment was issued by the tax authorities where Q-Med’s taxable income for FY2011 was adjusted upwards as a result of corrections made to the valuation of trademarks transferred to a related party in Switzerland. Further assessments were issued for FY2013 and FY2014 concerning the arm’s length remuneration for the limited risk distribution of Q-Med’s products in the Chinese market. Q-Med appealed to the Administrative Court and later to the Administrative Court of Appeal. Judgment With respect to the 2011 trademark transfer, the court upheld the tax authorities’ assessment. “The Court of Appeal agrees with the administrative court’s assessment that it can be considered almost impossible that two independent traders would not have used the latest sales figures when valuing the assets in connection with a transfer of a current nature. A valuation based on these more recent figures shows that the Restylane brand had a significantly higher value than the parties assumed. The transfer of the trademarks cannot therefore be considered to have taken place at a reasonable price. The correction rule in ch. 14 Section 19 of the Income Tax Act (1999:1229) is therefore applicable. The question then is how large a correction should take place, i.e. what is an arm’s length price. The company has claimed that the Swedish Tax Agency’s calculation of the lowest possible arm’s-length price is incorrect because the Swedish Tax Agency has not used a correct tax rate when calculating the buyer’s tax benefit from the deal. According to the Court of Appeal, the Swedish Tax Agency has made a relatively cautious assessment of what constitutes an arm’s length price. Even taking into account the new tax rate, the findings speak to the lowest price an independent company would have been prepared to accept strongly because it would not have been able to go below that price in any case. In making that assessment, the Court of Appeal has particularly taken into account that there is nothing in the investigation to indicate that the company would have been in a difficult financial situation or was in dire need of selling the brands for any other reason. There is therefore no reason to determine the arm’s length price at anything other than what the Swedish Tax Agency has done. With regard to the question of whether there was a basis for post-assessment, the Court of Appeal, like the Administrative Court, considers that the incorrect decision was due to the company having provided incorrect information by using old and out-of-date factual information in its valuation of the assets. It does not appear from the company’s declaration that there were later, more current, sales figures that had not been taken into account. The information in the company’s declaration is also not such that the Swedish Tax Agency’s obligation to investigate can be considered to have been triggered. The conditions for post-assessment are thus met. The company’s appeal must therefore be rejected in this part.” With restpect to the remuneration of the Chinese distributor, the court annulled the assessment for FY 2013. “In the cases it is clear that there were no sales or other transactions that could be characterized as sales between the company and the trading company during the tax year 2013. The sales that are now relevant and which may have been made at too low a price were instead made during the tax year 2012. A correction of the company’s results due to those sales would therefore have been made that year. The Tax Agency’s appeal in this part must therefore be rejected.” But the court largely upheld the assessment for FY 2014. “The study prepared by PwC China covers the relevant time period and covers only companies active in the Chinese and Taiwanese markets. The Court of Appeal considers that study to be a suitable starting point when assessing an arm’s length price. The study states that the combined operating margin for the comparable companies is between 2.87 percent and 13.65 percent with a lower quartile of 4.13 percent and an upper quartile of 6.86 percent. An arm’s length price is generally not a fixed price, but a range. As a starting point, the entire range of the companies that have been deemed comparable must therefore be considered to constitute an arm’s length price. From PwC China’s study, however, it appears that one of the compared companies has an operating margin many times higher than the other three, which have relatively equal operating margins. The study states that the companies are indeed the ones most comparable to the trading company, but that there may still be differences that are impossible to quantify. It is also stated that if all values ​​are taken into account, the range becomes so extensive that the result may become less reliable. To increase the reliability of the study, PwC China believes that the arm’s length price should therefore be determined based on the interquartile range. Against this background, the Court of Appeal considers that an arm’s length price in this case consists of what is stated in the study to be the interquartile range. An arm’s-length price cannot therefore be lower than it corresponds to an operating margin of 6.86 percent for the buyer. This means that the company’s income for the tax year 2014 should not be increased by SEK 87,446,389 but by SEK 79,285,197 (1.1135 x (91,396,000 – (294,350,000 x 0.0686))). The company’s appeal must therefore be upheld in part in this part.” 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. Judgment 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 ...

A restructuring that followed the acquisition of Timberland by VF Enterprises in 2011 resulted in an intra-group transfer of ownership to valuable intangibles to a Swiss corporation, TBL Investment Holdings. The IRS was of the opinion that gains from the transfer was taxable. Judgment of the US Tax Court The tax court upheld the assessment of the tax authorities. Excerpt: “we have concluded that petitioner’s constructive distribution to VF Enterprises of the TBL GmbH stock that petitioner constructively received in exchange for its intangible property was a “disposition” within the meaning of section 367(d)(2)(A)(ii)(II). We also conclude, for the reasons explained in this part IV, that no provision of the regulations allows petitioner to avoid the recognition of gain under that statutory provision.” “Because we do not “agree[] to reduce the adjustment to income for the trademarks based on a 20-year useful life limitation, pursuant to Temp. Treas. Reg. § 1.367(d)-1T,” we determine, in accordance with the parties’ stipulation, that “[p]etitioner’s increase in income for the transfer of the trademarks is $1,274,100,000.” Adding that figure to the agreed value of the foreign workforce and customer relationships that petitioner transferred to TBL GmbH and reducing the sum by the agreed trademark basis, we conclude that petitioner’s income for the taxable year in issue should be increased by $1,452,561,000 ($1,274,100,000 +$23,400,000 + $174,400,000 − $19,339,000), as determined in the notice of deficiency. Because petitioner did not assign error to the other two adjustments reflected in the notice of deficiency, it follows that respondent is entitled to judgment as a matter of law. Accordingly, we will grant respondent’s motion for summary judgment and deny petitioner’s corresponding motion.” Click here for translation ...

101. Company A is the Parent company of an MNE group with operations in country S. Company B is a member of the MNE group with operations in country T, and Company C is also a member of the MNE group with operations in country U. For valid business reasons the MNE group decides to centralise all of its intangibles related to business conducted outside of country S in a single location. Accordingly, intangibles owned by Company B are sold to Company C for a lump sum, including patents, trademarks, know-how, and customer relationships. At the same time, Company C retains Company B to act as a contract manufacturer of products previously produced and sold by Company B on a full-risk basis. Company C has the personnel and resources required to manage the acquired lines of business, including the further development of intangibles necessary to the Company B business. 102. The MNE group is unable to identify comparable uncontrolled transactions that can be used in a transfer pricing analysis of the arm’s length price to be paid by Company C to Company B. Based on a detailed comparability and functional analysis, the MNE group concludes that the most appropriate transfer pricing method involves the application of valuation techniques to determine the value of the transferred intangibles. In conducting its valuation, the MNE group is unable to reliably segregate particular cash flows associated with all of the specific intangibles. 103. Under these circumstances, in determining the arm’s length compensation to be paid by Company C for the intangibles sold by Company B, it may be appropriate to value the transferred intangibles in the aggregate rather than to attempt a valuation on an asset by asset basis. This would particularly be the case if there is a significant difference between the sum of the best available estimates of the value of individually identified intangibles and other assets when valued separately and the value of the business as a whole ...

97. Company A is the Parent of an MNE group with operations in country X. Company A owns patents, trademarks and know-how with regard to several products produced and sold by the MNE group. Company B is a wholly owned subsidiary of Company A. All of Company B’s operations are conducted in country Y. Company B also owns patents, trademarks and know-how related to Product M. 98. For sound business reasons related to the coordination of the group’s patent protection and anti-counterfeiting activities, the MNE group decides to centralise ownership of its patents in Company A. Accordingly, Company B sells the Product M patents to Company A for a lump-sum price. Company A assumes responsibility to perform all ongoing functions and it assumes all risks related to the Product M patents following the sale. Based on a detailed comparability and functional analysis, the MNE group concludes that it is not able to identify any comparable uncontrolled transactions that can be used to determine the arm’s length price. Company A and Company B reasonably conclude that the application of valuation techniques represents the most appropriate transfer pricing method to use in determining whether the agreed price is consistent with arm’s length dealings. 99. Valuation personnel apply a valuation method that directly values property and patents to arrive at an after-tax net present value for the Product M patent of 80. The analysis is based on royalty rates, discount rates and useful lives typical in the industry in which Product M competes. However, there are material differences between Product M and the relevant patent rights related to Product M, and those typical in the industry. The royalty arrangements used in the analysis would therefore not satisfy the comparability standards required for a CUP method analysis. The valuation seeks to make adjustments for these differences. 100. In conducting its analysis, Company A also conducts a discounted cash flow based analysis of the Product M business in its entirety. That analysis, based on valuation parameters typically used by Company A in evaluating potential acquisitions, suggests that the entire Product M business has a net present value of 100. The 20 difference between the 100 valuation of the entire Product M business and the 80 valuation of the patent on its own appears to be inadequate to reflect the net present value of routine functional returns for functions performed by Company B and to recognise any value for the trademarks and know-how retained by Company B. Under these circumstances further review of the reliability of the 80 value ascribed to the patent would be called for ...

