Federal Fiscal Court supports market support payments: own commercial interest of a parent can substantiate arm’s length treatment

The BFH’s decision

The BFH rejected the classification of such payments as hidden contributions that increase taxable profit. No direct business relationship was required between the grantor and the operating entities receiving the payment. An overall assessment of the circumstances showed that the trademark owner and licensor could benefit economically from increased sales in France. The payment therefore served its own business interests.

The lack of collateral likewise did not preclude arm’s length treatment. A payment that is generally non-repayable creates no repayment claim requiring security. What mattered instead was the expectation of profitability documented in advance and the contractual commitment to continue the business. The fact that the projections were later only partly realised did not invalidate them as a basis for the original decision.

Accounting treatment

The accounting implications are relevant. The BFH did not endorse an unrestricted immediate deduction. By virtue of the 15-year commitment to continue the business, the claimant acquired an intangible asset akin to goodwill in the form of a market development right. The subsidy therefore had to be capitalised and amortised over the asset’s useful life. Accordingly, the accounting treatment of comparable arrangements must be assessed separately in each case.

Practical recommendations

The decision is particularly helpful for licensors and other principal entities seeking to invest in the development or stabilisation of foreign markets in their own commercial interest. To support their tax position, for example during tax audits, companies should maintain robust documentation, in particular:

• the principal’s specific commercial interest, particularly the additional royalty income or other income expectations;
• financial projections and profitability calculations prepared in advance and supported by a clear rationale;
• the link between the payment and clearly defined obligations to develop the market and continue the business;
• the alignment of cost allocation with the functional and risk profiles of the entities involved; and
• the appropriate accounting treatment, particularly whether capitalisation as an intangible asset is required.

The ruling strengthens the arguments supporting payments into existing LRD and distribution structures. However, it does not provide blanket justification for every arrangement absorbing losses or margin reductions of foreign entities.  It remains necessary to demonstrate that each measure serves the principal’s commercial interests and withstands a robust arm’s length analysis.

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