A tax assessment had been issued to J – G Retalho, SGPS, S.A., regarding an arrangement whereby ownership to intangibles had been transferred to a related party in Switzerland and subsequent royalty payments for use of the intangibles had been deducted in the taxable income.
In the course of audit of these companies, the tax authorities concluded that the costs in question derive respectively from a contract for the use of the F… brand, sold to that entity for a period of no less than 30 years, and from a contract for the use of the P… brand, also sold to the same Swiss entity, for a period of no less than 30 years, with F… and P… continuing to deduct from their income, costs directly related to the management, promotion and development of the brands they transferred, as well as holding all the risks inherent to them.
Given that F… and P… have transferred their brands, through an operation that could not be carried out between independent entities, and that they continue to bear the costs associated with managing and developing them, as well as all the risks inherent to them, while additionally bearing a royalty for the use of an asset that in practice remains theirs, the tax authorities issued an adjustment to the taxable profit of company F… in the amount of €4,219,631.00 and a positive adjustment to the taxable profit of the controlled company P… in the amount of €5,383,761.00.
The Administrative Court of Appeal later upheld the assessment.
The company then filed an appeal for review with the Supreme Administrative Court. In the appeal the company argued that transfer pricing rules cannot be used to nullify an actual royalty for indispensable brand use, that the profit split method is exceptional and had been applied without establishing reliability, and that arriving at a zero result contradicts the arm’s length principle.
Judgment
The Supreme Administrative Court did not decide the merits. It admitted the appeal for review, finding that the issue of fully disregarding the related-party royalty payments has fundamental legal and social relevance and warrants guidance for uniform application of the law. Order admitting review dated 25 September 2025.
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