73. Första is a consumer goods company organised and operating in country A. Prior to Year 1, Första produces Product Y in country A and sells it through affiliated distribution companies in many countries around the world. Product Y is well recognised and attracts a premium compared to its competitors, to which Första is entitled as the legal owner and developer of the trademark and related goodwill giving rise to that premium. 74. In Year 2, Första organises Company S, a wholly owned subsidiary, in country B. Company S acts as a super distributor and invoicing centre. Första continues to ship Product Y directly to its distribution affiliates, but title to the products passes to Company S, which reinvoices the distribution affiliates for the products. 75. Beginning in Year 2, Company S undertakes to reimburse the distribution affiliates for a portion of their advertising costs. Prices for Product Y from Company S to the distribution affiliates are adjusted upward so that the distribution affiliate operating profit margins remain constant notwithstanding the shift of advertising cost to Company S. Assume that the operating profit margins earned by the distribution affiliates are arm’s length both before and after Year 2 given the concurrent changes in product pricing and the reimbursement of advertising costs. Company S performs no functions with regard to advertising nor does it control any risk related to marketing the products. 76. In Year 3, the prices charged by Första to Company S are reduced. Första and Company S claim such a reduction in price is justified because Company S is now entitled to income related to intangibles. It asserts that such income is attributable to intangibles in respect of Product Y created through the advertising costs it has borne. 77. In substance, Company S has no claim to income derived from the exploitation of intangibles with respect to Product Y. It performs no functions, assumes no risk, and in substance bears no costs related to the development, enhancement, maintenance or protection of intangibles. Transfer pricing adjustments to increase the income of Första in Year 3 and thereafter would be appropriate ...

69. Ilcha is organised in country A. The Ilcha group of companies has for many years manufactured and sold Product Q in countries B and C through a wholly owned subsidiary, Company S1, which is organised in country B. Ilcha owns patents related to the design of Product Q and has developed a unique trademark and other marketing intangibles. The patents and trademarks are registered by Ilcha in countries B and C. 70. For sound business reasons, Ilcha determines that the group’s business in countries B and C would be enhanced if those businesses were operated through separate subsidiaries in each country. Ilcha therefore organises in country C a wholly owned subsidiary, Company S2. With regard to the business in country C: Company S1 transfers to Company S2 the tangible manufacturing and marketing assets previously used by Company S1 in country C. Ilcha and Company S1 agree to terminate the agreement granting Company S1 the following rights with relation to Product Q: the right to manufacture and distribute Product Q in country C; the right to use the patents and trademark in carrying out its manufacturing and distribution activities in country C; and, the right to use customer relationships, customer lists, goodwill and other items in country C (hereinafter, “the Rights”). Ilcha enters into new, long-term licence agreements with Company S2 granting it the Rights in country C. The newly formed subsidiary thereafter conducts the Product Q business in country C, while Company S1 continues to conduct the Product Q business in Country B. 71. Assume that over the years of its operation, Company S1 developed substantial business value in country C and an independent enterprise would be willing to pay for that business value in an acquisition. Further assume that, for accounting and business valuation purposes, a portion of such business value would be treated as goodwill in a purchase price allocation conducted with regard to a sale of Company S1’s country C business to an independent party. 72. Under the facts and circumstances of the case, there is value being transferred to Company S2 through the combination of (i) the transfer of part of Company S1’s tangible business assets to Company S2 in country C, and (ii) the surrendering by Company S1 of the Rights and the subsequent granting of the Rights by Ilcha to Company S2. There are three separate transactions: the transfer of part of Company S1’s tangible business assets to Company S2 in country C; the surrendering by Company S1 of its rights under the licence back to Ilcha; and the subsequent granting of a licence by Ilcha to Company S2. For transfer pricing purposes, the prices paid by Ilcha and by Company S2 in connection with these transactions should reflect the value of the business which would include amounts that may be treated as the value of goodwill for accounting purposes ...

20. Primair, a resident of country X, manufactures watches which are marketed in many countries around the world under the R trademark and trade name. Primair is the registered owner of the R trademark and trade name. The R name is widely known in countries where the watches are sold and has obtained considerable economic value in those markets through the efforts of Primair. R watches have never been marketed in country Y, however, and the R name is not known in the country Y market. 21. In Year 1, Primair decides to enter the country Y market and incorporates a wholly owned subsidiary in country Y, Company S, to act as its distributor in country Y. At the same time, Primair enters into a long-term royalty-free marketing and distribution agreement with Company S. Under the agreement, Company S is granted the exclusive right to market and distribute watches bearing the R trademark and using the R trade name in country Y for a period of five years, with an option for a further five years. Company S obtains no other rights relating to the R trademark and trade name from Primair, and in particular is prohibited from re-exporting watches bearing the R trademark and trade name. The sole activity of Company S is marketing and distributing watches bearing the R trademark and trade name. It is assumed that the R watches are not part of a portfolio of products distributed by Company S in country Y. Company S undertakes no secondary processing, as it imports packaged watches into country Y ready for sale to the final customer. 22. Under the contract between Primair and Company S, Company S purchases the watches from Primair in country Y currency, takes title to the branded watches and performs the distribution function in country Y, incurs the associated carrying costs (e.g. inventory and receivables financing), and assumes the corresponding risks (e.g. inventory, credit and financing risks). Under the contract between Primair and Company S, Company S is required to act as a marketing agent to assist in developing the market for R watches in country Y. Company S consults with Primair in developing the country Y marketing strategy for R watches. Primair develops the overall marketing plan based largely on its experience in other countries, it develops and approves the marketing budgets, and it makes final decisions regarding advertising designs, product positioning and core advertising messages. Company S consults on local market issues related to advertising, assists in executing the marketing strategy under Primair’s direction, and provides evaluations of the effectiveness of various elements of the marketing strategy. As compensation for providing these marketing support activities, Company S receives from Primair a service fee based on the level of marketing expenditure it incurs and including an appropriate profit element. 23. Assume for the purpose of this example that, based upon a thorough comparability analysis, including a detailed functional analysis, it is possible to conclude that the price Company S pays Primair for the R watches should be analysed separately from the compensation Company S receives for the marketing it undertakes on behalf of Primair. Assume further that based upon identified comparable transactions, the price paid for the watches is arm’s length and that this price enables Company S to earn an arm’s length level of compensation from selling the watches for the distribution function it performs, the assets it uses and the risks it assumes. 24. In Years 1 to 3, Company S embarks on a strategy that is consistent with its agreement with Primair to develop the country Y market for R watches. In the process, Company S incurs marketing expenses. Consistent with the contract, Company S is reimbursed by Primair for the marketing expenses it incurs, and is paid a mark-up on those expenses. By the end of Year 2, the R trademark and trade name have become well established in country Y. The compensation derived by Company S for the marketing activities it performed on behalf of Primair is determined to be arm’s length, based upon comparison to that paid to independent advertising and marketing agents identified and determined to be comparable as part of the comparability analysis. 25. Under these circumstances, Primair is entitled to retain any income derived from exploiting the R trademark and trade name in the country Y market that exceeds the arm’s length compensation to Company S for its functions and no transfer pricing adjustment is warranted under the circumstances ...

The term “brand” is sometimes used interchangeably with the terms “trademark” and “trade name.” In other contexts a brand is thought of as a trademark or trade name imbued with social and commercial significance. A brand may, in fact, represent a combination of intangibles and/or other items, including among others, trademarks, trade names, customer relationships, reputational characteristics, and goodwill. It may sometimes be difficult or impossible to segregate or separately transfer the various items contributing to brand value. A brand may consist of a single intangible, or a collection of intangibles, within the meaning of Section A. 1 ...

A trade name (often but not always the name of an enterprise) may have the same force of market penetration as a trademark and may indeed be registered in some specific form as a trademark. The trade names of certain MNEs may be readily recognised, and may be used in marketing a variety of goods and services. Trade names are intangibles within the meaning of Section A. 1 ...

A trademark is a unique name, symbol, logo or picture that the owner may use to distinguish its products and services from those of other entities. Proprietary rights in trademarks are often confirmed through a registration system. The registered owner of a trademark may exclude others from using the trademark in a manner that would create confusion in the marketplace. A trademark registration may continue indefinitely if the trademark is continuously used and the registration appropriately renewed. Trademarks may be established for goods or services, and may apply to a single product or service, or to a line of products or services. Trademarks are perhaps most familiar at the consumer market level, but they are likely to be encountered at all market levels. Trademarks are intangibles within the meaning of Section A. 1 ...

When evaluating whether a taxpayer was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the purported business strategy. For example, if a manufacturer charges its associated distributor a below-market price as part of a market penetration strategy, the cost savings to the distributor may be reflected in the price charged to the distributor’s customers or in greater market penetration expenses incurred by the distributor. A market penetration strategy of an MNE group could be put in place either by the manufacturer or by the distributor acting separately from the manufacturer (and the resulting cost borne by either of them), or by both of them acting in a co-ordinated manner. Furthermore, unusually intensive marketing and advertising efforts would often accompany a market penetration or market share expansion strategy. Another factor to consider is whether the nature of the relationship between the parties to the controlled transaction would be consistent with the taxpayer bearing the costs of the business strategy. For example, in arm’s length transactions a company acting solely as a sales agent with little or no responsibility for long-term market development would generally not bear the costs of a market penetration strategy. Where a company has undertaken market development activities at its own risk and enhances the value of a product through a trademark or trade name or increases goodwill associated with the product, this situation should be reflected in the analysis of functions for the purposes of establishing comparability ...

