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SAC on beneficial ownership of royalties

A recent Supreme Administrative Court (SAC) judgment dealt with beneficial ownership in the context of licensing agreements. In its decision, the SAC emphasised that an entity who is unable to freely decide on the use of collected royalty payments and is bound to hand over the majority of the funds received to another entity is not the beneficial owner.

SAC 4 Afs 63/2022, the case under review, involved a dispute concerning the application of a UK-based company (in the taxable period in question, the UK was still a member of the EU) for exemption of income from royalties paid by a Czech company, and the fulfilment of the condition of beneficial ownership of the royalties by the UK company.

To understand the dispute and the judgment, it is important to note that the UK company was obliged to pay almost 95% of the funds received to other related parties.

The court looked into the actual economic benefit from the royalties and the entity's ability to use them freely. The UK company provided sublicenses to a Czech company and then passed on almost all funds received. The court concluded that the company was not the beneficial owner of the royalties because it was not free to make decisions about the use of the funds.

In its statement of grounds, the SAC emphasised that a beneficial owner of the royalties must be able to determine their use and must not be contractually bound to transfer most of the royalties to another entity. In terms of the economic benefit, it is crucial that the entity may dispose of the funds independently and use them as they see fit. This approach to the definition of beneficial ownership has potentially far-reaching implications for business practice and the taxation of licensing arrangements.

The judgment thus provides an important interpretation of the beneficial ownership of royalties, not least because its reasoning is based on the interpretations of beneficial ownership by the case law of the Court of Justice of the European Union.