Intangible assets are at the heart of many international business models today. These include not only patents and trademarks, but also proprietary software, technical processes, customer relationships, databases, trade secrets, and company-specific know-how.
Medium-sized corporate groups, in particular, often build up such assets over many years. Development takes place in Germany, marketing is handled by a foreign subsidiary, legal ownership lies with a group company, and ongoing maintenance is centrally managed by another company.
This raises a crucial question: Which company is entitled to collect the proceeds from the exploitation of intangible assets?
The answer does not lie solely in legal ownership. Rather, what matters is which companies actually contribute to value creation, control the relevant risks, and make key decisions. The focus here is on the so-called DEMPE functions.
What does DEMPE mean?
DEMPE stands for five functions that are relevant for value creation from intangible assets:
- Development, Also credentials for Development
- enhancement, Also credentials for Personal developments and Improvement of
- Maintenance, Also credentials for Care and conservation
- Protection, Also is Protection
- Exploitation, Also credentials for recovery
The OECD Transfer Pricing Guidelines and the Administrative Principles on Transfer Pricing 2024 clarify that income from an intangible asset should, in principle, be allocated to those group companies that perform significant DEMPE functions, control risks and make the relevant decisions.
The OECD also states for Germany that the allocation of profits from intangible assets does not depend solely on who the legal owner or holder is. The decisive factor is the contribution to value creation made by the DEMPE functions.
Legal ownership alone is not sufficient.
A company can be the legal owner of a patent, trademark, or software. However, this does not automatically mean that it is entitled to all profits from the use or exploitation of the patent, trademark, or software.
According to Section 1 of the German Foreign Tax Act (AStG), cross-border business relationships between related parties must be assessed according to the arm's length principle. Determining arm's length remuneration depends on the actual circumstances of the business transaction. A functional and risk analysis forms the basis for this.
In practice, the following questions, among others, need to be answered:
- Who visites effect the intangible Value developed?
- Who visites decides over development goals and Budgets?
- Who visites steuert credentials for Further development?
- Who visites funds credentials for authoritative Projects?
- Who visites controlled credentials for Development, Market- and Liability risks?
- Who visites decides over Registration and Defense of Intellectual property rights?
- Who visites bestimmt credentials for Marketing strategy?
- Who visites wearing credentials for economic Follow A negative development?
A company that is merely registered as the legal owner but does not perform any significant DEMPE functions and does not control the associated risks cannot regularly claim the entire residual profits without further ado.
The individual DEMPE functions in practice
Development, the development
Development encompasses all activities that lead to the creation of new intangible value. This includes, for example, the development of software, a technical process, or a new product.
A common example is a medium-sized machine manufacturer whose German subsidiary develops new control software. The programming is done partly by in-house employees and partly by a partner company abroad. However, the German subsidiary defines the technical objectives, decides on the budget, and bears the consequences if the development fails.
For transfer pricing analysis, it is not solely crucial who programmed the software. Rather, the focus should be on who actually controls the development and manages the key risks.
Important questions are:
- Who visites lays credentials for technical and economic Objectives firmly?
- Who visites decides over the Development budget?
- Who visites commissioned external Service providers?
- Who visites monitored the Development progress?
- Who visites decides over Amendments or the cancellation one Project?
Enhancement, further development and improvement
An existing intangible asset can significantly increase in value through technical, functional, or economic improvements.
Typical examples include:
- new Features Enterprise software
- additional Product variations
- credentials for Adaptation Technology an new Markets
- is Extension Brand
- credentials for Personal developments existing Database
A distinction must be made here between routine maintenance and value-adding development. If a foreign subsidiary independently develops new functions for software and decides on its technical direction, it can make a significant contribution to value creation.
However, simply following given instructions does not automatically lead to an independent claim to residual profits.
Maintenance, care and preservation
Maintenance and preservation ensure that an intangible asset remains usable and economically relevant.
For software, this could include, for example:
- Bug fixes
- security updates
- technical adjustments
- regular Updates
For a brand, ongoing quality controls or monitoring of brand usage can play a role.
However, not every maintenance service justifies a claim to a share of residual profits. If a company merely performs standardized tasks according to detailed specifications, an arm's-length routine fee may be appropriate. If, on the other hand, it makes independent decisions with significant economic impact, its contribution must be assessed separately.
Protection, the protection
The protection of intangible assets includes, among other things:
- credentials for Registration and Renewal of intellectual property rights
- credentials for Defense against violations of law
- credentials for Enforcement of claims
- Measures Protection of Trade secrets
- credentials for selection and Controller external Legal Advisory
In many corporate groups, the formal filing of a patent application is the responsibility of the parent company. However, decisions regarding intellectual property strategies and legal disputes are made by a central legal department or another group company.
Therefore, for the allocation of revenue, it is necessary to examine who actually decides on the protection, assesses the risks, and bears the economic consequences.
Exploitation, the exploitation
Exploitation describes the economic use of an intangible asset. This includes, for example:
- credentials for Award of Licenses
- credentials for Usage Technology in own Products
- credentials for Vermarktung Brand
- credentials for Integration of Software in a Business Model
- credentials for Usage of Customer relationships or Databases
A common example is a German sales company that establishes a brand developed across the entire group on the German market. It carries out marketing activities, maintains customer relationships, and bears market and sales risks.
These contributions may be taken into account when determining compensation. However, they do not automatically entitle the sales company to all profits from the brand. The decisive factor is the interplay between its activities and the other DEMPE functions.
