Tax planning. Transactions on the transfer of intellectual property rights
Since 2015, there have been signs of new approaches in the field of tax control of foreign companies and of companies with foreign participation in Russia, oriented towards methods to prevent erosion of the tax base and the transfer of profits to low-tax jurisdictions.
In 2015-2016 the courts made several important decisions, evidencing the new approaches of the tax authorities to the taxation of transactions on the transfer of intellectual property rights between foreign companies and the Russian companies interdependent with such foreign companies. Tax authorities and courts are beginning to use the concepts of “dependent agents” and “beneficial owners” (the actual recipients of the income), set out in the Model Convention of the Organisation for Economic Cooperation and Development (OECD) for the Avoidance of Double Taxation, and in comments on it.
The supervisory authorities are actively starting to use opportunities for the exchange of information with foreign states, and courts when considering tax-related cases and are no longer limiting themselves to a formal assessment of compliance with the legislation, but relying upon the priority of economic substance over the legal form.
Nowadays, the payment of royalties for the provision of databases, trademarks or know-how may, in certain circumstances, may be perceived as a method of receiving unjustified tax benefits or of tax evasion.
Businesses will have thoroughly to analyse their methods of tax planning, and, possibly, revise their approaches to this instrument.
We offer to evaluate your company’s assessment of the level of tax risk related to current agreements on the transfer of rights using the following tests:
With regard to the form of transaction
Whether the legal form corresponds to the content of the business transaction
With regard to the object of the transaction
Whether the set of transferred rights is an amount of intellectual property and whether the use of such rights matches the peculiarities of the company’s business activity
With regard to the beneficial owner
Whether the counterparty to a transaction is the actual recipient of the income, whether an additional tax benefit has been received
With regard to the dependent agent
Whether there are grounds to classify a company’s activity as an activity of a dependent agent of the beneficial owner
With regard to an assessment of economic justification
Assessment of the economic rationale used for payment calculation, its relationship to the functions performed by the parties, the accepted risks, the assets used and the financial result received on the basis of using the rights
With regard to conformity with market prices
Assessment of conformity of the transfer pricing of the transaction with the market level, using the methods indicated in section V.1. of the Tax Code of the Russian Federation
The result of these tests is a reasoned assessment of a company's resistance to tax risks, related to peculiarities of any transactions on the transfer of intellectual property rights.
Recommendations will be developed to minimise the risk of tax disputes when concluding transactions related to intellectual property items:
- with regard to planned transactions — recommendations on the market level of remuneration and a determination of the companies that are eligible to receive income from intangible assets;
- with regard to current transactions — it is reasonable to use the results of the tests to develop responses to the risks identified.