Differences in the specific characteristics of property or services often account, at least in part, for differences in their value in the open market. Therefore, comparisons of these features may be useful in delineating the transaction and in determining the comparability of controlled and uncontrolled transactions. Characteristics that may be important to consider include the following: in the case of transfers of tangible property, the physical features of the property, its quality and reliability, and the availability and volume of supply; in the case of the provision of services, the nature and extent of the services; and in the case of intangible property, the form of transaction (e.g. licensing or sale), the type of property (e.g. patent, trademark, or know-how), the duration and degree of protection, and the anticipated benefits from the use of the property. For further discussion of some of the specific features of intangibles that may prove important in a comparability analysis involving transfers of intangibles or rights in intangibles, see Section D.2.1 of Chapter VI ...

In 2019, the Danish parent company of the group, EAC Invest A/S, had been granted a ruling by the tax tribunal that, in the period 2008-2011, due to, inter alia, quite exceptional circumstances involving currency restrictions in Venezuela, the parent company should not be taxed on interest on a claim for unpaid royalties relating to trademarks covered by licensing agreements between the parent company and its then Venezuelan subsidiary, Plumrose Latinoamericana C.A. The Tax tribunal had also found that neither a payment of extraordinary dividends by the Venezuelan subsidiary to the Danish parent company in 2012 nor a restructuring of the group in 2013 could trigger a deferred taxation of royalties. The tax authorities appealed against the decisions to the High Court. Judgment of the High Court The High Court upheld the decisions of the tax tribunal with amended grounds and dismissed the claims of the tax authorities. Excerpts: Interest on unpaid royalty claim “The High Court agrees that, as a starting point, between group-related parties such as H1 and the G2 company, questions may be raised regarding the interest on a receivable arising from a failure to pay royalties, as defined in section 2 of the Tax Assessment Act. The question is whether, when calculating H1’s taxable income for the income years in question, there is a basis for fixing interest income to H1 on the unpaid royalty claim by G2, within the meaning of Paragraph 2 of the Tax Assessment Act. Such a fixing of interest must, where appropriate, be made on terms which could have been obtained if the claim had arisen between independent parties. The right to an adjustment is thus based, inter alia, on the assumptions that the failure to pay interest on the royalty claim has no commercial justification and that there is in fact a basis for comparison in the form of contractual terms between a debtor for a claim in bolivar in Venezuela and a creditor in another country independent of the debtor.” … “In the light of the very special circumstances set out above, and following an overall assessment, the Court considers that there are no grounds for finding that the failure to recover H1’s royalty claim from G2 was not commercially justified. The High Court also notes that the Ministry of Taxation has not demonstrated the existence of a genuine basis for comparison in the form of contractual terms for a claim in bolivar between a debtor in Venezuela and a creditor in a third country independent of the debtor. The High Court therefore finds that there is no basis under Section 2 of the Tax Assessment Act, cf. Section 3B(5) of the Tax Control Act, cf. Para 8 cf. Section 5(3), there is a basis for increasing G3-A/S’s income in the income years in question by a fixed rate of interest on the unpaid royalty claim with G2 company.” Dividend distribution in 2012 reclassified as royalty “…the Court of Appeal, after an overall assessment, accepts that the fact that the G2 company did not waive outstanding royalty receivables was solely a consequence of the very specific currency restrictions in Venezuela, that the payment of dividends was commercially motivated and was not due to a common interest between H1 and the G2 company, and that therefore, under Article 2(2) of the Tax Code, there is no need to pay dividends to the G2 company. 1(3), there are grounds for reclassifying the dividend distribution as a taxable deduction from the royalty claim, as independent parties could not have acted as claimed by the Tax Ministry.” Claim in respect of purchase price for shares in 2013 set-off against dividend reclassified as royalty “… For the reasons given by the Tax Court and, moreover, in the light of the very special circumstances of Venezuela set out above, the Court finds that there is no basis under section 2 of the Tax Assessment Act for reclassifying the claim of the G2 company against H2, in respect of the share purchase price for the G9 company, from a set-off against dividends due to an instalment of royalties due.” Click here for English translation Click here for other translation ...

Neopost Italia s.r.l. had paid service fees and royalties to its French parent. Following an audit, deductions for these intra-group transactions was adjusted by the tax authorities due to non compliance with the arm’s length principle and lack of documentation. However, for the purpose of determining an arm’s length remuneration a benchmark study had been performed by the tax authorities in which one of the comparables was not independent. The Court of Appeal upheld the decision of the tax authorities. Judgment of the Supreme Court The Supreme Court set aside the decision of the Court of Appeal and remanded the case to the court of first instance. In regards to the comparable company in the benchmark that was not independent, the Supreme Court found that: “it is entirely arbitrary, in comparing the two companies, to assert that the price charged by one of the two is the market price while the other is not”; this is a ruling that affects the unlawfulness of the method used by the Office (or, rather, the identification of the comparator), which is a prerequisite for the tax assessment.” In regards to the plea of “failure of the Court of Appeal to examine decisive facts of the case” the Supreme Court found that this was not grounds for setting aside a judgment: “…failure to examine the evidence does not in itself constitute a failure to examine a decisive fact if the historical fact relevant to the case was nevertheless taken into consideration by the court, even though the judgment did not take account of all the evidence. “…the reasoning, albeit brief, exists and is legitimately made by reference to the judgment of the first instance, while the impeachment does not even identify the historical fact whose examination was omitted by the appeal judge.” Click here for English translation Click here for other translation ...

Ferplast Slovakia s.r.o. is a contract manufacturer of the Italian FIVAC Group. In the reporting years, it sold 90% of its products to related parties and the remaining 10% to unrelated parties. In 2013 a royalty agreement was concluded with Ferplast SpA, according to which the latter pays a royalty of 2%/5% for the use of trademarks, etc. Ferplast Slovakia s.r.o. also paid the group parent – FIVAC SRL – for ORACLE software licenses. The tax authorities excluded the trademark royalty payments from the tax expense to the extent that they were related to the sale of products to related parties (90%), but at the same time allowed the royalty payments related to sale of products to independent customers (10%) in the tax expense. According to the tax authorities, there was no reason for a contract manufacturer to pay royalties on products which it produced on behalf of related parties. Regarding the payments for ORACLE software licenses, the FIVAC SRL had purchased ORACLE software licences from third parties and charged these costs with a 10% profit margin to the group companies. In the opinion of the tax authority, the 10% profit margin was unjustified and therefore did not constitute an expense for obtaining, maintaining and securing income. Ferplast Slovakia s.r.o. filed appeals with the Administrative Court, Regional Court and Supreme Court which all rejected the appeal. An appeal was then filed with the Constitutional Court. Judgment of the Constitutional Court The Constitutional Court dismissed the appeal of Ferplast Slovakia s.r.o. Clich here for English translation Click here for other translation ...

SA SACLA, which trades in protective clothing and footwear, as well as small equipment, was the subject of an tax audit covering the FY 2007, 2008 and 2009. In a proposed assessment issued in December 2011, the tax authorities increased its taxable income, on the basis of Article 57 of the General Tax Code, by considering that SACLA, by selling, a set of brands held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime, had carried out an indirect transfer of profits in the context of a reduction in the selling price. In a ruling of February 2020, the Lyon Administrative Court of Appeal, after dismissing the plea of irregularity in the judgment, decided that an expert would carry out an valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation should take into consideration an agreed exemption from payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert report was filed on 8 April 2021. After receiving the expert report SA SACLA asked the court to change the judgment by considering that the value of the transferred trademarks should be set at a sum of between 1.3 and 2.1 million euros and that penalties for deliberate breach should be discharged. Judgment of the Court of Appeal The court dismissed the request filed by SACLA and determined the value of the trademarks – in accordance with the expert report – to be 5,897,610 euros. Excerpt “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” Click here for English translation Click here for other translation ...

