On 7 April 2017, the Federal Ministry of Finance published an administrative instruction on the use of names and the transfer of trademark rights within the group. This is the tax authorities' response to judgements by the BFH[1]which had caused uncertainty in the run-up to the event.
The letter first distinguishes between the "mere" use of a name and the transfer of trade mark rights and other intangible assets (e.g. know-how) that may be directly associated with the use of a name and discusses the existence of an agreement under company law.
The letter also stipulates that the general documentation obligations of a taxpayer pursuant to Section 90 (3) AO include a list of the material intangible assets that they own, use or transfer to someone else for use. Associated contracts or their conclusion are to be regarded as extraordinary business transactions and must therefore be documented promptly.
In the opinion of the BFH, a "mere" use of a name is[2] is always not eligible for remuneration if it does not result in any economic benefits for which a third party would pay a fee. However, if a trademark right is associated with the use and this has a sales-promoting effect or contributes to the fact that a higher price can be achieved on the market, then it is eligible for remuneration in terms of reason and amount.
In particular, the ability to receive remuneration on the merits should already exist if a trademark has been registered, as there is then the possibility of a trademark infringement or the connection from the use. The ability to charge a fee in terms of amount can only be assumed if an economic benefit can be expected from the use; what is relevant is the ex-ante expectation, not the actual realisation of the benefit.
In connection with pure distribution activities (e.g. a distribution company only sells the products), remuneration for the use of the brand should generally not be considered and should be regarded as already included in the transfer price. In the case of commercial use, i.e. a manufacturing group unit resells a product directly without the brand owner being remunerated for the use of the brand, separate remuneration for the use of the brand is provided for.
In terms of methodology, the BMF letter refers to the so-called hypothetical arm's length comparison to determine an arm's length compliant licence fee. The letter applies to all cross-border transactions, regardless of whether the licensor or licensee is domiciled in Germany or abroad.
It is to be expected that the tax authorities will increasingly take up these cases in tax audits and demand licence payments, especially in outbound situations.
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[1] Judgements of 21.1.2016 (I R 22/14) and 9.8.2000 (I R 12/99)
[2] Judgement of 21 January 2016 (loc. cit.)
Guest article by Carsten Schmid, Transfer Pricing & Friends GmbH, Stuttgart. Further information is available at www.tpa-global.com.