Examples from business practice
In-house developed enterprise software
A German company holds the rights to software originally developed for its own business operations. Over time, a foreign subsidiary takes over ongoing development. It decides on new features, manages external programming services, and bears the risk that the new solutions will not be accepted by the market.
The German company remains the legal owner. Its actual functions may be limited to managing and protecting the rights. The foreign company, on the other hand, makes significant contributions in the areas of development and enhancement.
A lump-sum license payment to the German company might therefore require closer examination.
Corporate brand with local brand building
A German subsidiary uses a central group brand. However, it develops its own marketing campaigns, adapts its brand communication to the German market, and invests significantly in building customer relationships.
It is necessary to examine whether the German company is merely a sales company with routine functions or whether its activities make an independent contribution to the further development and exploitation of the brand.
Research and development on behalf of clients
A German company is conducting research and development services for a foreign subsidiary. Contractually, the German company is classified as a contract developer and receives a cost-plus fee.
In practice, however, it decides on technical solutions itself, manages key development projects, and bears a portion of the development risks. Therefore, the contractual classification as a purely contract developer may differ from the actual situation.
Therefore, remuneration should be reviewed regularly if decision-making powers, risks, or development contributions change.
Risks for German taxpayers
Profit adjustment according to § 1 AStG
If a German company allocates an unreasonably high license fee or remuneration to a foreign company, the tax authorities can make an income adjustment in accordance with Section 1 of the Foreign Tax Act (AStG).
This applies in particular if the foreign company is the legal owner but performs only minor value-adding DEMPE functions.
Conversely, insufficient compensation can also be problematic. If a German company undertakes significant development, enhancement, or commercialization functions without receiving adequate compensation, its taxable income in Germany may increase.
double taxation
A correction in Germany does not automatically lead to a corresponding adjustment abroad. If two tax authorities assess the functions and revenue entitlements differently, economic double taxation can arise.
This risk is particularly relevant in the following cases:
- cross-border License payments
- Transfers of IP Rights
- Functional shifts
- centrally controlled Research and Development activities
- different Reviews intangible Values
Audit and documentation risks
Intangible assets are often the focus of tax audits. The tax authorities don't just examine contracts and accounting records; they also question which company actually makes decisions and controls risks.
The following can be particularly critical:
- height internal group License payments
- Transfers of IP Rights to the Ausland
- Cost allocations for research and Development
- subsequent Amendments of License rates
- Restructuring
- hardly assessable intangible Values
- substantial Deviations between contract and actual Execution
Publicly available articles from consulting practice also indicate that intangible assets and digital value chains place special demands on tax analysis and documentation. Deloitte further emphasizes the importance of intangible assets in tax audits and the practical application of the DEMPE concept.
Hard-to-value intangibles
Intangible assets are particularly challenging, as their future returns are difficult to predict at the time of transfer. These include, for example:
- a message Software im early Stage of development
- a message new Platform solution
- a or not approved Product
- a message innovative Manufacturing technology
- a message Brand with first unknown Market potential
Section 1, paragraph 3c of the German Foreign Tax Act (AStG) contains special provisions for certain intangible assets that are difficult to value. Subsequent developments in actual earnings may become relevant for transfer pricing analysis.
Companies should therefore document:
- credentials for original Assessment assumptions
- resilient business plans
- Scenario analyses
- credentials for used scoring method
- expected and actual Business developments
- credentials for reasons for credentials for distribution of opportunities and Risks
The greater the deviation between the original forecast and subsequent developments, the higher the audit risk can be.
Documentation of the DEMPE functions
A sound transfer pricing documentation should not derive the entitlement to revenue solely from contracts or legal ownership. It should demonstrably show the actual value creation.
Key components include:
-
Identification of intangible assets
What patents, Brands, Software, Customer relationships or trade secrets exist? -
Assignment of DEMPE functions
What Society takes over Development, Further development, Care, Protection and Recycling? -
Analysis of decision-making processes
Wo great strategic and operating decisions met? -
Risk allocation
What Society controlled Development, Market-, Liability or Intellectual property rights risks? -
Evaluation of the contributions
What Transfer pricing method builds credentials for actual Value Added am besten from? -
Comparison with company practice
Feedback Contracts, Responsibilities, actual Processes and bookings match?
What companies should consider now
German companies with international business activities are advised to conduct a structured inventory:
- What intangible Values great im Group used?
- Who visites is legal proprietress respectively legal Owner?
- Who visites erfüllt credentials for the einzeln DEMPE Functions?
- Who visites controlled credentials for essential Risks?
- Sind License payments and other Compensations Is this customary?
- Feedback Contracts and actual Processes match?
- Become Shaping is Value Added contemporary taken into account?
- Is credentials for Documentation for a message audit durable?
Especially in medium-sized corporate groups, historically developed structures are common. For example, software may have originally been developed in Germany, while development and marketing now predominantly take place abroad. Similarly, a brand may be legally centralized, even though individual companies make significant contributions to its market position.
Regular review makes such changes visible and allows transfer prices and contracts to be adjusted in a timely manner.
Conclusion
For the entitlement to income from the exploitation of intangible assets, legal ownership alone is not the determining factor. What is crucial is which group companies perform the relevant DEMPE functions, control risks, and make key decisions.
German taxpayers should therefore regularly review their IP structures, licensing models, and development agreements. A consistent analysis in accordance with Section 1 of the German Foreign Tax Act (AStG), the Administrative Principles on Transfer Pricing 2024, and the OECD Transfer Pricing Guidelines provides a sound basis for arm's-length transfer prices.
This allows risks of income adjustments, back payments and economic double taxation to be identified early and specifically reduced.
