contacto@vag-global.com

Accreditation of Profits from Royalty Payments

3 May, 2024

Background

Companies require a distinguishing characteristic sign in the market for their business activities, for which they employ an identifying trademark. Hence, they enter into contracts with a third or related party that entitles them to use their trademark. This agreed consideration is referred to as royalties, which, according to Article 37 of the Income Tax Law, may be used as a deductible expense to determine the net income of the third category.

In this opportunity, RTF No. 05946-1-2019 is brought up, which discusses the application of the causality principle to the deductible expense for royalties paid for the use of a trademark.

Position of the Taxpayer

In this case, the taxpayer rendered construction services and hired the right to use a trademark to identify itself in the market to enhance the positioning of the company and increase its sales. This filed several documents, such as reports, contracts, and photos, among others, to support the royalties paid and justify the deductibility of the expense.

Position of the Tax Administration

Due to the audit procedure on such taxpayer, SUNAT repaired the attributed expenses, considering that the taxpayer failed to support the profits from the use of the trademark nor a direct increase in its income.

The Administration evaluated the filed documentation and concluded that the attributes of recognition and good image granted by the hired trademark were not exclusive to it, given that the same profits could be gained from the management of another trademark. Likewise, it highlighted the fact that the taxpayer could develop and register its distinctive trademark and not incur greater expenses.

Position of the Tax Court

In this regard, the Court determined that the controversy was mainly concerned with demonstrating the causality of the expense, i.e., it was necessary for the generation and maintenance of the source of the income, reaching the following conclusions:

  1. The trademark assignment contract provided by the taxpayer only evidenced an agreement of wills.
  2. The checks and account statements filed only evidenced the payment of the invoices issued due to the contract entered into.
  3. The photographs of the machinery and the advertising posters and copies filed did not conclude that the taxpayer had been a user of the trademark.
  4. The work contracts and Addenda entered into do not indicate the use of the trademark is a key element to enter into such agreements.
  5. The Economic-Financial Report – Marketing and Multiple Criteria Valuation of the Assignment of the Distinctive Sign, although it analyzes the effect of branding on sales, concludes the performance and positioning of the trademark derive from the taxpayer’s actions and not from the use of the trademark.

Finally, the Court concludes that the taxpayer did not demonstrate or justify the necessity of the expense or its link with the generation of income, given that this did not demonstrate having benefited from the assignment contract, thus maintaining the repair made by the Administration and confirming the appealed resolution.

Conclusion

Based on the aforementioned, when the taxpayer intends to deduct as an expense the royalties paid for the rights of use of a trademark, this should evaluate the principle of causality of such expenses. In order to prevent the expense is repaired in the event of an audit procedure, the documentation supporting the need and indispensability of the contracted trademark to generate profits for the company should be available.