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.

Portugal vs R... Cash & C..., S.A., June 2023, Tribunal Central Administrativo Sul, Case 2579/16.6 BELRS

Portugal vs R… Cash & C…, S.A., June 2023, Tribunal Central Administrativo Sul, Case 2579/16.6 BELRS

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. Judgement of the Court The Court of Appeal revoked the judgement 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 ... Continue to full case
Spain vs Institute of International Research España S.L., June 2023, Audiencia Nacional, Case No SAN 3426/2023 - ECLI:EN:AN:2023:3426

Spain vs Institute of International Research España S.L., June 2023, Audiencia Nacional, Case No SAN 3426/2023 – ECLI:EN:AN:2023:3426

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 ... Continue to full case
Czech Republic vs YOLT Services s.r.o., April 2023, Regional Court, Case No 29 Af 62/2018-214

Czech Republic vs YOLT Services s.r.o., April 2023, Regional Court, Case No 29 Af 62/2018-214

YOLT Services s.r.o. is active in distribution of TV programmes and paid royalties/license for use of these programmes to its parent company in Romania and subsidiaries in Hungary and Slovakia. These companies were contractually obliged to pay royalties received on to the producers of the programmes. According to the tax authorites, the beneficial owners of the royalties were not the group companies, but rather the producers of the programmes. On that basis the royalty payments were not excempt from withholding taxes. An assessment of additional taxes was issued where withholding taxes had been calculated as 15% of the royalties paid by YOLT services. Judgement of the Regional Court The court upheld the decision of the tax authorities in regards of the producers – and not the group companies – beeing the beneficial owners of the royalties. But the court referred the case back to the ... Continue to full case
Poland vs "Cosmetics sp. z o.o.", March 2023, Supreme Administrative Court, Case No II FSK 2034/20

Poland vs “Cosmetics sp. z o.o.”, March 2023, Supreme Administrative Court, Case No II FSK 2034/20

“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 ... Continue to full case
Portugal vs "N...S.A.", March 2023, Tribunal Central Administrativo Sul, Case 762/09.0BESNT

Portugal vs “N…S.A.”, March 2023, Tribunal Central Administrativo Sul, Case 762/09.0BESNT

The tax authorities had issued a notice of assessment which, among other adjustments, disallowed a bad debt loss and certain costs as tax deductible. In addition, royalties paid to the parent company were adjusted on the basis of the arm’s length principle. N…S.A. appealed to the Administrative Court, which partially annulled the assessment. Both the tax authorities and N…S.A. then appealed to the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal partially upheld the assessment of the tax authorities, but dismissed the appeal in respect of the royalty payments. According to the Court, a transfer pricing adjustment requires a reference to the terms of the comparable transaction between independent entities and a justification of the comparability factors. Extracts from the judgement related to the controlled royalty payment. “2.2.2.2 Regarding the correction for ‘transfer pricing’, the applicant submits that the Judgment ... Continue to full case
US vs Skechers USA Inc., February 2023, Wisconsin Tax Appeals Commission, Nos. 10-I-171 AND 10-I-172

US vs Skechers USA Inc., February 2023, Wisconsin Tax Appeals Commission, Nos. 10-I-171 AND 10-I-172

Skechers US Inc. had formed a related party entity, SKII, in 1999 and transferred IP and $18 million in cash to the entity in exchange for 100 percent of the stock. Skechers then licensed the IP back from SKII and claimed a franchise tax deduction for the royalties and also deductions for management fees and interest expenses on the unpaid balance of royalty fees. The Wisconsin tax authorities held that these were sham transaction lacking business purpose and disallowed the deductions. Judgement of the Tax Appeals Commission The Tax Appeals Commission ruled in favor of the tax authorities. Excerpt “(…) The burden of proof is on Petitioner to prove that the Department’s assessment is incorrect by clear and satisfactory evidence. In this case, Petitioner must prove that it had a valid nontax business purpose for entering into the licensing transaction that generated the royalty deductions ... Continue to full case
Portugal vs J... - GESTÃO DE EMPRESAS DE RETALHO SGPS. S.A., February 2023, Administrative Court of Appeal, Case 657/07.1 BELSB

Portugal vs J… – GESTÃO DE EMPRESAS DE RETALHO SGPS. S.A., February 2023, Administrative Court of Appeal, Case 657/07.1 BELSB

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 ... Continue to full case
US vs 3M Company And Subsidiaries, February 2023, US Tax Court, 160 T.C. No. 3 (Docket No. 5816-13)

