Category: Royalty and License Payments

Royalty is defined as payments for the use of or right to use intangible property.
Royalties or license fees are paid for use of patent, copyright, design or model, secret formula or process, trademark, trade name or for information concerning industrial, commercial or scientific experience (know-how) etc. Transfer pricing issues often relates to profit shifting, ownership and value of intangibles, and benefit tests.

South Africa vs ABD Limited, February 2024, Tax Court, Case No IT 14302

South Africa vs ABD Limited, February 2024, Tax Court, Case No IT 14302

ABD Limited is a South African telecommunications company with subsidiaries worldwide. These subsidiaries are operating companies, with local shareholders, but having ABD as a significant shareholder. ABD licences its intellectual property to these operating companies (referred to as Opcos) in return for which they pay ABD a royalty. The present case involves the royalty payments made by fourteen of the Opcos to ABD during the periods 2009 to 2012. ABD charged all of them the same royalty rate of 1% for the right to use its intellectual property. In 2011 ABD retained the services of a consultancy to advise it on what royalty it should charge its various Opcos.The consultancy procured research on the subject and then, informed by that, came up with the recommendation that a royalty of 1% could be justified. The tax authorities (SARS) found that a 1% royalty rate was not ... Continue to full case
France vs SASU Alchimedics, January 2024, CAA de Lyon, Case No. 21PA04452

France vs SASU Alchimedics, January 2024, CAA de Lyon, Case No. 21PA04452

Since 2012, the French company SASU Alchimedics has been owned by Sinomed Holding Ltd, the holding company of a group of the same name set up by a Chinese resident domiciled in the British Virgin Islands. SASU Alchimedics was engaged in the manufacture and marketing of products using electro-grafting technology for biomedical applications and the licensing and assignment of patents in the field of electro-grafting technologies. SASU Alchimedics was subject to an audit for the financial years 2014 and 2015, as a result of which the tax authorities increased its income for the financial years ended 31 December 2013, 2014 and 2015 by the price of services not invoiced to Sinomed Holding Ltd. In addition, the non-invoicing of these services was considered to be a transfer of profits abroad within the meaning of Article 57 of the French General Tax Code and the amounts were ... Continue to full case
France vs SA Compagnie Gervais Danone, December 2023, Conseil d'État, Case No. 455810

France vs SA Compagnie Gervais Danone, December 2023, Conseil d’État, Case No. 455810

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 ... Continue to full case
India vs Hyatt International-Southwest Asia Ltd., December 2023, High Court of Delhi, Case No ITA 216/2020 & CM Nos. 32643/2020 & 56179/2022

India vs Hyatt International-Southwest Asia Ltd., December 2023, High Court of Delhi, Case No ITA 216/2020 & CM Nos. 32643/2020 & 56179/2022

A sales, marketing and management service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and trademark license agreements pursuant to which Asian Hotels Limited was permitted to use Hyatt’s trademark in connection with the hotel’s operation. In 2012, the tax authorities issued assessment orders for FY 2009-2010 to FY 2017-2018, qualifying a portion of the service payments received by Hyatt as royalty and finding that Hyatt had a PE in India. Hyatt appealed the assessment orders to the Income Tax Appellate Tribunal, which later upheld the order of the tax authorities. Aggrieved with the decision, Hyatt filed appeals before the High Court. Judgement of the High Court The High Court set aside in part and ... Continue to full case
Netherlands vs "Tobacco B.V.", December 2023, North Holland District Court, Case No AWB - 20_4350 (ECLI:NL:RBNHO: 2023:12635)

Netherlands vs “Tobacco B.V.”, December 2023, North Holland District Court, Case No AWB – 20_4350 (ECLI:NL:RBNHO: 2023:12635)

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 ... Continue to full case
European Commission vs Amazon and Luxembourg, December 2023, European Court of Justice, Case No  C‑457/21 P

European Commission vs Amazon and Luxembourg, December 2023, European Court of Justice, Case No C‑457/21 P

