A recent court case in Sweden has raised questions about how to attribute profits related to intangible assets, like trademarks. The case involved a Swedish company (AB) that paid a Maltese group company (Corp) for the use of a trademark owned by Corp. The Swedish Tax Agency (STA) argued that Corp was not entitled to any licensing fees because it did not perform any functions related to the development, enhancement, maintenance, protection, or exploitation (DEMPE) of the trademark.
Court ruling has implications for companies paying licensing fees
The County Administrative Court in Sweden agreed with the STA and ruled that Corp was not entitled to the licensing fees. This case highlights the difficulties of determining how to allocate profits related to intangible assets and the importance of ensuring that fair compensation is paid for the use of these assets. Companies that pay licensing fees for intangible assets should be aware of this ruling and consider reviewing their tax structures to ensure compliance with relevant regulations.
Ruling based on OECD Transfer Pricing Guidelines
The court based its ruling on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the TP Guidelines), specifically sections 6.32, 6.40-42, and 6.47-48. The TP Guidelines state that the owner of a trademark is entitled to income accrued as a result of possessing the ownership of the trademark. The most common example of such revenue streams is through license fees, which are often priced as a percentage of the turnover generated. If another group company contributes to the DEMPE functions of the trademark, it is entitled to compensation from the owner of the trademark.
Challenges of attributing intangible-related profits
This case demonstrates the challenges of attributing intangible-related profits in the current business environment. The County Administrative Court in Sweden acknowledged that legal ownership can be separated from the rights to retain the full economic returns from intangibles. However, the court also stated that the type of compensation due to the owner of a trademark will depend on the DEMPE functions it performs. Companies paying licensing fees for intangible assets should be aware of this ruling and consider its implications for their own business practices.