US vs 3M Company And Subsidiaries, February 2023, US Tax Court, 160 T.C. No. 3 (Docket No. 5816-13)

“3M Parent” is the parent company of the 3M Group and owns the Group’s trademarks. Other intellectual property, including patents and unpatented technology, is owned by “3M Sub-parent”, a second-tier wholly owned US subsidiary of 3M Parent. “3M Brazil” has used trademarks owned by 3M US in its business operations. 3M Brazil’s use of these trademarks was governed by three trademark licences entered into by 3M Parent and 3M Brazil in 1998. Each licence covered a separate set of trademarks. Under the terms of the licences, 3M Brazil paid 3M Parent a royalty equal to 1% of its sales of the trademarked products. Some products sold by 3M Brazil were covered by trademarks covered by more than one of the three trademark licences. For such products, 3M Brazil and 3M Parent calculated the trademark royalties using a stacking principle whereby, for example, if a particular ... Continue to full case
Italy vs Dolce & Gabbana S.R.L., November 2022, Supreme Court, Case no 02599/2023

Italy vs Dolce & Gabbana S.R.L., November 2022, Supreme Court, Case no 02599/2023

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 ... Continue to full case
Italy vs Arditi S.p.A., December 2022, Supreme Administrative Court, Case No 37437/2022

Italy vs Arditi S.p.A., December 2022, Supreme Administrative Court, Case No 37437/2022

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 ... Continue to full case
Spain vs Universal Pictures International Spain SL, December 2022, Audiencia Nacional, Case No SAN 5855/2022 - ECLI:EN:AN:2022:5855

Spain vs Universal Pictures International Spain SL, December 2022, Audiencia Nacional, Case No SAN 5855/2022 – ECLI:EN:AN:2022:5855

Universal Pictures International Spain SL is a distributor of films on the Spanish Market. It distributes films both from related parties (Universal Pictures) and from unrelated parties. Following an audit, the Spanish tax authorities issued an assessment where the remuneration received for distribution of films from related parties had been compared to the remuneration received from distribution of films from unrelated parties and where the pricing of the controlled transactions had been adjusted accordingly . Not satisfied with the assessment of additional income a complaint was filed by Universal Pictures International Spain SL. Judgement of the Court The Court predominantly held in favor of Universal Pictures International Spain SL. The distribution activities performed in regards of films from related parties were limited risk whereas the activities performed in regards of distribution of films from unrelated parties were fully fledged. Hence the pricing of the controlled ... Continue to full case
Spain vs "XZ Insurance SA", October 2022, Tribunal Economic-Administrative Central  (TEAC), Case No Rec. 00/03631/2020/00/00

Spain vs “XZ Insurance SA”, October 2022, Tribunal Economic-Administrative Central (TEAC), Case No Rec. 00/03631/2020/00/00

“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 ... Continue to full case
India vs Google India Private Limited, Oct. 2022, Income Tax Appellate Tribunal, 1513/Bang/2013, 1514/Bang/2013, 1515/Bang/2013, 1516/Bang/2013

India vs Google India Private Limited, Oct. 2022, Income Tax Appellate Tribunal, 1513/Bang/2013, 1514/Bang/2013, 1515/Bang/2013, 1516/Bang/2013

Google Ireland licenses Google AdWords technology to its subsidiary in India and several other countries across the world. The Tax Tribunal in India found that despite the duty of Google India to withhold tax at the time of payment to Google Ireland, no tax was withheld. This was considered tax evasion, and Google was ordered to pay USD 224 million. The case was appealed by Google to the High Court, where the case was remanded to the Income Tax Appellate Authority for re-examination. Judgement of the ITAT After re-examining the matter on the orders of the Karnataka High Court, the Income Tax Appellate Authority concluded that the payments made by the Google India to Google Ireland between 2007-08 and 2012-13 was not royalties and therefore not subject to withholding tax. Excerpts “30. On a consideration of all the above agreements and the facts on record, ... Continue to full case
India vs Amway India Enterprises Pvt. Ltd., September 2022, High Court of Delhi, Case No ITA 313/2022

India vs Amway India Enterprises Pvt. Ltd., September 2022, High Court of Delhi, Case No ITA 313/2022

Amway India is engaged in the business of direct selling of consumer products through multi-level marketing. For FY 2013-2014 Amway paid royalties to a foreign Amway group company. Following an audit, an assessment was issued by the tax authorities where the royalty had been reduced based on a benchmark study resulting in additional taxable income. An appeal was filed by Amway India with the Income Tax Tribunal where the assessment was set aside. An appeal was then filed by the tax authorities with the High Court. In the appeal the tax authorities stated that the Tribunal had failed to appreciate the fact that the royalty payments were excessive considering the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred by Amway India for the benefit of the group’s trademark and brand. According to the tax authorities Amway India created marketing intangibles for the group and should be ... Continue to full case
US vs Medtronic, August 2022, U.S. Tax Court, T.C. Memo. 2022-84

