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Germany’s Finance Ministry (BMF) has issued guidelines clarifying when a parent company can charge tax-deductible royalty fees to subsidiaries for trademark licenses, in light of a ruling from the country’s top tax court, the Federal Finance Court (BFH).
The BMF said it aims to clarify the distinction between a company’s “mere” use of a group name—where a license fee wouldn’t be tax deductible—and situations where a parent company could charge a subsidiary for a tax-deductible license fee.
The April 7 guidance is needed because practitioners can sometimes find it challenging to differentiate between the two scenarios, said attorneys.
“It’s quite a thin line, so the advice is fairly technical,” Thomas Busching, a tax partner at Squire Patton Boggs in Frankfurt, told Bloomberg BNA in an April 11 telephone interview.
“On the one hand, they say a license fee for a group name or a company name is not deductible, but the tax authorities also recognize that they may also be identical with a trademark,” he added. “So where do you draw the line?”
The BFH confirmed in its Jan. 21, 2016, ruling an earlier decision from 2000 that dealt with the question of tax-deductible royalty fees for the use of company names, said attorneys.
“Back then, the BFH already confirmed the principle that when a subsidiary is simply and exclusively using the brand of the parent in its company name, then the parent cannot charge a fee that would be recognized as a tax expense of the subsidiary,” Bodo Bender, a tax partner at White & Case in Frankfurt, told Bloomberg BNA in an April 12 telephone interview.
“It’s only possible to charge a fee when there is some active economic use of the brand or trademark—such as manufacturing products or using the brand for services in the relevant foreign jurisdiction,” he added.
But due to changes that were made to Section 1 of Germany’s Foreign Tax Act (AStG) in the meantime, questions were raised as to whether this ruling would still apply under the revised Foreign Tax Act.
“Essentially, the BFH confirmed this,” said Bender. “And now the BMF said in its decree that it will continue to apply the principles established by the BFH for all open cases, also under the revised AStG.”
The court’s ruling—and by turn BMF decree—also applies to German subsidiaries of foreign companies as well as German parent companies with subsidiaries abroad, he added.
The advice laid out in the Finance Ministry’s decree should help companies interpret the finance court’s verdict on this matter, said attorneys.
“A couple of the guidelines are pretty practical,” said Busching. “This name or the trademark needs to have some sort of value—and a third-party would be willing to pay for the use of that trademark for it to be tax deductible.”
The BMF explains if a company has a German subsidiary that only serves as a distributor of products or services, the parent company cannot charge a tax-deductible license fee for the use of the company name.
“Apple would be a wonderful example,” said Busching. “Apple doesn’t have any kind of manufacturing here in Germany, so anything they do here is basically just distribution.”
As a result, the license fee for the use of the Apple trademark wouldn’t be tax deductible.
Instead, tax authorities said the use of a brand name in a situation like this would be factored into the price of the product the German subsidiary pays to the US.
“So German tax authorities wouldn’t allow a separate fee,” said Busching. “Because that fee for the use of the trademark is already factored into the general price for the distribution of the product.”
On the other hand, subsidiaries that use a brand name for more entrepreneurial purposes like manufacturing can be charged a tax-deductible fee, the BMF said.
“If you use it for manufacturing or service activities—if you use the brand or intellectual property for some further economic and entrepreneurial activity—then a fee can and should be charged,” Bender said.
But determining which of these situations applies isn’t always so clear cut, Bender added.
“It’s a question of definitions—what is a service activity and what is just a distribution activity?” he said. “It’s easy when you distribute goods produced by another group entity, but if you ‘distribute’ know-how, at the same time you often render services in relation to this know-how.”
Then it becomes even more important how companies apply transfer pricing and which method they apply within the group, he added.
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