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An important decision by a lower German tax court appeared in the professional journals in mid-1999 (Tax Court of Rheinland-Pfalz judgement of 14 December 1998, DStRE 1999, 597). The decision's headnote reads as follows:

"Royalties based on sales paid by a domestic group corporation to another group corporation for the use of the group name and logo as trademarks generally constitute constructive dividends. Their deductibility as business expenses is possible, if at all, only when the economic significance of the group name [as such] is eclipsed by its significance as a registered trademark."

The case involved the licensing of the group logo and elements of the group name to the German subsidiary of a British manufacturer of automotive brake systems and parts. The licensed intangibles were registered as trademarks. The license fee was 1.5 % of sales. The German subsidiary used the trademarks free of charge from 1985 to mid 1991, when a royalty fee was agreed on for the first time.

The court stated that trademarks, brands, logos etc., to the extent representing component parts of the group name, were generally provided to group members as a function of the shareholder relationship. They were part of the general group support, an inherent benefit of membership in a controlled group, not something for which an arm's length charge could be made. Whether the trademarks were licensed by the group parent or, as in the present case, by an affiliate, was irrelevant.

The court considered whether the trademarks were here of paramount economic importance so as to permit an arm's length charge by way of exception. The German subsidiary sold primarily to automobile manufacturers. The court stated that the purchasing decisions of automobile manufacturers were determined solely by considerations of price, quality, and reliability, hence that the trademarks attached to the products were irrelevant.

The court did note a connection between a reputation for quality, reliability, etc. and brand names, saying that this association was built up ("earned") over a period of time. It appeared to say, however, that the subsidiary had created its own reputation for quality in the years prior to the license agreement.

An appeal is pending before the Federal Tax Court. The lower court permitted appeal because of the fundamental importance of the new issues posed by the case.

The decision rests on a distinction between products for which trademarks and brand names are a major factor in the customer's purchasing decision (an example might be brand name clothing) and products as to which trademarks which are irrelevant because the customer is exclusively concerned with objective product characteristics such as price, quality, and reliability. Such a distinction between what one might call "quality-driven" and "image-driven" purchasing decisions is questionable. As the court itself states, a reputation for quality and dependability must be earned. Having been earned, it is symbolised by the brand name and logo.

Considerable significance attaches to the Federal Tax Court's ruling on the appeal.

For further information, please send a fax or an e-mail stating your inquiry to KPMG Frankfurt, attn. Christian Looks: Fax +49-(0)69-9587-2262, e-mail You may also send an e-mail to KPMG Germany by clicking the Contract Contributor button on this screen.

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