“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.
Judgement 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 of the case at hand it should be stated that a contractual provision covering the grant of a paid licence for the use of trademarks for the purpose of distribution of purchased goods (or activities supporting this process, such as promotion or advertising) is redundant, since the Applicant obtains this right by operation of law. According to the factual description presented in the application, the Company places goods on the market in the territory of the Republic of Poland with the consent of the entity holding the licence for the trademarks (the Establishment), and thus indirectly also with the consent of the entity authorised to these trademarks (the Licensor). The prerequisites set out in Article 155 p.w.p. were therefore fulfilled. On the other hand, the right to further trade in the goods and, at the same time, to exploit the trademarks in connection with the distribution of these goods passed to the Company with their acquisition.
The argumentation of the Appellant’s attorney according to which in the case at hand “additional performance should share the fate of the main performance” should therefore be considered unfounded, for the reason that the acquisition of the right to use trademarks in the case at hand cannot be considered in terms of performance at all. Its regulation in the contract in a pecuniary manner can only be treated in the context of the principle of freedom of contract, according to which the parties may shape the relationship in any way they wish. Thus, since the parties decided to determine a specific price for the right to use the trademarks, there is, in the opinion of the panel, no doubt that a royalty within the meaning of Article 12(3) of the Convention arises here as a result.
This aspect of the case at hand was ignored in the reasoning of the Court of First Instance. By confining itself to an assessment of the arguments of the parties, the Court focused its considerations on the question of the economic, functional and economic distinctiveness of the contractual elements and the consequent correctness of the application of the various forms of taxation. However, as emphasised earlier, the parties had structured the contractual provisions in a way that left no possibility for an assessment other than on the basis of the above criteria. Therefore, the Supreme Administrative Court shares the reasoning presented in the grounds of the appealed judgment.
For these reasons, the allegations of infringement of Article 12(1) and (2) of the Convention and of Article 21(1)(1) of the AIA proved to be unjustified…”
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II FSK 2034-20 pdf