A foreign affiliate’s borrowing of the same company name can entitle a German company to a royalty, even in the absence of an explicit trademark or brand license, according to a letter released by Germany’s Federal Ministry of Finance.
In its published April 7 letter on the transfer pricing consequences of related parties’ use of similar company names, the Federal Ministry of Finance stated that intragroup royalties may be required for company names in part because of their practical similarity to trademarks and brand names. If allowing a foreign affiliate to use the same company name provides an economic benefit for which a recipient would be willing to pay in an arm’s-length transaction, the German entity must be compensated accordingly, the letter says.
The letter is in response to the judgment of January 21, 2016, IR 22/14, by the Bundesfinanzhof (BFH) — Germany’s highest court in tax matters — holding that a foreign affiliate’s use of an abbreviation of the same company name written in the same graphic style is not a license that requires royalty payments. Using a variant of the same name does not represent a “business relationship” as defined by Germany’s Foreign Taxation Act, and therefore the government has no authority to impose a transfer pricing adjustment, according to the court. To warrant a royalty, the arrangement must also transfer trademark rights with a direct connection to the products or services offered, according to the decision.
“The ‘mere’ use of names without the transfer of trademark rights and other intangible assets, which can be directly connected with the use of names in a multinational enterprise group, is generally not payable according to the above-cited BFH case law,” according to the letter. This holding, however, applies only “if no economic advantages arise from the use of the name alone, for which, according to the principle of comparability, the person authorized to use would demand a fee and for which the user would be willing to pay a fee,” it says.
The test is whether the arrangement provides the beneficiary with the ex ante expectation of an economic benefit and a conscientious manager would require compensation in an arm's-length transaction for granting access to make that benefit available, according to the letter. Access to the same company name can offer economic benefits similar to those transferred in brand and trademark licenses, and in many cases company and brand names overlap, it says. For the same reasons, company names are often inseparable from the trademarks or brand names they hold and must therefore be valued in the aggregate. Under the Foreign Taxation Act, transfers of significant intangible assets that have no reliable comparables must be priced based on the intangible’s risk-adjusted profit potential and the parties’ functions.
“A brand should in particular be a binding presentation of the image of a product or a service, such as reliability, technical quality, and trust in certain properties. It thus also represents the intangible assets contained in the product or service,” the letter says. “If the company names given for use and the mark granted are the same, no distinction shall be made for the valuation and the assessments will be uniform.”
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