While living in France, Israel Daniel Amram (IDA) devised an idea for the development of a unique and efficient computerized interface that would link insurance companies and physicians and facilitate financial accounting between medical service providers and patients. IDA registered the trademark “SEPHIRA” and formed a company in France under the name SAS SEPHIRA . IDA then moved to Israel and formed Sephira & Offek Ltd. Going forward the company in Israel would provid R&D services to SAS SEPHIRA in France. All of the taxable profits in Israel was labled as “R&D income” which is taxed at a lower rate in Israel. Later IDA’s rights in the trademark was sold to Sephira & Offek Ltd in return for €8.4m. Due to IDA’s status as a “new Immigrant” in Israel profits from the sale was tax exempt. Following the acquisition of the trademark, Sephira & Offek Ltd licensed the trademark to SAS SEPHIRA in return for royalty payments. In the books of Sephira & Offek Ltd, the trademark was labeled as “goodwill” and amortized. Following an audit the tax authorities determined that the sale of the trademark was an artificial transaction. Furthermore, they found that part of the profit labeled by Sephira & Offek Ltd as R&D income (subject to a lower taxation in Israel) should instead be labeled as ordinary income. On that basis an assessment was issued. Sephira & Offek Ltd and IDA disapproved of the assessment and took the case to Court. Judgment of the Court The court ruled in favor of the tax authorities. The trademark  transaction was artificial, as commercial reasons for the transaction (other than tax optimization) had been provided. The whole arrangement was considered non-legitimate tax planning. The court also agreed that part of the income classified by the company as R&D income (subject to reduced taxes) should instead be taxed as ordinary income. Click here for English translation Click here for other translation ...

New Wave Norway AS is a wholly owned subsidiary of the Swedish New Wave Group AB. The group operates in the wholesale market for sports and workwear and gift and promotional items. It owns trademark rights to several well-known brands. The sales companies – including New Wave Norway AS – pay a concept fee to New Wave Group AB, which passes on the fee to the concept-owning companies in the Group. All trademark rights owned by the group are located in a separate company, New Wave Group Licensing SA, domiciled in Switzerland. For the use of the trademarks, the sales companies pay royalties to this company. There is also a separate company that handles purchasing and negotiations with the Asian producers, New Wave Group SA, also based in Switzerland. For the purchasing services from this company, the sales companies pay a purchasing fee (“sourcing fee”). Both the payment of royalties and the purchase fee are further regulated in the group’s transfer pricing document. Following an audit, the Customs Directorate added the payment of concept fee to the price of the acquired products for customs purposes. Decision of the Court The Court of Appeal ruled that the Customs Directorate’s decision on determining the customs value for the import of clothing and gift items was invalid. There was no basis for including a paid “concept fee” in the customs value. The condition of payment of concept fee had no connection to the sellers of the goods, but sprang from the buyer’s own internal organization. Click here for translation ...

Transactions had taken place between Vibac S.p.A. and related foreign group companies related to use of trademarks and royalty/license payments. It was up to the Vibac S.p.A. to demonstrate that the remuneration received from related companies for use of the trademark of the products had been at arm’s length. According to the company the royalty had been set at a low price to ensure that the foreign subsidiaries were more competitive. An upward adjustment was issued by the tax authorities rejecting the taxpayer’s argument that the below market royalty was explained by the need to enable its foreign subsidiary to penetrate more effectively the US market. The tax authorities argued that such a strategy could only be justifiable in a limited period. The tax authorities determined the arm’s length royalty payment by application of the Resale Price Method (RPM). However, due to the uniqueness of the asset transferred, which hardly allows the identification of comparable transactions, the same circular, while not excluding that in some cases one of the basic criteria adopted for the transfer of tangible goods (comparison, resale or increased cost) may be applied, points out that it should not be overlooked that a licence agreement depends essentially on the forecasts of the result that may be achieved by the licensee in the territory to which the right of exploitation refers and that it is, therefore, necessary to develop subsidiary valuation methods, always inspired by the principle of the arm’s length price, i.e. the price that would have been agreed upon between independent undertakings. With regard to the determination of the fee concerning the use of intangible assets, the circular notes that it is greatly affected by the specific characteristics of the economic sector to which the intangible right refers and that, in general, it is commensurate with the turnover of the licensee, so that the reference to these indices is a valid initial data for the assessment of the “normal value”. Vibac S.p.A. did not approve of the assessment an brought the case to court. The court of first instance held in favour of the tax authorities. This decision was then appealed to Corte di Cassazione. Judgment of the Court The Italien Corte di Cassazione upheld the decision of the court of first instance and dismissed the appeal of Vibac S.p.A. Excerpts: Indeed, the rationale of the abovementioned domestic tax legislation is to be found in the safeguarding of the principle of free competition, as set out in Article 9 of the OECD Model Convention, which is to be interpreted in the light of the specific features of tax law on tax arbitrage. In fact, the rationale of the domestic tax rules referred to above is to be found in the safeguarding of the principle of free competition, set out in Article 9 of the OECD Model Convention, which provides for the possibility of taxing profits arising from intra-group transactions that have been governed by conditions different from those that would have been agreed between independent companies in comparable transactions carried out on the free market; it is therefore necessary to verify the economic substance of the transaction and to compare it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and to assess its compliance with these (Court of Cassation no. 5645 of 2020, id. no. 9615 of 2019; id. 27018 of 2017). Thus, company policy, taken in itself, is not a necessary and sufficient cause of justification for derogating from the normal value rule. Since the normal value of a transaction is a function of the economic characteristics of the transaction, the transaction from which the normal value is to be derived will concern (a) goods and services of the same kind, (b) at the same marketing stage, (c) at the same time and (d) in the same market where the goods or services were acquired. In order to achieve the highest possible degree of comparability, the second part of Article 9 TUIR states that “for the determination of normal value”, reference should be made, “as far as possible, to the price lists or tariffs of the person who supplied the goods or services”. The presence of varied intra-group commercial transactions fully captures the estimative meaning of Article 9, as well as the OECD model. The adoption of the Resale Price Method is advocated, not only by Circular 22.9.1980 (No. 32/9/2267), but also and above all by the 1995 OECD Report. Click here for English translation Click here for other translation ...

Ferplast Slovakia s.r.o. is a contract manufacturer of the Italian FIVAC Group. In the reporting years, it sold 90% of its products to related parties and the remaining 10% to unrelated parties. In 2013 a royalty agreement was concluded with Ferplast SpA, according to which the latter pays a royalty of 2%/5% for the use of trademarks, etc. Ferplast Slovakia s.r.o. also paid the group parent – FIVAC SRL – for ORACLE software licenses. The tax authorities excluded the trademark royalty payments from the tax expense to the extent that they were related to the sale of products to related parties (90%), but at the same time allowed the royalty payments related to sale of products to independent customers (10%) in the tax expense. According to the tax authorities, there was no reason for a contract manufacturer to pay royalties on products which it produced on behalf of related parties. Regarding the payments for ORACLE software licenses, the FIVAC SRL had purchased ORACLE software licences from third parties and charged these costs with a 10% profit margin to the group companies. In the opinion of the tax authority, the 10% profit margin was unjustified and therefore did not constitute an expense for obtaining, maintaining and securing income. Ferplast Slovakia s.r.o. filed appeals with the Administrative Court and later the Regional Court which were rejected. An appeal was then filed with the Supreme Court. Judgment of the Supreme Court The Supreme Court upheld the decision of the Regional Court and rejected the appeal of Ferplast Slovakia s.r.o. Clich here for English translation Click here for other translation ...

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. Judgment 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 ...

Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company. An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark. The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies. The Administrative Court decided in favour of Ferragamo and dismissed the assessment. According to the Court the tax administration has not demonstrated the existence of an advantage granted by Ferragamo France to Salvatore Ferragamo SPA, nor the amount of this advantage. Judgment of the Conseil d’Etat The Conseil d’Etat overturned the decision of the Administrative Court and remanded the case back to the Administrative Court of Appeal for further considerations. “In ruling that the administration did not establish the existence of an advantage granted to the Italian company on the grounds that the French company’s results for the financial years ending from 2010 to 2015 had been profitable without any change in the company’s transfer pricing policy, whereas it had noted that the exposure of additional charges of wages and rents in comparison with independent companies was intended to increase, in a strategic market in the luxury sector, the value of the Italian brand which did not yet have the same notoriety as its direct competitors, the administrative court of appeal erred in law. Moreover, although it emerged from the documents in the file submitted to the trial judges that the tax authorities had established the existence of a practice falling within the provisions of Article 57 of the General Tax Code, by showing that the remuneration granted by the Italian company was not sufficient to cover the additional expenses which contributed to the value of the Salvatore Ferragamo trade mark incurred by the French subsidiary and by arguing that the latter had been continuously loss-making since at least 1996 until 2009, the court distorted the facts and documents in the file. By dismissing, under these conditions, the existence of an indirect transfer of profits to be reintegrated into its taxable income when the company did not establish, by merely claiming a profitable situation between 2010 and 2015, that it had received a consideration for the advantage in question, the court incorrectly qualified the facts of the case.” Click here for English Translation Click here for other translation ...

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle). In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to the relevant provocations that H1 A/S has not lifted the burden of proof that the payments of royalties to the group-affiliated company G1 SA, constitutes a deductible operating expense, cf. section 6 (a) of the State Tax Act. 4.5 and par. 4.6, the national court finds that the company’s royalty payment cannot otherwise be regarded as a deductible operating expense.” Adecco appealed the decision to the Supreme Court. The Supreme Court overturned the decision of the High Court and ruled in favor of Adecco. The Supreme Court held that the royalty payments had the nature of deductible operating costs. The Supreme Court also found that Adecco A/S’s transfer pricing documentation for the income years in question was not insufficient to such an extent that it could be considered equal to lack of documentation. The company’s income could therefore not be determined on a discretionary basis by the tax authorities. Finally, the Supreme Court did not consider that a royalty rate of 2% was not at arm’s length, or that Adecco A/S’s marketing in Denmark of the Adecco brand provided a basis for deducting in the royalty payment a compensation for a marketing of the global brand. Click here for translation ...