US vs Medtronic, August 2022, U.S. Tax Court, T.C. Memo. 2022-84

Medtronic had used the comparable uncontrolled transactions (CUT) method to determine the arm’s length royalty rates received from its manufacturing subsidiary in Puerto Rico for use of IP under an inter-group license agreement. The tax authorities found that Medtronic left too much profit in Puerto Rico. Using a “modified CPM” the IRS concluded that at arm’s length 90 percent of Medtronic’s “devices and leads” profit should have been allocated to the US parent and only 10 percent to the operations in Puerto Rico. Medtronic brought the case to the Tax Court. The Tax Court applied its own analysis and concluded that the Pacesetter agreement was the best CUT to calculate the arm’s length result for license payments. This decision from the Tax Court was then appealed by the IRS to the Court of Appeals. In 2018, the Court of Appeal found that the Tax Court’s ... Continue to full case
Korea vs "IP developer", June 2022, Tax Court, Case No 2022-0014

Korea vs “IP developer”, June 2022, Tax Court, Case No 2022-0014

The issue was whether “technical fees” received after a purported “transfer of patent rights” instead constituted business income – royalties – earned from continuous and recurring activities for profit and therefore subject to a higher income tax and VAT. During an audit, the tax authority found that “IP developer” had entered into a “technology transfer agreement” with a related party to transfer patent rights on four occasions between 2008 and 2020. Upon entering into the agreement, “IP developer” was to receive a “technology fee” of 5% of the annual sales of the subject technology. “IP developer” had registered a total of 78 patents, 8 design rights and 15 trademark rights, and had also entered license agreements with third parties and received income from these agreements in the form of royalty. On that basis the tax authorities considered that “IP developer” was engaged in the continuous ... Continue to full case
France vs Accor (Hotels), June 2022, CAA de Versailles, Case No. 20VE02607

France vs Accor (Hotels), June 2022, CAA de Versailles, Case No. 20VE02607

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 ... Continue to full case
France vs Société Planet, May 2022, Conseil d'État, Case No 444451

France vs Société Planet, May 2022, Conseil d’État, Case No 444451

In view of its purpose and the comments made on Article 12 of the OECD Model Convention, the Conseil d’État found that Article 12(2) of the Franco-New Zealand tax treaty was applicable to French source royalties whose beneficial owner resided in New Zealand, even if the royalties had been paid to an intermediary company established in a third country. The Supreme Court thus set aside the previous 2020 Judgement of the Administrative Court of Appeal. The question of whether the company in New Zealand actually qualified as the beneficial owner of the royalties for the years in question was referred to the Court of Appeal. Excerpt “1. It is clear from the documents in the file submitted to the judges of the court of first instance that the company Planet, which carries on the business of distributing sports programmes to fitness clubs, was subject to ... Continue to full case
Poland vs "Fertilizer Licence SA", April 2022, Provincial Administrative Court, Case No I SA/Po 788/21

Poland vs “Fertilizer Licence SA”, April 2022, Provincial Administrative Court, Case No I SA/Po 788/21

“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 ... Continue to full case
India vs Adidas India Marketing Pvt. Ltd., April 2022, Income Tax Appellate Tribunal Delhi, ITA No.487/Del/2021

India vs Adidas India Marketing Pvt. Ltd., April 2022, Income Tax Appellate Tribunal Delhi, ITA No.487/Del/2021

Adidas India Marketing Pvt. Ltd. is engaged in distribution and marketing of a range of Adidas and tailor made branded athletic and lifestyle products. Following an audit for FY 2016-2017, an assessment had been issued by the tax authorities where adjustments had been made to (1) advertising, promotion and marketing activities in Adidas India which was considered to have benefitted related parties in the Adidas group, (2) royalty/license payments to the group which was considered excessive and (3) fees paid by Adidas India to related parties which was considered “fees for technical services” (FTS) subjekt to Indian withholding tax. Following an unfavorable decision on the first complaint, an appeal was filed by Adidas with the Income Tax Appellate Tribunal. Judgement of the ITAT The Tribunal decided predominantly in favor of Adidas. Issues 1 and 2 was restored back to the tax authorities for a new ... Continue to full case
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