In its decision of 27.11.2020 (Ra 2019/15/0162) the Austrian Administrative Court (Verwaltungsgerichtshof) had to deal with the transfer of the trade mark rights of a large Austrian trading group to a group-owned company, which had relocated to Malta.

In doing so, it ruled on the deductibility of intra-group royalty payments made to a company based in Malta. Previously, both the tax audit and the Federal Fiscal Court (unpublished decision of 19.12.2018, Zl. RV/5100076/2014) had rejected the tax attribution of the trade mark rights to Malta and so their tax deductibility.

What happened?

In this case, the trade mark rights (amounting to approx. € 380 million) of a well-known Austrian trading group were held by a company situated in Malta following an intra-group demerger. The intra-group demerger resulted in a spin-off of the trading operations of the company situated in Austria. The trade mark rights remained with the company, which was relocated to Malta. Based on a license agreement, annual (revenue-based) licence fees of approximately € 50 million were paid by the operating Austrian company to the group-owned Maltese company for the use of the trade mark rights.

The Austrian company argued that the trade marks were not attributable to it. It said that the Maltese company created and registered the trade marks, which were in the Maltese company's name. It also pointed out that the Maltese company is responsible for international trade mark protection, bearing the ownership risk and carrying out ownership functions.

What did the court say?

In an extraordinary appeal, the Austrian Administrative Court denied that the royalties paid by Austria to Malta qualified as tax-deductible operating expenses because the Maltese company had not got economic ownership of the trade mark rights within the meaning of § 24 BAO (Austrian Federal Tax Code). The Austrian Administrative Court assumed that the trade mark company held the trade mark rights only as a trustee.

The decisive factor was that the essential decision-making powers were consistently held by the Austrian company. In the opinion of the Austrian Administrative Court, the Maltese company did not have any endowed staff with essential decision-making powers – according to the trade mark assets – to take care of trade mark administration. The court stated that the Maltese managing directors did not have any decision-making authority regarding marketing activities, and they only had administrative and support functions. It was also decisive for the court that the increase in brand value was almost exclusively attributable to the Austrian company due to large advertising campaigns.

What does this mean for you?

The case illustrates that national tax authorities are willing to "look behind" tax arrangements to determine their legality. EU Directive 2021/514 (the "DAC 7 Directive"), which is to be implemented into member state's national laws by 31 December 2022 and will be applicable as of 1 January 2023 will result in an automatic exchange of information on royalty payments flowing between EU member states. As a result, it can be assumed that the national tax authorities will be looking closely at tax arrangements in the near future.