Transferring Intellectual Property via Offshore Permanent Establishments: Lessons from BGH and IPAB Rulings

Introduction

In the present times, Offshore Permanent Establishments are leading  in the field of international taxation and intellectual property laws. Several multinational and transnational companies including startups have started to transport their intellectual property assets, commonly trademark, patent, copyright and design into offshore permanent establishments. This choice to transfer PEs is a strategic reaction to increased taxation and open ended research and development projects. Even though the process prima facie is legal, it causes strains and tensions over scrutiny by global tax authorities and regulatory bodies. In the contemporary and latest developments, the German federal court of justice and India’s Intellectual property appellate board have provided essential and precious information upon the navigation of such transfer.

Understanding Offshore PEs and IP Transfers 

A permanent Establishment is a definitive structured place of business, from which the activities of the business are carried on. In lieu of Article 5 of the OECD Base erosion and profit shifting guidelines, an establishment of this sort would comprise an area for management, a branch or  factory. The importance and vision of an establishment lies in its potential to relate the income of a non Indian enterprise to income to the establishments to the local taxation authorities. It is this lining in the operation that the well established corporations exploit in the transfer of intellectual property via offshore permanent establishments. There are three primary and optimal reasons for such transfers, firstly optimising tax, secondly, amalgamation of research and development and lastly the benefit pertaining to the territorial benefits like that of enforcement and regulations.

Overview of Key Legal Decisions

A. BGH Decision – Germany

In a similar context, the German federal court of justice in June  encountered a similar case, which is often referred to as the Ltd GmbH Patent Transfer Case. The case connects to a German owner of a patent, who established a company in Dublin, to transfer his right of patent in it. Following this, in order to pay licensing fees to the Dublin based company ,to start the commercial use of the patent. The challenge here was created due to the classification of licensing payments in two ways, either a violation of tax structure or distribution of hidden profits. This was trans national and cross border and lacked genuine substance in itself. The court of justice in an appeal filed in front of the court upheld the judgement of the lower court. It lacked the reality and true sense of economy and the taxation law was inconsiderate about the substance of payments.

B. IPAB Decision – India

In the Indian context, the IPAB primarily dealt with an extremely important case which involved a multinational giant from the telecom industry. In the instant case this multinational company had transferred its holdings, namely trademarks and rights over licensing, being of Indian origin to a company based in Mauritius. Regardless of the valuation of the intellectual property of the entity of Mauritius, it did not have any resources to enforce the application of the transferred intellectual property. In lieu of the Copyright act, 1957, The Trademark Act of 1999 and the Income Tax act of 2000, objections were raised as the said transfer also qualified for not adhering to rules within FEMA and the guidelines of the Reserve Bank of India. When this matter was presented in front of the board, it was scrutinised under the Trademarks Act 1999, specifically its section-18 and Section-19 of the Copyright Act of 1957. The appellate board, after due deliberations, held that there exists inconsistency with the legislations of the home country and it failed to satisfy effective control. It failed to be in lines with the regulations under FEMA and the guidelines issued by the Central Board of Direct Taxes. In the Judgement, IPAB and its heavy focus echoed the relevance upon the ceilings laid down by OECD through the BEP action plan.

Comparative Analysis and Lessons Learned

In a comparison over both the bodies, it is revealed that both the bodies have similarities as well as divergences in the way the reason while adjudicating matters. Both the aforementioned judgments are built over an essential concept, it being that the legitimacy of trans national Intellectual property transfer is guided by economic substances. Both the courts place emphasis on the valuation of intellectual property and compliance to the territorial power on it. However, Germany and the OECD framework have deep trenched relations and focus heavily upon the entities offshore. The court examined whether the offshore PE had any physical presence, decision-making authority, or staff with the requisite technical expertise. It considered the transaction not merely as an entire economic activity. India insisted heavily upon regulatory compliance, such as filing the necessary documents, obtaining approvals under FEMA, reporting to the Reserve Bank of India, and implications for undervaluation for public interest. Whether or not the transfer was compliant with Indian tax policy and IP law was one consideration which the IPAB took great care in addressing. India's policy, therefore, is more grounded in the twin system of regulatory and tax control, while Germany's approach gravitates towards economic integrity and international tax philosophy.

Conclusion

In conclusion of the lessons, the judgments given by both BGH and IPAB elucidate the ever dynamic philosophical jurisprudence that revolve around Intellectual property and its transfers to public establishments. These transfers are prima facie not unlawful, however the weight to prove their legitimacy is essential. The central lesson is certain and clear legality of a substance cannot hide in the disguise of commercial and profit making substance. For multinational and overseas companies in order to secure long term sustainability the regulatory trust must  be established. The upcoming years of cross border intellectual property ownership is not within the rapid and violent growing structure but in being a sensitive and specific blend of business requirements and legal action.

Author: Prachi Bhattacharya, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References –

1. BGH, X ZR 47/19 (‘Funkuhr I’), Bundesgerichtshof (26 Feb 2002).

2. BGH, X ZR 114/13 (10 May 2016).

3. BGH, X ZR 97/11 (‘Pallet Container II’) (17 July 2012).

4. Krista Rantasaari, ‘Abuse Of Patent Enforcement In Europe: How Can Start-ups And Growth Companies Fight Back?’ (2020) 11 JIPITEC.

5. OECD, DAF/INV/WD(2009)2 (Working Document, 2009).

6. Mauritius: Transfer of Trademark: Practicalities under the Law (Lexology, 8 Oct 2024).

7. SEC Form F-3 Amendment No. 2 (2005).

8. ‘Germany – Settled and Recent Case Law on Claim Construction (Part I)’ (Kluwer IP Blog, 11 Feb 2025).

9. ‘Exhaustion of patent rights and the limits of permissible use’ (Lexology, June 2021).