Royalty and license payments in transfer pricing concern the arm’s length pricing of contractual arrangements under which one group entity grants another the right to use intangible property — trademarks, patents, know-how, or proprietary technology — in exchange for a fee. The core legal question is whether the royalty rate, and the very existence of the payment obligation, reflects what independent parties would have agreed in comparable circumstances. The arm’s length standard, codified in Article 9 of the OECD Model Tax Convention and transposed into domestic legislation across jurisdictions, governs these transactions. Disputes arise both from the quantum of the royalty and from whether the underlying contractual arrangement itself has genuine economic substance.

In practice, tax authorities challenge royalty arrangements on several distinct grounds. They may dispute the rate charged, as seen in the Netherlands Tobacco B.V. litigation involving multi-year assessments exceeding €2.8 billion annually. They may challenge the arrangement’s economic rationale entirely, alleging a sale-and-leaseback of intangibles lacks business purpose, as occurred in the Polish E S.A. and P.B. cases involving trademark transfers to related parties followed by licence-back agreements. Authorities also contest whether a purported royalty embedded within a product purchase price constitutes a genuine separate payment or constitutes a double charge, the issue at the heart of the Polish Cosmetics sp. z o.o. case. Taxpayers generally argue contractual allocation of rights, commercial rationale, and comparability to third-party licensing benchmarks.

The OECD Transfer Pricing Guidelines address intangible-related payments primarily in Chapter VI (paragraphs 6.1–6.212 of the 2022 edition), which requires identification of the intangible, analysis of which entity performs DEMPE functions, and confirmation that legal ownership alone does not determine entitlement to returns. Chapter I’s guidance on accurately delineating the actual transaction is equally relevant, as illustrated by the Starbucks case, where the General Court scrutinised the allocation of roasting profits and the royalty paid to Alki LP. The Bundesfinanzhof’s Cutting Tech decision engages the question of whether a contract manufacturer using group-owned specifications should pay for their use.

Courts and practitioners focus on functional and comparability analysis: which entity develops, maintains, and exploits the intangible; whether comparable uncontrolled royalty rates can be identified; and whether the contractual terms would be replicated between independent parties. The Procter & Gamble case (6th Cir. 1992) remains significant for its analysis of cost-sharing and the appropriate base on which royalties are calculated. Key contested questions include the deductibility of royalties under domestic anti-avoidance rules, the substance of holding structures, and the interaction between transfer pricing adjustments and withholding tax treaty relief.

These cases collectively demonstrate that royalty arrangements remain among the highest-risk transfer pricing structures globally, requiring practitioners to align contractual form, functional substance, and benchmarking analysis with both OECD guidance and domestic rules.