Decoding intellectual property ownership: insights from Swedish transfer pricing case law

Transfer pricing issues concerning intellectual property (IP) have garnered widespread global attention in recent years. The unexpected outcome of the European Commission v Ireland & Apple Sales International state aid judgment in September 2024 – namely, the Commission’s unforeseen success in the nearly decade-long proceedings – has kept IP issues at the forefront of the transfer pricing landscape. Despite significant criticism from practitioners and academics, the substantive points raised by the Commission regarding intragroup dealings involving IP remain crucial.

The concepts of legal and economic ownership of IP are becoming increasingly relevant and are frequently encountered in transfer pricing matters, including:

• Cross-border acquisitions of valuable IP or strategically important businesses;

• Employment of unique foreign expertise; and

• Relocation of strategically significant roles.

Furthermore, tax issues relating to mobility in general may play a significant role. With international travel having returned to pre-COVID levels and remote work becoming firmly established during the pandemic, tax issues associated with these trends are further exacerbated. Essentially, any form of decentralisation could raise several questions concerning the economic and legal ownership of IP or the allocation of residual and routine profits among the companies within a multinational enterprise (MNE) group.

This article delves into the challenges and implications of transfer pricing in the context of centralised and decentralised businesses, based on recent Swedish transfer pricing case law. It explores how businesses can navigate these hurdles while ensuring compliance and optimising their strategies.

In recent years, Swedish administrative courts have, on several occasions, recognised and confirmed the notion of economic ownership of IP following the principles described in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD TP Guidelines).

In case 7416-14 (AB bioMérieux), the relevant administrative court of appeal (the Court) found that entering into a trademark and know-how licensing agreement, followed by downsizing of the Swedish licensor’s operations and eventual takeover by the French parent (the licensee), combined with the temporary transfer of strategic personnel from Sweden to France, constituted a transfer of value. The Court maintained that the licensor became a passive legal owner of IP in the process, while the parent company assumed responsibilities for capital investment, R&D efforts, and operational risks. The Court agreed with the Swedish Tax Agency (STA) that the subsidiary had relinquished its functions and associated risks to the parent company, thus warranting appropriate compensation.

In case 4775-4777-19 (Datawatch), an intercompany agreement was concluded a year after the acquisition of a Swedish company. The Swedish subsidiary remained the legal owner of the IP and performed R&D functions, while the US parent acted as a distributor and absorbed the residual non-routine profits. The STA argued that the contract terms did not match the actual circumstances, as key business functions and risks shifted to the parent company following the acquisition. The Court agreed, noting that the parent company took control over product development and the strategic decisions attached thereto, concluding that the change of control impacted the distribution of returns within the group.

In case 17-22 (Twilio), a Swedish company was acquired by a US parent company with the primary motive of gaining control over the Swedish subsidiary’s IP through a subsequent five-year licence agreement without any additional compensation due upon reaching the maturity, even if the agreement was extended. The STA deemed that the IP had been transferred to the parent company, despite the subsidiary retaining legal ownership. The administrative courts agreed with the STA in the first instance and on appeal, noting the extensive transfer of functions, assets, and risks to the parent company, conferring full control of the IP. This made it unlikely that the licence agreement would be terminated and the assets returned after the five-year maturity was reached.

On April 10 2024, the Court published another ruling on the subject in case 6754, addressing transfer pricing and the distinction between economic and legal ownership of intangible assets, as well as the allocation of residual and routine profits among companies within a multinational group.

Meda AB, the parent company of an international pharmaceutical group, established a subsidiary in Luxembourg in 2010 (LuxCo). LuxCo was subsequently used for four substantial acquisitions of pharmaceutical IP rights (IPR) from third parties during 2011–12. Following these acquisitions, LuxCo entered into intragroup licensing and distribution agreements with Meda AB concerning these rights. The agreements adhered to Meda Group’s transfer pricing policies, which stipulate that group companies owning certain IPR are considered ‘entrepreneurs’/principals for the products protected under these rights. Consequently, they are entitled to the non-routine residual profits associated with the IPR, while service providers and distributors are deemed low-risk entities warranting routine compensation.

As the IP owner following the acquisitions, LuxCo was entitled to the residual income from holding these IPR, whereas Meda AB and other group companies received an agreed routine compensation for the activities performed in relation to these rights.

The STA argued that the terms agreed between Meda AB and LuxCo did not reflect the accurate delineation of the transaction. The STA contended that only the contractual terms between Meda AB and LuxCo had been considered, while other economically significant circumstances, such as actual decision making and the allocation of risks connected to the acquisitions, were ignored.

The Court maintained that it is necessary to consider all economically relevant circumstances related to the contractual relationship between Meda AB and LuxCo. This means that all dealings between the parties and the actual actions undertaken must be identified and mapped. According to Swedish jurisprudence, circumstances beyond the actual terms of the contract also need to be considered in the examination. Therefore, the existence of an agreement explicitly regulating risk distribution is indecisive; what matters is who has practically controlled the acquisition risks.

