MNEs to face obstacles in acquiring Swedish companies with significant IP
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

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

MNEs to face obstacles in acquiring Swedish companies with significant IP

Sponsored by

sponsored-firms-kpmg.png
The case has implications for MNE groups looking to expand in Sweden

Karolina Viberg and Maria Andersson of KPMG Sweden analyse a judgment by the Administrative Court of Appeal of Stockholm that has implications for multinational enterprises (MNEs) that are contemplating to acquire a Swedish company with significant intellectual property (IP).

The case

The background to the case, and a previous judgment delivered by the Administrative Court of Stockholm, have been presented and analysed in the previous article by KPMG Sweden. As a summary, the case concerns a Swedish company (AB), which had been acquired by a US company (Corp). According to the Swedish Tax Agency (STA), when acquiring AB, Corp acquired the right to retain returns from the IP developed by AB. As a basis for this view, the STA considered that Corp controlled all the material risks connected to the IP after the acquisition and, therefore, possessed the “economic ownership” of the IP. 

The Administrative Court ruled in favour of AB and judged that no transfer of economic ownership had taken place. In short, the court accepted an argument put forward by AB that it was unlikely that the IP could be transferred while the competence to develop the product was still in AB. The court also stated that a transfer was not apparent from the agreement that was in place between the parties. 

Judgment by the Administrative Court of Appeal of Stockholm

In contrast to the Administrative Court, the Court of Appeal ruled in favor of the STA. The court emphasised that AB had, in initial responses to the STA during the tax audit, stated that the agreement in place between the parties did not reflect the actual conduct and that significant functions and risks had been transferred following the acquisition. AB had later retracted these comments, but the court stated that as no reason had been given to why the comments had been made if they were wrong, they should be regarded as accurate.

The Court of Appeal considered that it was proven that Corp did not have the knowledge required to develop the IP. However, in the court’s opinion, the decisive factor when determining which company controlled the product development risk was which company could say no to new projects. According to the court, the risk should therefore be allocated to Corp since Corp was always informed about product development initiatives and could always block them. 

The court agreed with the STA’s view that the arm’s-length remuneration for the transfer of IP should be calculated based on the acquisition price for the shares in AB, while subtracting the value of the business that was still in place in AB after the transfer.

Implications for MNEs 

The case has implications for MNE groups that are either contemplating to acquire, or are in the process of acquiring, a Swedish company with significant IP ownership. The case implies that there is a risk that a third-party acquisition of shares in a company holding IP for which the control of the development, enhancement, maintenance, protection and exploitation (DEMPE) functions are shifted to the acquiring entity, may result in a transfer of said IP and a subsequent exit taxation. 

It is rather common that the overall strategy relating to IP development and sales changes upon acquisition, as these are normally included in the overall governance of a parent company in relation to its group. As a result, the STA’s and Court of Appeal’s view results in a reclassification of the transaction and implies that an acquisition of shares in a Swedish company owning IP would in most cases result in a subsequent transfer of IP to the ultimate parent. 

Moreover, the interpretation of the STA and Court of Appeal, if applied more broadly, may result in that it will not be possible for any other entity within an MNE group apart from the ultimate parent company which has the ultimate decision rights to be regarded as the economic owner of IP. However, in the authors’ view, such an effect may be in conflict with the OECD Guidelines, as the Guidelines state that the right to retain returns from IP should be awarded to the entity that performs and controls the relevant DEMPE functions, which may not be the parent company in many cases. It is our view that the ruling is not in line with the Swedish arm’s-length principle. We are hopeful that the case will be appealed and that the Supreme Court grants leave to appeal. 

Nevertheless, MNEs should prepare to defend their position if IP related to an acquired company is not centralised subsequent to an acquisition. For example, this could be done by analysing the distribution of DEMPE functions before and after an acquisition in order to assess the facts and circumstances and align the transfer pricing with the value creation. In addition, we recommend considering whether any mitigating measures should be adopted in relation to an acquisition, such as making an open disclosure in the income tax return, in order to mitigate the levying of tax penalties as a part of transfer pricing adjustments. 





Maria Andersson

T: +46 8 723 96 12

E: maria.andersson@kpmg.se


Karolina Viberg

T: +46 8 723 94 52

E: karolina.viberg@kpmg.se



more across site & bottom lb ros

More from across our site

Proposals by HM Revenue and Customs to raise standards in the advisory market are ‘well overdue’, one partner declared
An intimate understanding of a client’s sector is essential to winning new business, a survey of over 28,000 corporate counsel reveals
‘Auditors are failing to perform their core function’ according to a think tank; in other news, White & Case adds a tax partner in Luxembourg
An overhaul of EU import taxes could spell the end of an exemption for cheap parcels
Sharma, managing director for A&M in the United Arab Emirates, tells ITR about intense time pressures, mimicking Jurgen Klopp and what makes tax cool
AI will speed up some of the most laborious TP processes without making human input redundant, argues Hank Moonen, CEO of TaxModel
Firms with a broad geographic reach are more likely to win work, especially from global companies with high turnovers, according to survey data of nearly 29,000 corporate counsel
Australian businessman Gordon Merchant used EY’s advice to offset an A$85 million capital gain, according to the Federal Court
Griggs has been drafted in ahead of schedule as the incumbent Tim Ryan departs for Citigroup; while the Netherlands plans to scrap a 15% share buyback tax
Authorities must ensure that Russian firms do not use transfer pricing schemes to increase profits made from oil sold in different markets, advocacy organisations have argued
Gift this article