DEMPE Court Cases in Europe: How Courts Allocate Revenues From Intangibles

Author: Munshya Mupela

As tax authorities increase their scrutiny of cross-border intellectual property (IP) structures, European courts are increasingly at the centre of disputes over how revenues related to intangibles should be allocated among entities within multinational groups. A recurring theme across judgments is that legal IP ownership alone no longer determines entitlement to returns. Instead, courts look at the underlying DEMPE functions – development, enhancement, maintenance, protection and exploitation – to determine which entities truly create and control the intangible value.

This section of this Trends and Developments article reviews major European cases, focusing on Sweden and Italy, and places them within the broader global trend of DEMPE-based judicial reasoning. The analysis relies on the DEMPE framework in Chapter VI of the 2022 OECD Transfer Pricing Guidelines and cases summarised in the TPA Global DEMPE Handbook.

Who performs and controls the DEMPE functions connected to valuable intangibles?

At the heart of DEMPE litigation lies a simple yet far-reaching question:

How would a court assess the reward linked to your intangibles?

Courts have become sceptical of transfer pricing models that are built around paper ownership or contractual allocations that do not match economic behaviour.

To guide this analysis, courts tend to focus on five key checkpoints:

• control over DEMPE decisions;
• people and capabilities performing and overseeing DEMPE;
• risk assumption and control;
• funding and financial capacity; and
• conduct versus contracts.

Failure across these checkpoints may lead to a reallocation of intangible-related returns.

Sweden: royalty payments to a Maltese IP owner

One of the clearest European examples of DEMPE reasoning comes from Sweden. In this case, a Swedish operating company (“SwedishCo”) paid a 3% royalty to a Maltese group IP company (“MaltaCo”) for the use of intangibles. However, when audited, the Swedish Tax Agency denied the deduction, challenging whether MaltaCo performed any real DEMPE activities.

According to the case summary, MaltaCo performed no DEMPE functions – it held IP on paper but lacked people, control, or decision-making capacity. It neither developed nor enhanced nor protected the intangible assets in question.

Court’s view

The court concluded that legal ownership alone does not entitle the holder to returns. Because MaltaCo “did not perform or control the DEMPE functions related to the intangible”, the royalty lacked economic basis and could be denied for tax purposes.

Key takeaways

• Funding or holding IP alone does not justify returns.
• Courts may deny royalties when DEMPE substance cannot be demonstrated.
• Paper IP ownership structures face significant risk if not supported by functional evidence.

This is one of the strongest European signals that substance must follow returns, aligning Sweden with OECD principles established in the wake of its Base Erosion and Profit Shifting (BEPS) project.

Italy: group brand royalty cases

Italy has produced several large cases concerning brand royalties within multinational groups. These cases typically involve an Italian or foreign entity paying royalties for the use of the group’s brand. Tax authorities have often questioned whether the supposed brand owner actually performs DEMPE functions related to brand management.

Key issues

The central dispute is whether “the mere use of a group brand justifies a royalty under the arm’s length principle”. Authorities and courts evaluate whether:

• the brand owner actively enhances, maintains and protects the brand;
• the brand owner is simply a legal owner or one that employs people with real branding capabilities; and
• the observed behaviours match contractual claims?

Court’s view

Case outcomes have been mixed, reflecting differences in factual evidence. Some courts sided with taxpayers where DEMPE analyses were insufficiently developed by the tax authorities. Others emphasised that legal ownership is not enough and that brand owners must prove functional involvement in DEMPE activities.

Notably, the Italian courts highlighted that “the simple recognition of group membership does not justify a royalty”, highlighting that routine use of a shared group brand is often not a royalty-worthy transaction in itself.

Key takeaways

• Use of a group brand does not automatically justify a royalty.
• Courts expect clear evidence of DEMPE activities by the brand owner.
• Where such evidence is lacking, the royalties risk being disallowed.

Italy’s cases reinforce the principle that marketing-related intangibles require real strategic and managerial functions, not just passive ownership.

Global cases illustrating the same DEMPE logic

Although this article focuses on Europe, it is helpful to note that DEMPE jurisprudence globally reflects these trends.

India – Mercedes Benz advertising, marketing and promotion case

A subsidiary incurred heavy advertising and marketing expenses, and authorities argued these created brand intangibles for the parent. The tribunal rejected superficial DEMPE reasoning and required a full functional analysis instead, holding that marketing expenditure alone does not constitute DEMPE.