According to the minutes of the board meetings of Meda AB and LuxCo, the acquisitions of the IPR were first discussed and decided by the board of Meda AB long before they were mentioned in the subsidiary’s board meeting minutes. The board meeting minutes were not merely formulated as approvals for LuxCo to move forward with the acquisitions but, rather, included personal authorisations from the board and the chairman to Meda AB’s CEO to carry out the acquisitions at a specified acquisition price. More importantly, Meda AB’s board decided to carry out the first acquisition before the subsidiary had started its operations. This acquisition is mentioned in LuxCo’s board minutes for the first time three days before the purchase was completed. Additionally, Meda AB issued a press release about one of the acquisitions before the transaction had been addressed in LuxCo’s board meeting.

The Court concluded that the evidence clearly suggests that the actual decisions were made by Meda AB, where the upper management, which had controlled the acquisition process, was located.

Furthermore, the Court addressed the substance of Meda AB and LuxCo. The high sums involved, combined with the nature of the acquisitions, implied that the acquisition processes must have required significant competence and experience from the acquirer. The investigation revealed that the CEO of Meda AB possesses solid knowledge and experience in the field, as evidenced by the board minutes, indicating that the CEO was ultimately responsible for the acquisitions based on the mandates given by Meda AB’s board.

The STA’s analysis demonstrated that LuxCo’s CEO was involved in the acquisitions but only under the direction of others and thus participated to a limited extent. Additionally, the other employees of LuxCo, who numbered between two and five people at the time of the acquisitions, lacked the capacity, competence, and experience required to carry out the acquisitions. The STA concluded that although LuxCo was the formal contracting party during the acquisitions and thus the legal owner, the acquisition processes and the decisions to acquire the IPR, participation in tendering, and negotiations were actually driven by Meda AB, whereas LuxCo’s decisions merely formalised those already made by Meda AB. Consequently, Meda AB predominantly controlled the risks associated with the acquisitions.

The Court agreed that the actual decisions regarding the acquisitions were made by Meda AB, and the allocation of profits to LuxCo were inconsistent with the economic reality of the transactions, as it would be unlikely that two unrelated parties would agree on such terms. The Court further stated that the returns for controlling these risks should have instead been absorbed by Meda AB, whereof 40% should be allocated to other group companies that had contributed to the IPR, while LuxCo should retain a routine profit for its actual role as a provider of intragroup administrative services.

The bioMérieux, Datawatch, and Twilio cases share a common theme: a shift in the status quo resulting from events such as acquisitions and the conclusion of new intragroup agreements. These events led to the cessation or reduction of business activities, knowledge transfer, a restriction of responsibilities, and a decrease in decision-making authority. In contrast, the Meda case did not involve an event that triggered a change in the responsibilities of the parties involved. Instead, it was characterised by an inaccurate assessment of the contributions made by the legal owner of the IP and an overestimation of the importance of the subsidiary’s board of directors, who did not control the associated risks.

These cases underscore the importance of adhering to market-based principles in profit allocation and transfer pricing within MNEs, highlighting the importance of accurate and transparent agreements that reflect actual transactions and risk distribution between affiliated companies. The cases do not only convey outcomes relating to the acquisition of IPR but can also be extended to any form of decentralisation resulting from acquisitions, changes in leadership, strategic personnel, or relocation thereof. It is therefore crucial to be aware of different functions within an MNE group and how business processes interact to assess whether any decision-making capacity and control over risks have been transferred.

For instance, caution should be exercised with intragroup licensing and contract R&D service arrangements in general, especially concerning the so-called DEMPE (development, enhancement, maintenance, protection, and exploitation) functions defined in the OECD TP Guidelines. Extra care needs to be taken when identifying who actually performs the DEMPE functions, has the decision-making capacity, and exercises control over these functions, consequently assuming the business risks attached thereto.

Cases involving IPR can be particularly delicate, as any extra discretion or mandate conferred to one of the parties or relocation of key personnel involved could be deemed a transfer of functions or assets. This could trigger a shift in economic ownership of IP and subsequently require a reassessment of the relevant intragroup arrangements, as well as the allocation of profits connected to the IP. More importantly, a relocation of responsibilities and the corresponding profits between contract parties on the open market would likely lead to compensation being paid for the party surrendering control and title to non-routine returns, meaning that potential exit taxation consequences must be observed.

Likewise, when making cross-border acquisitions of businesses, various integration issues that could have potential transfer pricing implications may surface. It is therefore necessary to assess whether the post-acquisition integration of the new subsidiary into the rest of the MNE group has any impact on the transfer pricing policies deployed, not only from the perspective of IPR but the business in its entirety. Where it is decided to fully integrate the company into existing intercompany arrangements and align with the relevant transfer pricing models for these set-ups, it is important to ensure that the actual conduct corresponds to the agreed terms and conditions.

In conclusion, Meda and other recent case law in Sweden serve as a crucial reminder for MNEs to meticulously align their transfer pricing practices with the actual conduct and substance of their intragroup dealings. It is imperative that MNE groups maintain transparent and precise agreements that accurately reflect the actual activities and risk management undertaken by each entity within the group. The case emphasises that formal ownership and contractual terms must correspond to the true operational conduct and decision-making processes to ensure fair and equitable distribution of profits.