Type of remuneration established within transaction should reflect the functional profile

The functional analysis is a key item of the transfer pricing documentation. It determines precisely the functional profile of the parties to the controlled transaction and introduces the risks involved. Consequently, it supports determining the arm’s length remuneration due. An example of how a remuneration – reflecting the functional profile – was challenged by tax authorities is addressed in the decision of the District Administrative Court in Poznań of 7 June 2022 (reference number: I SA/Po 100/22).

The company performed functions and incurred costs related to the development, maintenance and use of a trademark. It then transferred the rights to the trademark it had promoted to related entities – including to obtain support in the field of marketing and advertising activities of the capital group. After the transfer, the company paid to related entities license fees related to the use of trademarks as part of its business. The remuneration was defined as a percentage of revenues, but in the opinion of tax authority, these companies did not participate in generating them.

The authority claimed that the licensors – contrary to the agreement – performed no tasks related to advertising and marketing aimed at increasing the recognition of the entrusted trademark, which were previously performed by the company. Also, the licensors did not establish a separate marketing department for this purpose and did not hire specialized employees – so, their actual operations only involved simple administrative activities. Therefore, related entities were entitled only to remuneration for their functions in the form of reimbursement of costs incurred increased by the arm’s length margin.

In practice it may happen that contractual provisions differ from the actual activities made with related entities. However, the substance over form is the prevailing approach. The OECD Guidelines also state that if the behavior of the parties to the transaction is not consistent with the economically significant provisions of the contract, further analysis is necessary to determine the actual course of the transaction, including an analysis of the functions performed by the parties, risks incurred and assets involved.

The authority proved that – despite the contractual provisions – it was in fact the company which was the economic owner of the trademark in the controlled period, while the licensors performed only administrative and legal functions for the company. As a result, the benefits were disproportionate to the (only) function performed by the licensors: the function of legal protection of the trademark. The District Administrative Court upheld tax authority’s decision. It admitted that the authority adequately demonstrated that the terms of the transaction as a result of the existing relations differed from the terms that would have been established by third parties. As a consequence, the company reported income lower than the one to be expected if the relationship had not existed.


The functional analysis and determination of the functional profile are necessary to establish the arm’s length remuneration level. Incorrectly describing functional profile or establishing remuneration inadequately to the profile triggers a major risk in the event of a potential tax audit.

In addition, the analyzed case confirms that intangible assets – like licenses – are still in the spotlight of the authorities. Inspections in this area are becoming increasingly detailed.

We recommend that all transactions involving the transfer of intangible assets be analyzed in terms of their legal and economic ownership. The aim is to properly account for this type of transactions from the perspective of transfer pricing regulations. It is extremely important to make the so-called DEMPE analysis provided for in the OECD guidelines. It examines the participation of an entity (entities) in the performance of functions like: development, improvement, maintenance, protection and use of intangible assets. The analysis supports determining the economic ownership of an asset.

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