Transfer of valuable intangibles

Last week we provided a second opinion to an accounting firm in respect of the envisaged transfer of valuable intangibles of one of its clients, a MNE, to a Luxembourg company. The MNE manufactured and distributed products. The value of the products was not determined by the technical features of the products, but rather by the brand name and exposure. The MNE wanted to differentiate itself from its competitors through the development of brand names with great value, by implementing a carefully developed and expensive marketing strategy. The brand names are owned by X BV in The Netherlands. The development, maintenance and execution of a worldwide marketing strategy are the main value drivers of the MNE, performed by 275 employees at X BV’s Netherlands head office. The value of the brand names resulted in a high consumer price for the products. X BV’s head office also provides for central services for the group affiliates (e.g. human resource management, legal, tax). The products are manufactured by affiliates under contract manufacturing arrangements with X BV. They are distributed by affiliates who purchase them from X BV. After having allocated an arm’s length remuneration to the contract manufacturers and distributors the profits derived by X BV are considered to be the remuneration for the intangibles, marketing activities and central services of X BV.


12 Dec. '17
Patrick T.F. Schrievers

Last week we provided a second opinion to an accounting firm in respect of the envisaged transfer of valuable intangibles of one of its clients, a MNE, to a Luxembourg company. The MNE manufactured and distributed products. The value of the products was not determined by the technical features of the products, but rather by the brand name and exposure. The MNE wanted to differentiate itself from its competitors through the development of brand names with great value, by implementing a carefully developed and expensive marketing strategy. The brand names are owned by X BV in The Netherlands. The development, maintenance and execution of a worldwide marketing strategy are the main value drivers of the MNE, performed by 275 employees at X BV’s Netherlands head office. The value of the brand names resulted in a high consumer price for the products. X BV’s head office also provides for central services for the group affiliates (e.g. human resource management, legal, tax). The products are manufactured by affiliates under contract manufacturing arrangements with X BV. They are distributed by affiliates who purchase them from X BV. After having allocated an arm’s length remuneration to the contract manufacturers and distributors the profits derived by X BV are considered to be the remuneration for the intangibles, marketing activities and central services of X BV.

The MNE envisaged to transfer the brand names to a newly set up affiliate, Z SARL in Luxembourg in exchange for a lump sum payment. After the restructuring, X BV is remunerated on a cost plus basis for the services it performs for Z SARL and the rest of the group. The remuneration of the affiliated contract manufacturers and distributors remains the same. The excess profits after remuneration of the contract manufacturers, distributors, and X BV head office services are paid to Z SARL. From a transfer pricing and comparability analysis we have drawn the following conclusions: • To start off a search (high-level: US, Canada and pan-European data) showed that there was / is no reliable evidence from uncontrolled comparable transactions of the ownership of brand names and attached risks being attributed between independent parties in the same manner as in the controlled transaction between X BV and Z SARL. • Z SARL being managed by a local trust company does not have people (employees or directors) who have the authority to (effectively) perform control functions in relation to the risks associated with the strategic development of the brand names. It also does not have the financial or economic capacity to bear these risks. • High ranking officials from X BV’s head office fly to Z SARL twice a year to formally validate the strategic decisions necessary to operate the company. These decisions are prepared by X BV’s head office in The Netherlands before the meetings take place in Luxembourg. The MNE considers that these activities are service activities performed by the Netherlands head office for Z SARL. They are remunerated at cost plus in the same way as the central services rendered to all group members (e.g. human resource management, legal, tax). • The development, maintenance and execution of the worldwide marketing strategy are still performed by the same employees of X BV’s head office but will instead be remunerated on a cost plus basis. X BV however does not have a contractual incentive to maximize the value of the brand names or the market share because it is remunerated on a cost plus basis.

We have recommended the client not to follow-up on this advice since in The Netherlands, but probably in most OECD countries, these arrangements will not be recognized. In this respect we have not even assumed the possible application of general anti-avoidance rules and the question about Z SARL’s place of effective management. We have also commented that we question the ethical nature of this particular tax advice. It goes beyond the intent of the law and involves a deliberate approach to exploit the tax system. Only if Z SARL would actively perform the development, maintenance and execution of a worldwide marketing strategy and the employees of Z SARL would have the authority to and actually perform control functions in relation to the risks associated with the strategic development of the brand names, the transaction could be recognized for transfer pricing purposes as it has economic substance.

We, NovioTax, being a research based advisory firm, are continuously working on increasing our knowledge base, and its consequences for companies doing business globally. Through research, we develop our intellectual capital. Every member of NovioTax is for instance required to participate in research activities. We believe that through the use of research we will discover new ideas and opportunities that support our clients. We are currently working on several Research Papers that will be released via our website.


Patrick T.F. Schrievers

Patrick T.F. Schrievers is a tax lawyer and member of the Dutch Association of Tax Advisers (NOB) and the International Fiscal Association (IFA).

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