The Hungarian company “Trademark Ltd” was involved in distribution of trademark rights. Trademark Ltd obtained the trademark rights from affiliated companies in Luxembourg and Barbados and then also passed trademark rights on to other affiliated company.
For the purpose of determining the remuneration, only one company in the group had a transfer price record. According to this, the basis for calculating the remuneration was the turnover achieved.
The tax authorities examined the nature of the prices charged between the parties and found that they were not the normal market price. The consideration for the trademark rights was therefore assessed by applying a weighted average cost of capital to the net profit margin. For FY 2006 this rate was set at 12% applied at the group level. On that basis, the amount of the trademark payments was reduced, thereby increasing the tax base of Trademark Ltd by HUF 209,357,000.
Trademark Ltd disagreed with the assessment.
The judgement of the Court
On the basis of the evidence obtained by the court the WACC indicator approach was not appropriate for determining the arm’s length profit margin of Trademark Ltd. The count noted that a WACC indicator is not suitable for measuring the company’s market profit, measuring short-term one-year returns.
The Court further stated that the transfer price is a price range, not a specific abstract price, thus there is no specific price from which to deviate.
The court decided that the remuneration of Trademark Ltd should be determined by application of TNM method. According to the decision of the Curia, it is the responsibility of Trademark Ltd to apply the calculation based on the net profit margin of the transaction referred to in Article 18 (2) (d).