SAT’s perspective on the payment of royalties

What is the SAT's criteria regarding the payment of royalties between related parties?

The SAT (Servicio de Administración Tributaria – Tax Administration Service), based on the OECD Transfer Pricing Guidelines, considers double expenses when a legal entity pays royalties to the legal owner and expenses for advertising, development, improvement, maintenance, protection, and exploitation of the intangible asset. It is because the SAT considers this person as the “economic owner” of the trademark or patent. 

1. Transfer Pricing

Concerning transfer pricing, the legal owner is the person who, for legal purposes, has registered the intangible asset on its own behalf. However, the OECD indicates that simple legal ownership will not be sufficient to be the beneficiary of the income derived from the licensing or disposal of the intangible.  

If the legal owner does not perform the functions, does not contribute to the assets, or does not incur the risks related to the development, improvement, maintenance, protection, and exploitation of the intangible asset (of which it is the owner), the person performing these activities could acquire the economic ownership of this intangible asset or, at least, be remunerated for the activities, which would result in changes in the consideration for the disposal or use of the intangible asset and the taxable base of the participants. 

2. SAT Criteria

In 2018, the SAT published criterion 39/ISR/NV, which mentions that in the analysis of functions, activities, assets, and risks; taxpayers that enter into transactions with related parties must identify and consider valuable contributions such as intangibles created or used, or comparability factors that define some competitive advantage of the business.  

3. OECD Guidelines

These Guidelines propose minimum assumptions of analysis to the Arm’s Length condition of transactions involving intangible assets, which entails knowing in detail: 

  • The intangible asset, object of the transaction  
  • The related parties to whom the legal ownership of the intangible assets, object of the transaction, is attributed.  
  • The DEMPE functions  
  • Consistency between the legal and economic conduct of the parties.  
  • Confirmation of the correct organization of the transaction or correctness of the transaction  
  • Confirmation of the arm’s length value of the transaction 
Source: Diario El Financiero 25/08/22

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