In 2013 an intra-group restructuring took place involving the transfer of trademark rights developed by an operating company to a related entity within the same corporate group. Following this transfer, the entity now holding the trademarks licensed them back to the operating company, which paid royalties and deducted them for income tax purposes. The entity holding the trademarks amortised the acquired intellectual property.
Following an audit the tax authorities concluded that the licensing structure did not reflect arm’s length conditions. Relying on transfer pricing provisions, they argued that the trademark-holding entity did not perform any meaningful DEMPE functions or bear any significant economic risk. Based on this, the authorities went beyond a price adjustment and effectively reclassified the transaction by denying the deductibility of royalty payments and disallowing amortisation of the trademarks.
The taxpayer challenged the assessment, arguing that, under the applicable transfer pricing provisions at the time, the authorities were only empowered to adjust prices and could not disregard or replace actual transactions. They emphasised that explicit statutory authority to reclassify transactions was introduced only on 1 January 2019 and that neither the OECD Guidelines nor a functional analysis could substitute a clear legal basis.
Judgment
The Supreme Administrative Court upheld the taxpayer’s position. It ruled that, under the transfer pricing rules in place before 2019, the tax authorities were not entitled to reclassify or disregard a transaction that had been lawfully executed by related parties. Their powers were limited to adjusting the level of remuneration in line with arm’s length conditions.
The Court confirmed that the OECD Transfer Pricing Guidelines are not a source of law and cannot extend administrative powers beyond what is expressly provided for in legislation. As the authorities had applied anti-avoidance logic without proper legal basis, their assessment was unlawful and had to be annulled.
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