Markus Greinert
Flick Gocke Schaumburg

Susann Metzner
Flick Gocke Schaumburg

Intangibles play a significant and dual role in the determination of arm’s length transfer prices for cross-border transactions between related parties. On the one hand, the ownership of intangibles is one of the key determinants for the distribution of the total profit of the multinational group. If a related party owns intangibles that significantly contribute to the value creation of the group, this entity is generally entitled to receive (part of) the residual profits of the group, i.e. the remaining profits after compensating all routine activities. Otherwise, if a company does not hold any right in any intangibles, it would in general only be entitled to a low routine return for the functions performed and risks assumed. The ownership in an intangible is thus a crucial element when setting up an arm’s length transfer pricing system. This connection between ownership in intangibles and the entitlement to the residual profits of the group, however, has led to transfer pricing systems where a great share of the group’s total profit is allocated to a group company in a low-tax country which does not perform any functions except that it holds the legal ownership in the intangible.