International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Germany: How to adapt to the DEMPE concept when using third-party licensing agreements for transfer pricing

Sponsored by


Yves Hervé and Philip de Homont of NERA Economic Consulting show how taxpayers can adapt their defence strategies to the DEMPE concept, focusing particularly on the use of third-party agreements.

Inter-company licensing arrangements are often challenged by tax authorities worldwide. Those in the country of the licensor might complain that the licence rate is not high enough, while those in the country of the licensees often complain that a licence rate is too high. The latter group was recently strengthened by the new OECD guidelines that introduced the DEMPE concept: entities should earn profits in line with their contributions in terms of the development, enhancement, maintenance, protection, and exploitation (DEMPE) of intangibles.

In practice, this concept has meant that tax authorities in local jurisdictions of the licensees often complain that their entities are paying licence fees despite making some form of contribution to the intangible, usually by some local enhancement or maintenance. This is quite typical as, for example, local entities license a brand from their central group headquarters but make some adaptions for their local market (an enhancement) or incur the marketing spending to keep the brand relevant for customers (a form of maintenance).

How can taxpayers react to such a claim and show that their licence rates are arm's length and should therefore not be adjusted? The traditional best practice approach has been to use a database search of third-party licensing contracts. This has the advantage of yielding a relatively straightforward answer, like a specific royalty expressed as a percentage of sales that would be appropriate. On the other hand, the challenge with benchmarking searches is to find truly comparable intangibles. As acknowledged by the OECD, circumstances related to intra-group intangible transactions are normally pretty unique as every profit maximising multinational tries to develop and market its intangibles as USPs. This suggests that publicly available information on third-party licence arrangements usually provides only poor benchmarking evidence for arm's-length pricing.

The DEMPE concept provides a route to improve comparability, since taxpayers now also have to demonstrate how local enhancement or maintenance of intangibles figures into the comparison between the intra-group licensing and the database agreements. The terms and conditions in the agreements between independent parties can provide important insights for this analysis. Third parties are usually rather explicit about responsibilities, budgets and other obligations of the counterparties in their agreements. Therefore, paragraphs outlining the obligations of the licensors and licensee can be analysed.

To improve comparability, one can try to directly include the DEMPE review into the search and limit the dataset to those agreements where the third-party licensor and licensee perform approximately the same responsibilities as within the company. For example, if the group-internal transaction assigns the responsibility for local marketing expenditure to the licensee, one could exclude all those third-party agreements, where this responsibility is either left open or assigned to the licensor.

An alternative is to rely on a wider array of contracts to make the impact of varying DEMPE functions more explicit through statistical analysis. The advantage of this approach is that it enables a wider range of third-party contracts, which increases reliability. It also allows taxpayers to reflect regional differences between their subsidiaries to a stronger degree. For example, we found through a regression analysis that for a certain class of marketing intangibles, the licence rate varied between 2% and 3.5%, depending on how strongly the licensor was involved in local DEMPE contributions. This allowed the taxpayer to set three different licence rates for its subsidiaries, depending on their exact profiles.

We believe that in many practical cases, the results of the adjusted benchmarking analysis should be rooted in a value chain analysis and may often be corroborated by a profit split analysis. Overall, the proper reflection of local contributions to intangibles – be they marketing or technical intangibles – allows taxpayers to pre-empt or counter claims by tax authorities that their local DEMPE contributions are not considered.

NERA Economic Consulting

T: +49 69 710 447 502 and +49 69 710 447 508

E: and


more across site & bottom lb ros

More from across our site

An intense period of lobbying and persuasion is under way as the UN secretary-general’s report on the future of international tax cooperation begins to take shape. Ralph Cunningham reports.
Fresh details of the European Commission’s state aid case against Amazon emerge, while a pension fund is suing Amgen over its tax dispute with the Internal Revenue Service.
The OECD’s rules may be impossible for businesses to manage, according to tax experts from companies including Shell.
The UK government is now committed to replacing the ‘super-deduction’ with a 100% capital allowances regime to offset the impact of the corporate tax rise to 25%.
Corporate tax is set to rise in the UK for the first time in decades, but the headline rate remains historically low despite what many observers think.
President Joe Biden’s nominee is set to be confirmed as IRS commissioner for a five-year term.
British companies are waiting to hear the details of what will replace the 130% ‘super-deduction’ next week, while Spain considers stopping a major infrastructure company moving to the Netherlands.
President Joe Biden wants to raise corporate tax and impose a higher stock buyback tax on US businesses, but his budget proposal faces insurmountable obstacles in Congress, writes Ralph Cunningham.
EY is still negotiating the terms of the plan to split its audit and consulting functions, but the future of tax services is reportedly a sticking point.
Country-by-country reporting is the best option for safe harbour provisions under the global anti-base erosion rules, according to tax directors at companies including Standard Chartered Bank and Pernod Ricard.