EUROPE-WIDE Trends and Developments Contributed by: Munshya Mupela, Semra Altıntaş, Shirley Li and Joyce Lo, TPA Global
Key takeaways • Funding or holding IP alone does not justify returns. • Courts may deny royalties when DEMPE substance cannot be demonstrated. • Paper IP ownership structures face significant risk if not supported by functional evidence. This is one of the strongest European signals that substance must follow returns, aligning Sweden with OECD principles established in the wake of its Base Erosion and Profit Shifting (BEPS) project. Italy: group brand royalty cases Italy has produced several large cases concerning brand royalties within multinational groups. These cases typically involve an Italian or foreign entity pay - ing royalties for the use of the group’s brand. Tax authorities have often questioned whether the sup - posed brand owner actually performs DEMPE func - tions related to brand management. Key issues The central dispute is whether “the mere use of a group brand justifies a royalty under the arm’s length principle”. Authorities and courts evaluate whether: • the brand owner actively enhances, maintains and protects the brand; • the brand owner is simply a legal owner or one that employs people with real branding capabilities; and • the observed behaviours match contractual claims? Court’s view Case outcomes have been mixed, reflecting differ - ences in factual evidence. Some courts sided with taxpayers where DEMPE analyses were insufficiently developed by the tax authorities. Others emphasised that legal ownership is not enough and that brand owners must prove functional involvement in DEMPE activities. Notably, the Italian courts highlighted that “the sim - ple recognition of group membership does not justify a royalty”, highlighting that routine use of a shared group brand is often not a royalty-worthy transaction in itself.
Key takeaways • Use of a group brand does not automatically justify a royalty. • Courts expect clear evidence of DEMPE activities by the brand owner. • Where such evidence is lacking, the royalties risk being disallowed. Italy’s cases reinforce the principle that marketing- related intangibles require real strategic and mana - gerial functions, not just passive ownership. Global cases illustrating the same DEMPE logic Although this article focuses on Europe, it is helpful to note that DEMPE jurisprudence globally reflects these trends. India – Mercedes Benz advertising, marketing and promotion case A subsidiary incurred heavy advertising and marketing expenses, and authorities argued these created brand intangibles for the parent. The tribunal rejected super - ficial DEMPE reasoning and required a full functional analysis instead, holding that marketing expenditure alone does not constitute DEMPE. Australia – PepsiCo case Even when a contract did not explicitly state a royalty, the lower courts recharacterised part of the payment as a deemed royalty because economic substance indicated valuable IP was being remunerated. How - ever, the High Court of Australia ultimately overturned this view, holding that the payments were for physical goods (the concentrate used to make Pepsi) rather than royalties and therefore were not subject to royalty withholding tax. India – Netflix case Authorities attempted to recharacterise Netflix India as an IP owner entitled to 43% of global revenue. The tribunal rejected this, stating that operational importance does not imply DEMPE and that Netflix’s content and technology DEMPE activities occurred outside India. Together, all of these cases show a global judicial alignment around DEMPE – ie, returns follow people, control and substance.
68 CHAMBERS.COM
Powered by FlippingBook