Transfer Pricing Of Intangibles

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Transfer Pricing Of Intangibles

Article by Andreas Köster-Böckenförde and Alexa Clauss

I. Introduction

The development, transfer, and licensing of intangibles are part and parcel of cross-border transactions among related parties. The allocation of costs and revenues, risks and chances, has a fundamental impact on the tax liability of multinational companies. Therefore, enterprises should pay special attention to transfer-pricing strategies, particularly with regard to intangible assets. But determining adequate transfer prices is extremely difficult. And the national fiscal authorities closely examine how companies deal with this matter, paying particular attention to whether they comply with the documentation rules.

II. The Definition of "Intangible Property"

When determining transfer prices, the first step is to identify the intangibles. Since there is no universal, abstract definition of "intangible assets" in German legislation or administration, the identification of intangibles often presents serious difficulties. The applicable rules and guidelines comprise only enumerations of intangibles.1

Under Section 266.II.A of the German Commercial Code (Handelsgesetzbuch), "intangibles" are identified as concessions, industrial property and similar rights, the licenses referring to such rights, goodwill, and advance payments. Section 5 of the 1983 Administrative Guidelines lists industrial property and similar rights, design protection rights, copyrights, business secrets, and other rights and benefits not legally protected.2 The 2005 Administrative Guidelines discuss the transfer of intangibles without defining the term at all.3

In several judgments, the Federal Tax Court defined "intangibles" as "incorporeal objects."4 Nevertheless, in most cases the Court merely gives examples (the right to supply, options, concessions,5 software6) without providing a more general or abstract definition.

The literature tries to bridge this gap, holding that the lack of physical substance distinguishes intangible from tangible assets. Commentators further define "intangible assets" by explaining what they are not: neither material fixed assets nor financial assets.7 While financial assets obviously have no physical su...

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