Brewery S.A. had transferred its trademarks to a subsidiary in Cyprus and in subsequent years paid royalties/licences for the use of the trademarks. The tax authorities had disregarded deductions of the royalty/licence payments for tax purposes, and the resulting assessment of additional taxable income was later upheld by the District Administrative Court. Judgment 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 ...

In this case, the Gothenburg Court of Appeal reviewed the tax treatment of a 2012 sale of the “L” trademark by E AB, a Swedish company, to its Dutch affiliate SGH BV. The main issues were whether E AB should be taxed on the full sales revenue and whether the sale was conducted at an arm’s length price. E AB argued that it held only a minor economic interest in the trademark and should be taxed accordingly. The company also claimed that the price should not be adjusted for the seller’s tax effects, as this was not an arm’s length consideration. E AB referenced Cost Sharing Agreements (CSAs) to justify its lower taxable income, arguing that these agreements represented contributions from other subsidiaries to the trademark’s value. Judgment The court found that E AB was both the legal and economic owner of the trademark at the time of sale, given its control and investment in the brand, and ruled that E AB should be taxed on the entire sales revenue. The court rejected the CSAs as evidence of shared ownership, noting that they merely allowed subsidiaries to use E AB’s brand assets for a fee and did not support a transfer of ownership rights. Additionally, the court ruled that an arm’s length price should reflect both the buyer’s and seller’s tax effects, following OECD guidelines that advise considering all relevant economic factors in a transaction. The court upheld the Swedish Tax Agency’s adjustment, finding that the sale price did not cover the full market value, including the seller’s tax cost. This undervaluation resulted in a SEK 117 million income adjustment for E AB, which was added to its taxable income. Click here for English translation Click here for other translation ...

SA Sacla, a French company trading in protective clothing and footwear, as well as small equipment, was audited for fiscal years 2007, 2008 and 2009. The French tax administration issued an assessment, considering that SA Sacla by selling brands owned by it for an amount of 90,000 euros to a Luxembourg company, Involvex, had indirectly transfered profits abroad. Due to inconclusive results of various valuations presented by the tax authorities and the taxpayer, an expert opinion was ordered by the Court on the question of whether the price of the brands sold by SA Sacla to the company Involvex had been at arm’s length. DECIDES: Article 1: Before ruling on the request of SA SACLA, an expert will carry out an assessment in order to determine whether the selling price of the brands sold by SA SACLA corresponds to their value, taking into account the exemption payment of royalties for a period of 5 years granted by the company Involvex to SA SACLA. Click here for translation ...

Nestlé del Uruguay S.A. had deducted royalty payments to its parent company located in Switzerland for the right to use certain local brands such as Águila, El Chaná, Vascolet, Bracafé and Copacabana. Royalties were calculated as 5% of sales, with the exception of payments for the Águila brand products, where royalties were calculated as 2% of sales. The tax administration (DGI) found that the royalty payments had not been at arm’s length. In defense of this position, it was argued that these local brands had been developed by Nestlé Uruguay itself, and then transferred to Nestlé Switzerland in 1999 for a sum of USD 1. Nestle Uruguay disagreed and argued that the tax administration was applying transfer pricing rules retroactively to a transaction concluded in 1999, when such rules did not yet exist. Judgment of the Court The Court considered that the Nestlé Uruguay should not pay 5% in royalties for the right to use trademarks it had developed itself. “…the Court shares the report of the tax inspectors of the International Taxation Department of the DGI insofar as they state: “It is… questionable… that Nestlé del Uruguay S.A. pays royalties for the use of trademarks developed and operated by the company itself… Nestlé Uruguay developed, maintained and operated the local brands… in Uruguay, contributing to generate the value of these brands…”. “This conclusion… does not imply the retroactive application of the transfer pricing rules to previously operated brand assignments, but rather the application of such rules only for the period… where there was relevant activity by the plaintiff with respect to the exploitation of the local brands”. Instead royalties for use of all the local brands – not only on the Águila brand – should be calculated as 2% of sales. Click here for English translation Click here for other translation ...

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. “Section 2 of the Tax Assessment Act. Paragraph 1 states that, when calculating the taxable income, group affiliates must apply prices and terms for commercial or economic transactions in accordance with what could have been agreed if the transactions had been concluded between independent parties. SKAT does not consider it in accordance with section 2 of the Tax Assessment Act that during the period 2006 to 2009, H1 A/S had to pay royalty to G1 SA for the right to use trademark, “know-how intangibles” and “ international network intangibles ”. An independent third party, in accordance with OECD Guidelines 6.14, would not have agreed on payment of royalties in a situation where there is a clear discrepancy between the payment and the value of licensee’s business. During the period 2006 to 2009, H1 A/S did not make a profit from the use of the licensed intangible assets. Furthermore, an independent third party would not have accepted an increase in the royalty rate in 2006, where the circumstances and market conditions in Denmark meant that higher profits could not be generated. H1 A/S has also incurred considerable sales and marketing costs at its own expense and risk. Sales and marketing costs may be considered extraordinary because the costs are considered to be disproportionate to expected future earnings. This assessment takes into account the licensing agreement, which states in Article 8.2 that the termination period is only 3 months, and Article 8.6, which states that H1 A/S will not receive compensation for goodwill built up during the contract period if the contract is terminated. H1 A/S has built and maintained the brand as well as built up “brand value” on the Danish market. The company has contributed to value of intangible assets that they do not own. In SKAT’s opinion, an independent third party would not incur such expenses without some form of compensation or reduction in the royalty payment, cf. OECD Guidelines 6.36 – 6.38. If H1 A/S was not associated with the trademark owners, H1 A/S would, in SKAT’s opinion, have considered other alternatives such as terminating, renegotiating or entering into more profitable licensing agreements, cf. OECD Guidelines 1.34-1.35. A renegotiation is precisely a possibility in this situation, as Article 8.2 of the license agreement states that the agreement for both parties can be terminated at three months’ notice. The control of the group has resulted in H1 A/S maintaining unfavorable agreements, not negotiating better terms and not seeking better alternatives. In addition, SKAT finds that the continuing losses realized by the company are also due to the Group’s interest in being represented on the Danish market. In order for the Group to service the global customers that are essential to the Group’s strategy, it is important to be represented in Denmark in order to be able to offer contracts in all the countries where the customer has branches. Such a safeguard of the Group’s interest would require an independent third party to be paid, and the company must therefore also be remunerated accordingly, especially when the proportion of global customers in Denmark is significantly lower than in the other Nordic countries.“ Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle) . In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to ...

In FY 2005 Shell Timur Sdn Bhd in Malaysia had sold its economic rights in trademarks to a group company, Shell Brands International AG. The sum (RM257,200,000.00) had not been included in the taxable income, but had – according to Shell – been treated as a capital receipt which is not taxable. The tax authorities conducted a transfer pricing audit beginning in June 2015 and which was finalized in 2018. Following the audit an assessment was issued where the gain had been added to the taxable income of Shell Timur Sdn Bhd. According to the tax authorities they were allowed to issue the assessment after the statutory 5-year time-bar in cases of fraud, wilful default or negligence of a taxpayer. An application for leave was filed by Shell. Courts decision The Court dismissed the application. Excerpt “I am, by the doctrine of stare decisis, bound by these pronouncements of the Court of Appeal and Federal Court. Hence, it is crystal clear that in matters concerning the raising of assessments of tax under section 91(1) or 91(3) of the ITA, challenges by the tax payer are best left to be dealt by the SCIT, unless of course if there are any exceptional circumstances. (27) In this case, I do not find exceptional circumstance that would warrant leave to be granted for judicial review. Which would then make this application an abuse of process. Wherefore, the I dismissed the application for leave.” ...

Ferplast Slovakia s.r.o. is a contract manufacturer of the Italian FIVAC Group. In the reporting years, it sold 90% of its products to related parties and the remaining 10% to unrelated parties. In 2013 a royalty agreement was concluded with Ferplast SpA, according to which the latter pays a royalty of 2%/5% for the use of trademarks, etc. Ferplast Slovakia s.r.o. also paid the group parent – FIVAC SRL – for ORACLE software licenses. The tax authorities excluded the trademark royalty payments from the tax expense to the extent that they were related to the sale of products to related parties (90%), but at the same time allowed the royalty payments related to sale of products to independent customers (10%) in the tax expense. According to the tax authorities, there was no reason for a contract manufacturer to pay royalties on products which it produced on behalf of related parties. Regarding the payments for ORACLE software licenses, the FIVAC SRL had purchased ORACLE software licences from third parties and charged these costs with a 10% profit margin to the group companies. In the opinion of the tax authority, the 10% profit margin was unjustified and therefore did not constitute an expense for obtaining, maintaining and securing income. Ferplast Slovakia s.r.o. filed an appeal with the Administrative Court, which was rejected. An appeal was then filed with the Regional Court. Judgment of the Regional Court The Regional Court also rejected the appeal of Ferplast Slovakia s.r.o. (Later an appeal was made to the Supreme Court) Clich here for English translation Click here for other translation ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgment of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the products sold to ST Dupont Marketing (Hong Kong). Click here for English translation Click here for other translation ...