Australia – PepsiCo case

Even when a contract did not explicitly state a royalty, the lower courts recharacterised part of the payment as a deemed royalty because economic substance indicated valuable IP was being remunerated. However, the High Court of Australia ultimately overturned this view, holding that the payments were for physical goods (the concentrate used to make Pepsi) rather than royalties and therefore were not subject to royalty withholding tax.

India – Netflix case

Authorities attempted to recharacterise Netflix India as an IP owner entitled to 43% of global revenue. The tribunal rejected this, stating that operational importance does not imply DEMPE and that Netflix’s content and technology DEMPE activities occurred outside India.

Together, all of these cases show a global judicial alignment around DEMPE – ie, returns follow people, control and substance.

Lessons for multinational groups

European DEMPE cases reveal several lessons, as set out below.

Substance must match returns

Holding IP in a low tax jurisdiction without performing DEMPE is no longer defensible. Courts want evidence of:

• skilled personnel;
• strategic decision-making;
• oversight of risks; and
• financial capacity to bear risks.

Contracts must reflect conduct

Courts repeatedly disregard formal legal arrangements when conduct contradicts them. This was evident in both the Swedish and Italian cases, where economic reality dictated revenue allocation.

Routine functions do not create intangible ownership

Marketing, distribution, and administrative activities – even when important locally – do not constitute DEMPE unless accompanied by strategic, risk bearing roles.

DEMPE documentation is essential

Lack of robust DEMPE evidence often leads to:

• denied deductions;
• income reallocations; and
• recharacterisation of transactions.

The message from European and non-European courts is clear: substance over form. If the IP owner lacks DEMPE substance, transfer pricing outcomes may be recharacterised under the OECD Transfer Pricing Guidelines.

How Tax Technology Is Changing the Landscape in Europe and How Tax Authorities and Taxpayers Should Operate

Author: Semra Altıntaş

Introduction

Tax technology is reshaping how tax systems operate across Europe. Developments such as DAC7, DAC8, Pillar Two, and VAT in the Digital Age (ViDA) are shifting compliance away from periodic reporting toward more continuous, data-driven processes. Tax authorities increasingly rely on more frequent and granular data reporting combined with enhanced analytical capabilities, which in certain regimes may approximate near real-time visibility. This directly affects how taxpayers organise their internal processes.

Tax is no longer a year-end exercise but is becoming embedded in day-to-day business operations, driven by data from enterprise resource planning systems and other digital sources. While technology plays a central role, the main challenge lies in how both tax authorities and taxpayers adapt their operating models. Tax processes are particularly suited to this transformation given their structured, rule-based and data-driven nature.

This section of this Trends and Developments article examines how tax authorities and taxpayers should redesign their processes and governance frameworks to operate effectively in an increasingly technology-driven tax environment.

How tax authorities and taxpayers should operate

A three‑layer governance structure

In a technology-driven tax environment, governance must operate across clearly defined layers. Generic AI protocols establish overarching principles, including accountability, transparency and ethical use of AI in tax processes. At an operational level, tool-specific protocols govern the application of individual technologies in practice, including usage parameters and review responsibilities. Micro-certifications ensure that professionals have the competence to operate, supervise, and assess automated outputs. Governance and capability development therefore form part of a single control framework.

Four generations of tax technology maturity

Tax functions operate at different levels of technological maturity. At Gen 1, processes are digitised without fundamental redesign. At Gen 2, the focus shifts to integrating and standardising data flows, improving consistency of outcomes. At Gen 3, systems support decision-making through AI-enabled recommendations, while professionals retain responsibility for final judgments. At Gen 4, more advanced, artificial-general-intelligence-style environments enable integrated and co-ordinated workflows under stricter governance. Understanding where an organisation sits in this progression is important, as it determines both achievable automation and governance requirements.

Human–machine partnership and orchestrated workflows

The interaction between humans and technology is evolving toward a functional partnership. Systems provide scale through data processing and automation, while professionals contribute judgment and interpretation. Tax processes are increasingly organised through orchestrated workflows, where systems handle routine tasks and escalate more complex matters to experts. In practice, this requires tax professionals to focus on supervising outputs, validating results, and intervening where judgment is required, rather than performing manual processing tasks.

