In its decision dated 27/11/2020, RA 2019/15/0162, the Austrian Administrative Supreme Court (Verwaltungsgerichtshof) had to deal with a trademark licensing between Malta and Austria. The Austrian trading company MCo had demerged its business and real estate to the Austrian company XCo in 2007. The trademarks stayed with MCo. In a next step, the management of MCo and the trademarks were transferred to a Maltese permanent establishment of MCo. In an Austrian tax audit, the tax authorities denied the deductibility of the licence payments of approximately MEUR 50 for 2008 and 2009 from XCo to MCo. The Austrian Fiscal Court and the Austrian Supreme Court also denied the deductibility of the licence payments and attributed the beneficial ownership of the trademarks to XCo.
Arguments brought forward by XCo
XCo had argued that the trademarks were generated by MCo and registered in the name of MCo. Furthermore, MCo was in charge of the international trademark protection, exercised its functions as an owner and bore the risk of an owner.
Reasons for the decision of the Supreme Court
The main reasoning for the attribution of the beneficial ownership to XCo was that the main functions and decisions regarding the use of the trademarks were allocated to the – formal licensee – XCo. Based on the decision of the Supreme Court, the following points seemed crucial for the attribution of the beneficial ownership to XCo:
- The activities of XCo in Austria were mainly relevant for the appreciation of value of the trademarks, as XCo bore the substantial part of the advertising and marketing expenses. Whilst XCo's expenses, in this regard, amounted to EUR 56 or 68 million, MCo's marketing expenses amounted to not even EUR 500,000 in the respective years. Furthermore, the advertising strategy was based on the requirements of XCo and other group companies (the licensees).
- No new trademarks have been generated since the re-structuring. Additionally, the main aspects of the licence agreements and the value of the trademarks had already been decided before the re-structuring.
- Whilst the Maltese directors of MCo were present for meetings in Austria, they only had administrative and support functions. They had no authority to decide on marketing activities.
- MCo only had one employee who was in charge of trademark administration, registration, licence agreements and oversight of the brand activities.
- MCo only had one full-time employee and 7 part-timers. Hence, the personnel expenses were well below EUR 100,000 each year. Comparing this with the trademarks worth almost EUR 400 million, the court stated that there was an imbalance. Hence, the decisive functions as regards brand administration, maintenance and management must have been with other group companies or external specialists (lawyers, advertising agencies), whilst MCo only had supporting functions.
Unfortunately, the decision of the Fiscal Court has not been made publicly available. It would have offered a much better view on the facts of the case and the argumentation of XCo than the decision of the Supreme Court. Nevertheless, the decision should be analysed as regards any comparable structure. Especially with IP structures in low tax jurisdictions, taxpayers must look very closely as to whether the substance and the substance and risk profile are in a balanced relationship with the income attributed to that entity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.