“Brewery S.A.” had transferred its trademarks to a subsidiary in Cyprus and in subsequent years paid royalties/licences for the use of the trademarks. The tax authorities disregarded the deductions of the royalty/licence payments, and issued an assessment of additional taxable income. An appeal was filed by “Brewery S.A.” Judgment 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 ...

Sogefi Filtration S.p.A. received a notice of assessment for the 2003 financial year concerning various issues, including the deduction of royalties paid for the use of a trademark, interest income on a loan granted to a foreign subsidiary and the denial of a tax credit for dividends received by a French subsidiary. Sogefi appealed to the Regional Court, which ruled largely in its favour. Not satisfied with the decision, the tax authorities appealed to the Supreme Court. Judgment of the Supreme Court On the issue of transfer pricing the Supreme Court clarified, that the French arm’s length provision is not an anti-avoidance rule. Excerpt “4.1. The plea – admissible as it does not concern questions of merit but the correct application of the rule – is well founded. 4.2. It should be noted, in fact, that Art. 76 (now 110) tuir does not incorporate an anti-avoidance regulation in the strict sense, but is aimed at repressing the economic phenomenon of transfer pricing (shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations) considered in itself, so that the proof incumbent on the tax authorities does not concern the higher national taxation or the actual tax advantage obtained by the taxpayer, but only the existence of transactions, between related companies, at a price apparently lower than the normal price, it being incumbent on the taxpayer, pursuant to the ordinary rules of proximity of proof under Art. 2697 et.e. and on the subject of tax deductions, the taxpayer bears the burden of proving that such transactions took place for market values to be considered normal in accordance with the specific provisions of Article 9(3) of the Income Tax Code (see Court of Cassation no. 11949 of 2012; Court of Cassation no. 10742 of 2013; Court of Cassation no. 18392 of 2015; Court of Cassation no. 7493 of 2016). Such conclusion, moreover, is in line with the ratio of the legislation that is to be found “in the arm’s length principle set forth in Article 9 of the OECD Model Convention””, so that the assessment on the basis of the normal value concerns the “economic substance of the transaction” that is to be compared “with similar transactions carried out under comparable circumstances in free market conditions between independent parties” (see. in particular, Court of Cassation No. 27018 of 15/11/2017 which, in recomposing the different interpretative options that have emerged in the Court’s case law, expressly stated “the ratio of the rules set forth in Article 11O, paragraph 7, of the Income Tax Code must be identified in the arm’s length principle, excluding any qualification of the same as an anti-avoidance rule”). Incidentally, it should be noted that the current OECD Guidelines, in terms not dissimilar from what has been provided for since the 1970s, are unequivocal in clarifying (Chapter VII of the 2010 Guidelines, paras. 7.14 and 7.15 with respect to the identification and remuneration of financing as intra-group services, as well as 7. 19, 7.29 and 7.31 with respect to the determination of the payment), that the remuneration of an intra-group loan must, as a rule, take place through the payment of an interest rate corresponding to that which would be expected between independent companies in comparable circumstances. 4.3. However, in the case in point, the CTR excluded the application of the institute on the assumption that “a more favourable interest rate granted to a subsidiary for the acquisition of a company operating in the same sector in Spain is not necessarily of an avoidance nature” and, therefore, although faced with the objective fact of the divergence from the normal value, it excluded its relevance on the basis of an irrelevant assumption extraneous to the provision, the application of which it misapplied, resulting, in part, in the cassation of the judgment.” Click here for English translation Click here for other translation ...

By a trademark license agreement dated August 22, 2008, a group company in Luxembourg granted another group company a non-exclusive right to use and exploit the brands registered in the territory of the Grand Duchy of Luxembourg, Benelux and the European Community for an initial period of ten years, renewable tacitly each time for a period of one year and this against a license fee paid and calculated annually corresponding to 3% of this turnover. By letters of 30 January 2015, the Tax Office informed the company that they intended to refuse to deduct the royalties paid to the company for the years 2010, 2011 and 2010. An appeal was filed by Lux SA with the Administrative Tribunal, which later dismissed the appeal and upheld the assessment issued by the tax authorities. An appeal was then filed by Lux SA with the Administrative Court. Judgment The Administrative Court set aside the decision of the tribunal and ruled in favour of Lux SA. Click here for English translation Click here for other translation ...

Government licences and concessions may be important to a particular business and can cover a wide range of business relationships. They may include, among others, a government grant of rights to exploit specific natural resources or public goods (e.g. a licence of bandwidth spectrum), or to carry on a specific business activity. Government licences and concessions are intangibles within the meaning of Section A. 1. However, government licences and concessions should be distinguished from company registration obligations that are preconditions for doing business in a particular jurisdiction. Such obligations are not intangibles within the meaning of Section A. 1 ...

The term “brand” is sometimes used interchangeably with the terms “trademark” and “trade name.” In other contexts a brand is thought of as a trademark or trade name imbued with social and commercial significance. A brand may, in fact, represent a combination of intangibles and/or other items, including among others, trademarks, trade names, customer relationships, reputational characteristics, and goodwill. It may sometimes be difficult or impossible to segregate or separately transfer the various items contributing to brand value. A brand may consist of a single intangible, or a collection of intangibles, within the meaning of Section A. 1 ...

A trade name (often but not always the name of an enterprise) may have the same force of market penetration as a trademark and may indeed be registered in some specific form as a trademark. The trade names of certain MNEs may be readily recognised, and may be used in marketing a variety of goods and services. Trade names are intangibles within the meaning of Section A. 1 ...

A trademark is a unique name, symbol, logo or picture that the owner may use to distinguish its products and services from those of other entities. Proprietary rights in trademarks are often confirmed through a registration system. The registered owner of a trademark may exclude others from using the trademark in a manner that would create confusion in the marketplace. A trademark registration may continue indefinitely if the trademark is continuously used and the registration appropriately renewed. Trademarks may be established for goods or services, and may apply to a single product or service, or to a line of products or services. Trademarks are perhaps most familiar at the consumer market level, but they are likely to be encountered at all market levels. Trademarks are intangibles within the meaning of Section A. 1 ...

When evaluating whether a taxpayer was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the purported business strategy. For example, if a manufacturer charges its associated distributor a below-market price as part of a market penetration strategy, the cost savings to the distributor may be reflected in the price charged to the distributor’s customers or in greater market penetration expenses incurred by the distributor. A market penetration strategy of an MNE group could be put in place either by the manufacturer or by the distributor acting separately from the manufacturer (and the resulting cost borne by either of them), or by both of them acting in a co-ordinated manner. Furthermore, unusually intensive marketing and advertising efforts would often accompany a market penetration or market share expansion strategy. Another factor to consider is whether the nature of the relationship between the parties to the controlled transaction would be consistent with the taxpayer bearing the costs of the business strategy. For example, in arm’s length transactions a company acting solely as a sales agent with little or no responsibility for long-term market development would generally not bear the costs of a market penetration strategy. Where a company has undertaken market development activities at its own risk and enhances the value of a product through a trademark or trade name or increases goodwill associated with the product, this situation should be reflected in the analysis of functions for the purposes of establishing comparability ...

Differences in the specific characteristics of property or services often account, at least in part, for differences in their value in the open market. Therefore, comparisons of these features may be useful in delineating the transaction and in determining the comparability of controlled and uncontrolled transactions. Characteristics that may be important to consider include the following: in the case of transfers of tangible property, the physical features of the property, its quality and reliability, and the availability and volume of supply; in the case of the provision of services, the nature and extent of the services; and in the case of intangible property, the form of transaction (e.g. licensing or sale), the type of property (e.g. patent, trademark, or know-how), the duration and degree of protection, and the anticipated benefits from the use of the property. For further discussion of some of the specific features of intangibles that may prove important in a comparability analysis involving transfers of intangibles or rights in intangibles, see Section D.2.1 of Chapter VI ...

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 ...

By a trademark license agreement dated August 22, 2008, a group company in Luxembourg granted another group company a non-exclusive right to use and exploit the brands registered in the territory of the Grand Duchy of Luxembourg, Benelux and the European Community for an initial period of ten years, renewable tacitly each time for a period of one year and this against a license fee paid and calculated annually corresponding to 3% of this turnover. By letters of 30 January 2015, the Tax Office informed the company that they intended to refuse to deduct the royalties paid to the company for the years 2010, 2011 and 2010. Click here for translation ...

LuxCo TM sold trademarks to a newly established sister company. The price had been set at €975,000. The tax authorities issued an assessment where the price had been set at €6,475,000 and the difference was considered to be hidden profit distribution. The Administrative court ruled in favor of the tax authorities. LuxCo TM’s valuation had been based on wrong facts and assumptions. Click here for translation ...