In 2017 the European Commission concluded that Luxembourg had granted undue tax benefits to Amazon of around €250 million. According to the Commission, a tax ruling issued by Luxembourg in 2003 – and prolonged in 2011 – lowered the tax paid by Amazon in Luxembourg without any valid justification. The tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to a company which is not subject to tax (Amazon Europe Holding Technologies). In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU’s taxable profits. This decision was brought before the European Courts by Luxembourg and Amazon, and in May 2021 the General Court found that Luxembourg’s tax treatment of Amazon was not illegal under ... Continue to full case
Poland vs S. spółka z o.o., December 2023, Supreme Administrative Court, Case No I FSK 925/22

Poland vs S. spółka z o.o., December 2023, Supreme Administrative Court, Case No I FSK 925/22

S. spółka z o.o. had deducted licence fees paid for the use of a trademark owned by a related party. Following an audit, the tax authority issued an assessment where these deductions had been disallowed. An appeal was filed with the Administrative Court which later upheld the tax assessment, and S. spółka z o.o. then filed an appeal with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Court ruled in favour of S. spółka z o.o. and set aside the decision of the Administrative Court and the tax assessment. Excerpt “In the present case, it should have been considered that the tax authorities created their own clause, assessing the case on the basis of the entirety of the acts performed between the applicant and its controlled companies – going beyond the scope of Article 11(1)-(4) of the u.p.d.o.p. Indeed, in the legal ... Continue to full case
Poland vs P.B., December 2023, Supreme Administrative Court, Case No II FSK 456/22

Poland vs P.B., December 2023, Supreme Administrative Court, Case No II FSK 456/22

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 ... Continue to full case
Poland vs "E. K.", November 2023, Administrative Court, Case No I SA/Po 25/23

Poland vs “E. K.”, November 2023, Administrative Court, Case No I SA/Po 25/23

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 ... Continue to full case
Australia vs PepsiCo, Inc., November 2023, Federal Court 2023, Case No [2023] FCA 1490

Australia vs PepsiCo, Inc., November 2023, Federal Court 2023, Case No [2023] FCA 1490

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 in February 2022. Judgment of the Court The Federal Court ruled in favor of the tax authorities. Following the decision of the Court, the ATO issued an announcement concerning ... Continue to full case
European Commission vs Apple and Ireland, November 2023, European Court of Justice, AG-Opinion, Case No C-465/20 P

European Commission vs Apple and Ireland, November 2023, European Court of Justice, AG-Opinion, Case No C-465/20 P

In 1991 and 2007, Ireland issued two tax rulings in relation to two companies of the Apple Group (Apple Sales International – ASI and Apple Operations Europe – AOE), incorporated under Irish law but not tax resident in Ireland. The rulings approved the method by which ASI and AOE proposed to determine their chargeable profits in Ireland deriving from the activity of their Irish branches. In 2016, the European Commission considered that the tax rulings, by excluding from the tax base the profits deriving from the use of intellectual property licences held by ASI and AOE, granted those companies, between 1991 and 2014, State aid that was unlawful and incompatible with the internal market and from which the Apple Group as a whole had benefitted, and ordered Ireland to recover that aid. In 2020, on the application of Ireland and ASI and AOE, the General ... Continue to full case
US vs Coca Cola, November 2023, US Tax Court, T.C. Memo. 2023-135

US vs Coca Cola, November 2023, US Tax Court, T.C. Memo. 2023-135

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 ... Continue to full case
Poland vs "K.P.", October 2023, Provincial Administrative Court, Case No I SA/Po 475/23

Poland vs “K.P.”, October 2023, Provincial Administrative Court, Case No I SA/Po 475/23

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. Judgement 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 Poland vs KP Po 475_23 October 2023 ... Continue to full case
Korea vs "IP-owner Corp" September 2023, Seoul Appeals Commission, Case no  2023-0250

Korea vs “IP-owner Corp” September 2023, Seoul Appeals Commission, Case no 2023-0250

“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 ... Continue to full case
France vs SAS Arrow Génériques, September 2023, Court of Administrative Appeal, Case No 22LY00087

