In April 2017, the German Federal Ministry of Finance published a circular regarding the use of the company name and trademark licensing. This circular is in response to a decision of the German Federal Tax Court on 21 January 2016 and provides guidance on the application of the arm’s length principle under §1 of the German Foreign Tax Act with regard to the license of a trademark which is identical to the group name. In particular, the German Federal Tax Court has decided that the mere use of a company name (not a product related trademark) does not qualify as a business transaction under §1(4) of the German Foreign Tax Act.
Basic principle
According to the new circular, a distinction has to be drawn between the use of a company symbol or company name and the use of a product specific trademark. Accordingly, the sole use of a company symbol or company name without the license of a (product related) trademark does not, in principle, qualify as an intercompany transaction that needs to be remunerated under the arm’s length principle. However, the use of a company symbol or company name should be remunerated where economic benefits (e.g. sales promotion) result from the use of this company symbol or name. In this case, the possibility of excluding a third party from the use of the respective company symbol or name constitutes a substantial criterion for receiving economic benefits. Irrespective of the requirement to charge royalties, the license of a trademark should be assessed as an extraordinary business transaction under §3 (2) of the German Regulations Regarding the Documentation of Profit Allocations in connection with §90 (3) of the German General Fiscal Law. Therefore, proper transfer pricing documentation should be prepared in any case.
Determination of the royalty rate
The new circular also provides guidance on determining the royalty rate. In particular, the use of the company symbol or company name should be remunerated if the benefitting entity could reasonably expect an economic advantage from the use of the company symbol or company name. Generally, if the company symbol or company name is solely used within the sales activities of the group and, in this context, only products of the multinational group are sold, no independent benefit is attributed to the use of the company symbol or company name. In this case, the purchasing price of the intercompany sales entity already includes remuneration for the use of the intangible and, therefore, no additional royalty needs to be paid. However, this would change if the group entity produced goods and provided services on the open market and, for this purpose, the use of the company symbol or company name is of great relevance.
Finally and with respect to the application of arm’s length terms, the Finance Ministry states that the royalty rate should be determined on the basis of the so called hypothetical arm’s length principle in accordance with §1 (3) sentences 5 ff. of the German Foreign Tax Act. This means, that the transfer price should be the price that is most likely to accord with the arm’s length principle based on a true estimation considering the perspective of both parties. In this case, the amount of the claim for damages would not be in accordance with the arm’s length principle. However, royalty rates may be unreasonable insofar as the applied royalty rates result in a lasting or permanent loss to the licensee.
The administrative guidelines issued by the Finance Ministry apply to all comparable cross-border cases, irrespective of whether the licensee or licensor are domestic or foreign companies.