S AB appealed a decision by the Swedish Tax Agency regarding its income assessments for 2007 and 2008, which involved disputes over transfer pricing. The primary issue was the valuation of trademarks sold by S AB, specifically whether the sale price of SEK 103 million adhered to the arm’s length principle. The Swedish Tax Agency argued that a hypothetical independent buyer would be willing to pay more, estimating an arm’s length price of SEK 134 million by factoring in the tax effects of the transaction. Judgment The Administrative Court of Appeal agreed with the valuation of the Tax Agency, thereby adjusting S AB’s taxable income for the years in question. S AB had contended that tax benefits should not influence the valuation, citing ambiguities in the 2006 OECD guidelines and challenging the suitability of using the Gordon growth model. However, the court determined that tax implications for both buyer and seller are relevant to the valuation of intangible assets and should be included. Click here for English translation Click here for other 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. Then an appeal was filed with the Income Tax Appellate Tribunal ...

“X Beverages S.A.” had entered into an agreement with the ABCDE Group for the use of concentrate and trademarks for the production and sale of beverages in Spain, but according to the agreement, “X Beverages S.A.” only paid for the concentrate. Following an audit for the financial years 2005-2007, the tax authorities issued an assessment which considered part of the payment to be royalties on which withholding tax should have been paid. Court’s Judgment The Court agreed that part of the payment could be qualified as royalties, but the assessment made by the tax authorities had been based on secret comparables – leaving the taxpayer defenceless – and on this basis the Court annulled the assessment. Excerpts “The taxpayer itself seems to recognize that the so-called “Contract of …” contains both a distribution contract and a trademark assignment contract when it says on page 127 of its statement of allegations “Indeed, this authorization of use is necessary to be able to carry out the activity of packaging and distribution that is the object of the contract, and it would not be possible for X to carry out its obligations under the contract if it did not have this authorization to use the trademark. If X did not have the right to use the trademark, it would not be able to package and label the product as required by its principal (Z), nor would it be able to distribute it under said trademark, in accordance with the terms of the contract.” And although the “authorization of use” of the trademark recognized by the taxpayer is qualified by the latter as an obligation and not as a right of the same, seeming to want to reach the conclusion that only if it were a right it would generate a royalty, in the opinion of this Court both aspects (obligation and right) are not mutually exclusive but complementary: X acquires the right to use the trademark and the obligation to use the same with respect to the products (the beverages) made by it with the “concentrates” acquired from the ABCD Group. And without the existence of limits and/or conditions. Limits and/or conditions which, on the other hand, are inherent to any assignment of rights contract, which is never absolute. In the present case, such limits would be that X may not use the trademark to identify other products not made with the “concentrates” purchased from the ABCD Group and that it may not identify the products made with such “concentrates” under another trademark. Both things are logical since the trademark owner remains the owner of the trademark (he only assigns its use in a certain temporal and territorial scope) and must protect its prestige by means of the indicated precautions (previously called limits and/or conditions). Por otro lado, y en contra de lo alegado (pág. 129 of the pleadings), the right to use the trademark is not something merely “instrumental” but something “substantial” to the contracts entered into between the parties in the sense that it is in the interest of the supplier to sell its concentrates and of X to market the products it manufactures with such concentrates under certain trademarks (ABCD or M8), of special diffusion and prestige in the market and whose use implies a volume of sales notably higher than that which it would obtain if it marketed the products under X ‘s own denomination without such diffusion and prestige in the market. 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 defends. This circumstance is supported by the Inspection in the Valuation Report, which grants to the assignment of the trademark, as an example, percentages of 61.17% of the price of the concentrate in the case of ABCD-1 and 46.18% in the case of ABCD-2.” “Thus, it is clear that the promotion of the ABCD trademark in Spain (not of the products themselves, which is what is made with the “concentrates” acquired by X) generates expenses for the holder of the trademark[2] ( ABCD Group and, specifically,ABCD C…), the inspection revealed that “it does not seem reasonable to think that the ABCD trademarks in Spain only generate expenses and no income” (….) “From a strictly economic perspective, the actions of the ABCD group, assuming such an amount of expenses to make the brand known to the consumer without this action generating any income for the brand in Spain, lacks all rationality”. This is an additional fact taken into account by the Inspectorate for the purpose of confirming the rationality of the fact that the assignment of use of the trademark is not free of charge but that the ABCD Group obtains income from it.” “In the case at hand, we cannot properly speak of “lack of evidence” but more properly of “lack of externalized evidence” since, even if such evidence exists (which this Court, in principle, has no doubt about), it cannot be incorporated into the file that is made available to the interested party, Therefore, the latter is defenseless when it comes to being able to oppose the suitability of the comparables used, so that, as stated in the previously transcribed SAN, we are faced with an “inadequate assessment method” in terms of generating defenselessness in the taxpayer. This Central Court has recently pronounced in the same sense as above in its RG of 05-09-2013 (RG 3780/11). Having said the above with respect to the “subjective motivation”, it should be noted that the objections raised by the taxpayer with respect to the “technical motivation” refer basically to the fact that the data used by the Inspection to assess are not in any case comparable with those of ABCD because ABCD is unique and neither by its product characteristics, nor by the characteristics of the product …. . In ...

The Italian tax authorities had challenged the inter-company royalty paid by Computer Associates SPA, 30% as per contract, to it’s American parent company, registered in Delaware. According to the authorities a royalty of 7% percentage was determined to be at arm’s length and an assessment for FY 1999 was issued, where deduction of the difference in royalty payments was disallowed. The tax authorities noted the advantage for group to reduce the income of Computer Associates SPA, increasing, as a result, that of the parent company, due to the much lower taxation to which the income is subject in the US state of Delaware, where the latter operates (taxation at 36% in Italy, and 8.7% in the State of Delaware). The Supreme Court dismissed the appeal of Computer Associates SPA and concluded that the assessment was in compliance with the law. Click here for English translation Click here for other translation ...

The Supreme Court of Canada ruled in the case of GlaxoSmithKline Inc. regarding the intercompany prices established for purchases of ranitidine, the active ingredient in the anti-ulcer drug Zantac, from a related party during the years 1990 to 1993. The Supreme Court partially reversed an earlier decision of the Tax Court and affirmed a decision of the Federal Court of Appeal in concluding that other transactions should be taken into account when determining whether the transfer prices are reasonable. However, the Supreme Court did not determine whether the transfer pricing methodology used by GlaxoSmithKline Inc. was reasonable but instead remanded the matter to the Tax Court ...

“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). Judgment 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 ...

Maruti Suzuki India manufactures and sells cars and spare parts. A license agreement had been entered with the group parent for use of licensed information and trademark for the manufacture and sale of the products. Hence, Maruti Suzuki paid royalties to the parent for trademark and technology. The tax administration made an adjustment where the royalty paid for use of the trademark was disallowed and where a reimbursement with mark-up for non-routine advertising, marketing and promotion of the brand name was imputed. The High Court, referred the case back to the tax administration with observations. If there is an agreement between the group parent and the taxpayer which carries an obligation on the taxpayer to use the trademark owned by the group parent. Such agreement should be accompanied either by an appropriate payment by the group parent or by a discount provided to the taxpayer. Appropriate payment should be made on account of benefit derived by the group parent in the form of marketing intangibles obtained from such mandatory use of the trademark. However, if the agreement between the group parent and Maruti Suzuki for the use of the trademark is discretionary, no payment is required to the foreign entity ...

The issue in the VERITAS case involved the calculation of the buy-in payment under VERITAS’ cost sharing arrangement with its Irish affiliate. VERITAS US assigned all of its existing European sales agreements to VERITAS Ireland. Similarly,VERITAS Ireland was given the rights to use the covered intangibles and to use VERITAS US’s trademarks, trade names and service marks in Europe, the Middle East and Africa, and in Asia-Pacific and Japan. In return, VERITAS Ireland agreed to pay royalties to VERITAS US in exchange for the rights granted. The royalty payment included a prepayment amount (i.e. lump-sum payment) along with running royalties that were subject to revision to maintain an arm’s length rate. Thereafter, VERITAS Ireland began co-developing, manufacturing and selling VERITAS products in the Europe, the Middle East and Africa markets as well as in the Asia-Pacific and Japan markets. These improvements, along with the establishment of new management, allowed VERITAS’ 2004 annual revenues to be five times higher than its 1999 revenues from Europe, the Middle East and Africa, and Asia-Pacific and Japan. the IRS’s economic expert employed the income method to calculate the buy-in payment (for pre-existing intangibles that were to be used by the parties to develop future technology under the cost sharing arrangement). These calculations were based on the assumption that the transfer of pre-existing intangibles by VERITAS US was “akin to a sale” and should be evaluated as such. To value the transfer, the IRS expert aggregated the intangibles so that, in effect, he treated the transfer as a sale of VERITAS US’s business, rather than a sale of each separate intangible asset. The aggregation of  the intangibles was necessary, in the view of the IRS expert, because the assets collectively (the package of intangibles) possessed synergies and, as a result, the package of intangibles was more valuable than each individual intangible asset standing alone. The Court rejected the IRS’s method on the following premises: The IRS did not differentiate between the value of  subsequently developed intangibles and pre-existing intangibles, thus including intangibles beyond what  is required for the buy-in payment; The IRS included intangibles such as access to VERITAS US’s marketing and R&D teams, which are not among the intangibles recognized by the US transfer pricing rules; and The IRS incorrectly assigned a perpetual useful life for transferred intangibles that have a useful life of four years ...