A “New Rome” architecture and distribution of authority

Tax processes are well suited to more advanced use of technology because they are structured and largely rule-based. As systems become more capable, they support not only execution but also parts of the analysis, making it essential to clearly define responsibilities. Without proper governance, decision-making may become overly dependent on system outputs, weakening accountability. To avoid this, both tax authorities and taxpayers should operate within a “New Rome” architecture (see fig 1). This is one where data, systems, and human oversight are aligned and roles are clearly defined. Systems should support processing and analysis, while responsibility for interpretation and decisions remains with professionals, ensuring that control stays visible.

Auditability and “human-in-the-loop” validation

At the core of this transformation is a single-source architecture that separates raw data from the information generated by applying tax logic. Trust in such systems should be anchored in auditability – the ability to trace, reconstruct and verify outcomes based on underlying data and applied rules. This is more important than relying on explanations alone. It also requires avoiding fragmented or inconsistent data, as this directly affects the reliability of the outputs. For both tax authorities and taxpayers, this means ensuring strong data readiness and embedding human-in-the-loop controls at key points, so that results are reviewed and validated before further automation is applied.

Conclusion

Tax technology is no longer a supporting function but a core determinant of how tax systems operate. Developments such as DAC7, DAC8, Pillar Two, and ViDA are pushing both tax authorities and taxpayers to redesign their processes around data integrity, automation and real‑time control. Operating effectively in this environment means moving beyond isolated tools and focusing on structured governance frameworks, clear allocation of responsibilities, and reliable data foundations. Organisations that treat tax as an end‑to‑end, technology‑enabled process, rather than a reporting obligation, will be better positioned to operate effectively as digital tax administration continues to evolve.

How the Interplay Between CbCR and VCA Gives a Different Perspective

Author: Shirley Li

Introduction

Transfer pricing is traditionally viewed as a transactional tool that is assessed at the level of individual controlled transactions. However, a purely transaction‑by‑transaction perspective may result in profit allocations that do not fully reflect the broader value chain or the actual contributors to value creation. With the increasing transparency brought by country-by-country reporting (CbCR) and Pillar Two disclosures, tax authorities are becoming more aware of the value‑chain perspective embedded within transfer pricing outcomes. Consequently, they are now more inclined to question how intra‑group prices are set and how the overall profit is divided among all entities participating in the value chain.

What is CbCR and value chain analysis?

CbCR, in both its private (tax authority) and public (stakeholder-facing) formats, offers a consolidated, jurisdiction-level portrayal of an MNE’s global footprint. Private CbCR contains detailed quantitative data – revenues, profits, taxes, employees, tangible assets and main activities. Public CbCR reveals key indicators of where profits, taxes and personnel are located.

A value chain analysis (VCA) is an end-to-end assessment of a multinational group’s business activities, providing a holistic view of how functions interact, how value is created and how profit is allocated. It highlights the key value drivers of an MNE’s business and identifies each entity’s contribution to the value creation process. VCA can support transfer pricing by setting arm’s length prices, testing transaction outcomes and determining the contribution of each entity within the value chain.

Performing a VCA is similar to solving a Rubik’s Cube: multiple sides must be aligned at once. Value creation within an MNE is embedded across operational and technical processes, requiring comprehensive consideration of all relevant drivers. Focusing on a single dimension, like looking at only one transfer pricing transaction, can distort the overall analysis.

In the post-BEPS environment, transfer pricing documentation must be consistent with the actual strategy, business model and governance. Each value driver should correspond to the way profits are allocated; otherwise, tax authorities may detect inconsistencies – just as misaligned sides of a Rubik’s Cube reveal leakages from different angles (see fig 2).

Interaction of VCA and CbCR

Alignment check and consistency test

The pie charts in fig 3 show mismatches in four ratios from CbCR data. For example, Netherlands operations make up just 10% of full-time equivalents (FTEs) but generate 43% of operating margin (OM) and 38% of gross margin (GM), while China has 54% of FTEs but only 7% of OM and 10% of GM. If profits were allocated solely by FTEs, these misalignments would require explanation to stakeholders like tax authorities.

Qualitative and functional analysis

VCA’s goal is to identify who performs which functions, who assumes which risks, who owns or uses which assets, and where DEMPE activities take place. This technique is mainly structural and qualitative. It answers questions such as:

• Which entity performs core functions?
• Which entity contributes most to value creation?
• Which jurisdictions have real economic substance?

The link with CbCR lies in assessing whether jurisdictions that host high-value functions in the VCA also report commensurate profit levels in both private and public CbCR disclosures. If entities performing core strategic, DEMPE, or entrepreneurial functions exhibit low profitability or appear in low tax jurisdictions without substantive operations, the disparity highlights structural misalignment and potential BEPS risks. Thus, VCA uses CbCR as a substance check: the functional story must match the profit story.

