Transfer pricing: High Court rejects deductibility of trademark royalties of Adecco’s Danish subsidiary

Adecco A/S, the Danish subsidiary of Swiss staffing multinational Adecco SA, paid trademark royalties of 2% on revenues in Denmark from low-skilled staff and 4% from professional staff.

In a recent landmark decision, the Danish High Court has rejected the tax deductibility of such trademark royalties, thereby following the reasoning of Danish tax authority SKAT. Among other things, the Court took issue with the following aspects of Adecco’s case:

Adecco A/S had realized consistent losses over the period prior to the tax audit. The court questioned if an unrelated party had paid royalties for the use of a trademark in a similar loss-making situation.

In a previous period, the royalty rate was 1.5% on all revenues. The Swiss parent had justified the increase with a new business model requiring higher investments on intangible assets. The financial statements of Adecco SA however showed lower cost.

The comparable transactions brought forward by Adecco SA were franchise royalty rates of Adecco’s US subsidiaries with 39 unrelated franchisees. The court rejected the results of these CUTs for various reasons:

• The interquartile range analysis of these 39 cases showed a high bandwidth.
• They were franchise agreements.
• Staffing markets show national characteristics, and all of the CUTs were in the US.

The benefits from using the licensed trademarks were not sufficiently substantiated. Adecco A/S incurred significant own marketing costs. Moreover, the TP documentation stated that the staffing market was competitive, with little customer loyalty.

The TP documentation of Adecco was unspecific to the Danish subsidiary and market. Moreover, the taxpayer failed to respond to some of the Court’s questions.

As a conclusion, TP professionals must make sure that the documentation and the comparables are specific enough to the country and relevant market. Interestingly, a peer group analysis on the temporary staffing sector performed in 2014 with comparable data from MARKABLES showed median and mean royalty rates of 0.7% and 1.0% from 25 different cases. Customer relations are considered two times more important than brand.

Original documents on the case can be found here, and here.