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 trademark ‘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 trademark in the Internal Market. The tax authorities considered the payment of royalties to X-GmbH for the years in question a hidden profit distribution. An appeal was filed with the administrative court which upheld the decision of the tax authorities. An appeal was then filed with the Supreme Administrative Court. Judgment The Supreme Administrative Court upheld the assessment of the tax authorities and dismissed the appeal. Click here for English translation Click here for other translation ...

This case is about business restructuring and transfer of intangibles – customer list, technology, trademarks and goodwill. Cytec Norge was originally a full-fledged manufacturer that was changed into a toll manufacturer. The customer portfolio, technology, trademarks and goodwill were transferred to the related entity, Cytec Netherlands, free of charge. The court found that Cytec Norge AS had held intangibles of considerable value prior to the business restructuring in 1999, and that the Norwegian entity should have received an arm’s-length remuneration for the transfer of these rights to the related Dutch entity. The court ruled that the Norwegian tax authorities’ calculation of such remuneration and the increased income was correct. An appeal to the Supreme Court was dismissed in 2008. Click here for translation ...

This case is about a IP sale-and-license-back arrangement. The taxpayer acquired the shares in BV Z (holding). BV Z owns the shares in BV A and BV B (the three BVs form a fiscal unity under the CITA). BV A produces and sells shoes. In 1993, under a self-proclaimed protection clause, BV A sells the trademark of the shoes to BV C, which is also part of the fiscal unity. The protection clause was supposedly intended to protect the trademark in case of default of BV A. Taxpayer had created BV C prior to the sale of the trademark. In 1994, the taxpayer entered into a licensing agreement with BV C: the taxpayer pays NLG 2 to BV C per pair of shoes sold. Next, BV C is then moved to the Netherlands Antilles, which results in the end of the fiscal unity as of January 1, 1994. The roundtrip arrangement, the sale of an intangible and the subsequent payment of licensing fees, is now complete. In 1999 the royalty for use of the trademark was increased from fl. 2 per pair of shoes to fl. 2.50 per pair, resulting in annual royalty payments of fl. 300.000 from A BV to B BV. The Court disallowed tax deductions for the royalty payments. The payments were not proven to be at arm’s length. B BV had no employees to manage the trademarks. There were no business reasons for the transactions, only a tax motive. Hence the sale-and-license back arrangement was disregarded for tax purposes. Also, the licensing agreement were not found to produce effective protection of the brand and was therefore also considered part of a tax planning plan. Taxpayers often seek to maximise differences in tax rates through selling intangibles to a low- tax country and subsequently paying royalties to this country for the use of these intangibles, thereby decreasing the tax-base in the high-tax country. The arm’s length principle requires taxpayers to have valid business purposes for such transactions and requires them to make sure that the royalties are justified – why would an independent company pay royalties to a foreign company for an intangible it previously owned?’ To adress such situations a decree was issued in the Netherlands on August 11, 2004. The decree provided additional rules for transfers of intangibles when the value is uncertain at the time of the transaction (HTVI). It refers to situations in which an intangible is being transferred to a foreign group company and where this company furthermore licenses the intangible back to the transferor and/or related Dutch companies of this company. In these situations a price adjustment clause is deemed to have been entered. The deemed price adjustment clause prevents a sale at a very low price with a consequent high royalty fee to drain the Dutch tax base. Through the price adjustment clause the Dutch tax authorities are guaranteed a fair price for the sale of the intangible. Click here for translation ...

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 ...

In September 2006 the Internal Revenue Service announced that it has successfully resolved a transfer pricing dispute with Glaxo SmithKline. Under the settlement agreement, GSK will pay the Internal Revenue Service approximately $3.4 billion, and will abandon its claim seeking a refund of $1.8 billion in overpaid income taxes, as part of an agreement to resolve the parties’ long-running  transfer pricing dispute for the tax years 1989 through 2005. See also the GlaxoSmithKlein decision from july 2001 The IRS announcement ...

B SA Limited was incorporated in South Africa 9 May 1924. C plc is the controlling shareholder of the company. On 24 October 1979 B SA Limited amended paragraph 1 of its memorandum of association by adding the following to it: The corporate name “B SA Limited” is adopted and used by permission of (C) Limited. On withdrawal of that permission B SA Limited will cease to use such name and will immediately change its corporate name and trading name so that neither includes the mark (B) or any trade mark, trade name, name or other mark of ownership belonging to (C) Company Limited, or any other trade mark, trade name, name or other mark of ownership likely to be confused therewith. During 1996 C plc decided that users of its licensed marks and the licensed marketing indicia should be required to pay a royalty. To this end it commissioned an independent company to determine the value of its licensed marks and licensed marketing indicia. This study identified the role played by the brand in the various business segments in which B SA Limited was involved. Based on this information calculation was made in respect of the profit actually generated by each segment which could be attributable to the licensed marks. Consequent upon the above B SA Limited made the following royalty payments during the relevant years of assessment: 1997 1998 1999 : : : R 40.190.000; R 45.150 000; and R 42.519.000. B SA Limited then claimed a deduction of the above amounts in calculating its taxable income in its Income Tax Returns for the years 1997, 1998 and 1999. The Revenue Service issued an assessment disallowing the deduction of the royalties in calculating the taxable income. B SA Limited objected and appealed against the disallowance of the deduction. The Court ruled as follows: The consideration paid in terms of the Trademark Licence Agreement enabled the Respondent to trade in its economic sphere with a valuable brand. The payments made were made with the purpose of maintaining and growing market share. The agreement was crucial as it is the foundation and pre-requisite of any entitlement to conduct the Appellant’s business in the manner and form that it conducts its business. The payments in issue are thus in substance a purchase price for a business which gave a substantial market share in the defined area, similar to a franchise agreement. The payments made to obtain these rights must therefore by its very nature be a capital expense. In the statement of agreed facts it is recorded that the price of (the products in which Appellant trades) are fixed. As a result, the only way that the Appellant can distinguish its products from its competitors is by its brand. Brand is thus the nucleus to secure and guarantee the Appellant a market share. Having regard to what I have said above I am satisfied that the expenditure incurred by the Appellant in paying for the licensed marks and the licensed marketing indicia are expenses which are capital in nature and the Respondent was thus entitled to disallow such expense as it properly did. B SA Limited’s appeal against the assessment was dismissed ...

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

When DHL sold the “DHL” trademark to DHL International, the IRS disagreed with DHL’s evaluation of the arms-length price of the intellectual property and used its authority under Section 482 to reallocate income and impose penalties. DHL appealed the IRS ruling and the tax court upheld the IRS allocation to DHL. In this decision the U.S. Court of Appeals for the Ninth Circuit affirmed the tax court’s application of Section 482 to the sale of the trademark and the $100 million valuation for the intangible asset, but reversed the tax court’s rejection of a $50 million value of the foreign trademark rights, as asserted by DHL. And ...

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 ...

In this case, experts had utilized the relief-from-royalty method in the valuation of trademarks. On this method the Court noted: “In our view, the relief-from-royalty method necessarily undervalues trademarks. The fair market value of a trademark is the price a willing purchaser would have paid a willing seller to buy the mark…The relief-from-royalty model does not accurately estimate the value to a purchaser of a trademark. Royalty models are generally employed to estimate an infringer’s profit from its misuse of a patent or trademark… Resort to a royalty model may seem appropriate in such cases because it estimates fairly the cost of using a trademark… However, use of a royalty model in the case of a sale is not appropriate because it is the fair market value of a trademark, not the cost of its use, that is at issue. A relief-from-royalty model fails to capture the value of all of the rights of ownership, such as the power to determine when and where a mark may be used, or moving a mark into or out of product lines. It does not even capture the economic benefit in excess of royalty payments that a licensee generally derives from using a mark. Ownership of a mark is more valuable than a license because ownership carries with it the power and incentive both to put the mark to its most valued use and to increase its value. A licensee cannot put the mark to uses beyond the temporal or other limitations of a license and has no reason to take steps to increase the value of a mark where the increased value will be realized by the owner. The Commissioner’s view, therefore, fundamentally misunderstands the nature of trademarks and the reasons why the law provides for exclusive rights of ownership in a mark. Given the shortcomings of the relief-from-royalty methodology, the Tax Court erred when it adopted the Commissioner’s trademark valuations. The Tax Court is instructed to examine alternate methods of determining the fair market value of the trademarks in question.” ...

A subsidiary company, which paid royalties for a licence of a trademark to its parent company, could not deduct part of the sums paid as a temporary increase of the royalties by one point because it could not justify the benefit from the use of the trademark. Click here for translation ...