France vs SAS Arrow Génériques, September 2023, Court of Administrative Appeal, Case No 22LY00087

SAS Arrow Génériques is in the business of distributing generic medicinal products mainly to the pharmacy market, but also to the hospital market in France. It is 82.22% owned by its Danish parent company, Arrow Groupe ApS, which is itself a wholly-owned subsidiary of the Maltese company Arrow International Limited. In 2010 and 2011, SAS Arrow Génériques paid royalties to its Danish parent, Arrow Group ApS, and to a related party in the UK, Breath Ltd. According to the French tax authorities, the royalties constituted a benefit in kind granted to Arrow Group ApS and Breath Ltd, since SAS Arrow Génériques had not demonstrated the reality and nature of the services rendered and had therefore failed to justify the existence and value of the consideration that it would have received from the payment of these royalties, which constitutes an indirect transfer of profits to related ... Continue to full case
Denmark vs Maersk Oil and Gas A/S (TotalEnergies EP Danmark A/S), September 2023, Supreme Court, Case No BS-15265/2022-HJR and BS-16812/2022-HJR

Denmark vs Maersk Oil and Gas A/S (TotalEnergies EP Danmark A/S), September 2023, Supreme Court, Case No BS-15265/2022-HJR and BS-16812/2022-HJR

In 2012, the tax authorities increased the taxable income for the income years 2006-2008 for two companies in the former A. P. Møller – Mærsk Group. P. Moller – Maersk Group. The taxable income was thus increased for the former Mærsk Olie og Gas A/S (MOGAS), which was taken over by Total S.A. in 2018, and for A.P. Møller – Mærsk A/S (APMM), which was the management company in the joint taxation with, among others, MOGAS. As grounds for the increases, the tax authorities referred to the fact that intra-group transactions had taken place between MOGAS and the company’s subsidiaries, Mærsk Olie Algeriet A/S and Maersk Oil Qatar A/S, which did not fulfil the tax legislation’s rules that transactions between group companies must be priced in accordance with what could have been achieved if the transactions had been concluded between independent parties (arm’s length terms) ... Continue to full case
Denmark vs "Consulting A/S", August 2023, Eastern High Court, Case No B-0956-16 and BS-52532/2019-OLR (SKM2023.628.ØLR)

Denmark vs “Consulting A/S”, August 2023, Eastern High Court, Case No B-0956-16 and BS-52532/2019-OLR (SKM2023.628.ØLR)

The cases concerned whether the tax authorities had been entitled to exercise an assessment of two types of intra-group transactions made between H1 A/S and a number of group companies. The cases also concerned whether, if so, the tax authorities’ judgement could be set aside. The two types of controlled transactions were employee loans (IAA) and royalty payments for access to and use of intangible assets. The employee loans (IAA) were temporary intra-group loans of “idle” employees who were not in the process of or were about to perform specific tasks for the operating company in which they were employed. To a large extent, these were cross-border employee loans. In the employee loans, the borrowing operating company provided a consultancy service to a customer, and it was also the borrowing operating company that bore the business risk. The TP documentation stated that the lending operating ... Continue to full case
Germany vs "Cutting Tech GMBH", August 2023, Bundesfinanzhof, Case No I R 54/19 (ECLI:DE:BFH:2023:U.090823.IR54.19.0)

Germany vs “Cutting Tech GMBH”, August 2023, Bundesfinanzhof, Case No I R 54/19 (ECLI:DE:BFH:2023:U.090823.IR54.19.0)

Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been ... Continue to full case
Poland vs "K. S.A.", July 2023, Supreme Administrative Court, Case No II FSK 1352/22 - Wyrok

Poland vs “K. S.A.”, July 2023, Supreme Administrative Court, Case No II FSK 1352/22 – Wyrok

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 ... Continue to full case
Poland vs "E S.A.", June 2023, Provincial Administrative Court, Case No I SA/Po 53/23

Poland vs “E S.A.”, June 2023, Provincial Administrative Court, Case No I SA/Po 53/23

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 ... Continue to full case