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Richard Schmidtke |
Alexander Linn |
On April 7 2017, the Federal Ministry of Finance (BMF) published guidance on the application of section 1 of the Foreign Tax Act (AStG) in the context of the use of a brand name and the use of trademark rights and other intangible assets.
Background
On January 21 2016, the Federal Tax Court (BFH) decided (case I R 22/14) that where related parties of a multinational group are allowed to use a brand name free of charge, this may not create a business relationship on which a transfer pricing adjustment according to section 1 of the AStG is possible. With reference to the principles of older case law (BFH case I R 12/99), the court concluded that a permission to use the group's name as part of the own company name does not trigger taxable license fees.
Applicable regulations
Section 1 of the AStG allows an income adjustment in cross-border business relations of related parties to the extent intra-group transactions do not follow the arm's-length principle.
Administrative guidance
The BMF agrees with the BFH that the mere use of names within a group without the use of trademark rights and other intangible assets is in principle not subject to any consideration, so that in cross-border cases no income adjustment according to section 1 of the AStG will occur. However, the BMF caveats this to cases where the use of names does not create a benefit for which two independent parties would agree on a remuneration. In addition to that, the BMF argues that a cross-border use of names is often associated with the use of trademark rights and other intangible assets, so that the remuneration is linked to such advantages.
An indication for a business transaction which is subject to a remuneration exists where the owner of the name or trade mark has the possibility to exclude a third party from using the name or trademark, e.g. if the trade mark is registered in the respective country.
When determining the amount of the remuneration, it has to be considered if the user expects to receive an actual economic benefit from the use of an intangible value (e.g. use of a company name or a trade mark) irrespective of whether this benefit actually was obtained (ex-ante consideration). For example, entities only engaged in distribution activities would not receive a benefit from the use of the name or trade mark if the value of these intangibles is embedded in the purchase price of the goods. Contrary to that, production and service entities would receive a benefit from the use of names or trademarks when these are used in the own value-generating activities. As a general rule, the amount payable as a license fee is determined by the hypothetic arm's-length principle.
Observations
According to representatives of the German tax administrations, one purpose of the new guidance is to ensure that inbound cases are treated similar as outbound cases. There is the perception that foreign multinationals charge significant trademark fees to German subsidiaries, but German multinationals do not do the same with their foreign subsidiaries. German subsidiaries should therefore be prepared to document as part of their transfer pricing documentation the advantages received and may have to consider the application of the hypothetical arm's-length test as the appropriate transfer pricing method for trade mark fees.
Richard Schmidtke (rschmidtke@deloitte.de) and Alexander Linn (allinn@deloitte.de)
Deloitte
Tel: +49 89 29036 8690 and +49 89 29036 8558
Website: www.deloitte.de