Quantitative allocation

VCA quantifies value creation by linking key value drivers to the business processes that support them. It assigns weights to processes such as innovation, procurement, manufacturing, supply chain or sales, and then determines how much value each entity contributes. This technique is quantitative. It produces a theoretical profit allocation percentage based on actual value contributions across entities.

The connection with CbCR is therefore numerical rather than structural. CbCR discloses the actual profit distribution across jurisdictions, enabling a direct comparison between theoretical value creation percentages and reported outcomes. Significant gaps between these two distributions indicate misallocation of profit relative to economic contribution, prompting heightened audit interest. Accordingly, VCA uses CbCR not only as a risk filter but also as a benchmark to test whether real world profit aligns with quantified value creation.

Conclusion

In the post-BEPS landscape, the VCA framework complements CbCR by providing the analytical lens needed to interpret jurisdiction-level profit disclosures. While CbCR reveals the actual distribution of revenues, profits, employees, and assets across countries, VCA explains whether such outcomes align with the underlying value-creating activities of the group. The interaction of the two therefore serves as a coherence test: profit should follow value creation. Any divergence detected through CbCR can be examined and substantiated – or challenged – through VCA, making the combination of both tools essential for demonstrating transparency, substance and defensible transfer pricing positions.

The Expanding Tax Transparency Landscape in Europe: From Private CbCR to Public CbCR and DAC 9 and How the Data Intersects

Author: Joyce Lo

Introduction

International tax has expanded rapidly, and MNEs now face deeper and more numerous reporting expectations than ever before. In Europe, the three-tier OECD BEPS Action 13 framework – Country‑by‑Country Reporting (CbCR), Master File, and Local File – has now been supplemented by EU Public CbCR. And then Pillar Two reporting will begin, which brings with it more detailed data requirements. While differing in scope and purpose, these frameworks are built on an underlying assumption of the arm’s length principle: profits should be allocated and taxed fairly across jurisdictions. As their scope continues to broaden, tax transparency has evolved beyond high-level disclosures towards detailed and structured datasets to support the assessment of fair taxation across jurisdictions.

Private CbCR as the original data backbone

Since BEPS Action 13, private CbCR has served as an information exchange mechanism between MNEs and tax administrations. In Europe, this is implemented through Directive (EU) 2016/881 and DAC4. Private CbCR provides tax authorities with a jurisdictional breakdown of revenues, profits, taxes paid, employees and tangible assets – making it the baseline dataset for all subsequent European transparency initiatives.

Both EU Public CbCR and the Pillar Two GloBE Information Return (GIR) – implemented through Directive (EU) 2021/2101 and Directive (EU) 2022/2523 – mirror private CbCR’s structure. Their first reporting deadline falls in 2026, marking a pivotal year in which MNEs must establish robust frameworks to manage and reconcile all required data.

EU Public CbCR: transparency for a wider audience

EU Public CbCR shifts tax disclosures from confidential exchanges between tax authorities to public accessibility. It applies to large EU-based MNEs as well as non‑EU groups with EU operations. The required disclosures largely mirror the information requested under private CbCR. Public CbCR focuses on information related to EU member states, the EEA, and EU-listed non-cooperative jurisdictions, ensuring this information is made available in a transparent and accessible format.

GloBE Information Returns (GIR) and how CbCR connects

Pillar Two introduces a new level of tax reporting complexity. Through DAC9, the EU has implemented the required GIR reporting under Pillar Two. The GIR requires extensive jurisdiction‑level data, including GloBE income, adjusted covered taxes and tax adjustments. As a result, it is significantly more tax‑accounting‑intensive than CbCR.Fig 4 outlines the GIR sections and their respective focuses and relationships with CbCR.

Conclusion

Europe’s tax transparency framework is evolving from high-level CbCR data to sophisticated GloBE disclosures. CbCR remains the baseline dataset, Public CbCR enhances visibility, and Pillar Two introduces detailed calculations and reconciliations. Although these regimes differ in purpose, they are anchored in an underlying assumption of the arm’s length principle. As reporting obligations expand, MNEs must develop well‑governed data architectures that connect CbCR information with Pillar Two GIR requirements. Tax reporting has now entered a new level of complexity, requiring strong data management and co-ordinated processes across the organisation.

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This article was produced with the assistance of AI. All substantive content, analysis and conclusions remain the sole work of the authors.