Intangible assets in international tax law: When ideas become a tax issue
In modern, globally active companies, the greatest value often no longer lies in machinery, buildings or inventories – but in intangible assets such as brands, software, patents or know-how. These intangible assets are central to innovation, growth and competitiveness.
However, they pose one of the greatest challenges in international tax law: Who is allowed to pay tax on the income from these intangible assets? How are they valued? And what needs to be considered when such intangible assets are transferred abroad?
This article highlights the tax principles, the internationally recognized DEMPE concept and shows how companies should proceed with cross-border transactions.
Overview
What are intangible assets in international tax law?
The term “intangible assets” does not have a uniform legal definition.
The OECD has defined the term for international tax law in the Transfer Pricing Guidelines 2022, Chapter VI. The German legislator has essentially adopted this definition into law: § Section 1 (3c) AStG .
Essentially, intangible assets are assets that are not tangible assets or financial assets. They can be part of a business, even if they cannot be transferred individually. They also give a person an actual or legal position – i.e. certain rights of use or disposal – over these assets.
Typical examples:
- Trademarks and trademark rights
- Patents, licenses, know-how
- Software (in-house development or purchased)
- Customer databases, customer lists, customer relationships
- Business processes, procedures, designs, recipes
- Valuable company (“goodwill”) components
Intangible assets often create the majority of a company’s value – especially in technology-oriented or digitalized business models.
Intangible assets: How income is allocated under international tax law
As soon as intangible assets are transferred or used across national borders, the following question arises:
Which company in the group of companies is entitled to the income generated?
It is often difficult to determine transfer prices for intangible assets, as comparative values in particular are not or only incompletely available. The remuneration for the use and transfer of intangible assets in transactions within a group of companies is correspondingly difficult.
The DEMPE concept of the § Section 1 (3c) AStG determines which company should receive remuneration for the transfer or transfer of use of intangible assets.
DEMPE stands for:
- Development– Development of the intangible asset
- Enhancement– improvement or further development
- Maintenance– Preservation
- Protection(e.g. legal protection, IP management)
- Exploitation– economic use or utilization
Within the framework of the DEMPE concept:
Legal ownership does not play a role in the DEMPE regulation. If the legal owner neither exercises nor controls the DEMPE functions, there is no entitlement to the income from the intangible asset.
The decisive factor is who actually performs the relevant DEMPE functions or controls the associated risks. If an affiliated company makes contributions to the development, improvement or use, these must be remunerated at arm’s length.
This means that the principle of “function over form” applies in international tax law: The decisive factor is functional ownership, i.e. the actual economic activity surrounding the intangible asset – not just the formal legal position.
These regulations are intended to ensure that the taxable base is allocated in particular to the countries in which the actual value creation takes place.
In order to allocate income correctly, it is necessary to analyze precisely which company performs the relevant functions and bears the economic risks in each individual case.
Example:
A company formally transfers its trademark rights to a foreign company. However, this foreign company has no employees of its own there, no R&D department and no management functions. In this case, it is not possible to allocate profits abroad.
Intangible assets: Valuation for cross-border transfers
The DEMPE analysis is used to allocate income and clarifies which business unit is economically entitled to the income arising from the intangible asset.
In contrast, the transfer of an intangible asset is a separate taxable transaction.
A fair market valuation is required for this process.
Objective of the valuation: Determination of an arm’s length market value for the intangible asset
Recognized valuation methods for intangible assets
When transferring an intangible asset to a foreign affiliated company, companies must determine the objective value of the asset. This value forms the basis for the arm’s length selling price.
As these are usually unique or company-specific values, there are usually no direct market prices. For this reason, the valuation is based on recognized economic methods.
The recognized valuation methods include the IDW S5 valuation method and the ISO 10668:2010 trademark valuation. In principle, these valuation methods are also accepted by the tax authorities.
Hypothetical arm's length comparison for intangible assets
For tax purposes, however, a valuation according to the hypothetical arm’s length principle (§ Section 1 (3) sentence 7 AStG ) to be determined.
The hypothetical arm’s length comparison always comes into play if no comparative values can be determined for the determination of an arm’s length price. This is particularly the case:
– For intangible assets that are difficult to value
– If a relocation of functions takes place or
– No comparative values can be determined.
For the hypothetical arm’s length comparison procedure, please refer to our blog post on the relocation of functions – tax trap when expanding abroad.
PRACTICAL TIP
Intangible assets are among the most sensitive issues in international tax law. In practice, the following challenges arise in particular:
- No physical comparative values: Intangible assets are usually unique. There are often no market prices or comparable transactions, which makes arm's length valuation difficult.
- High audit intensity: Tax authorities scrutinize cross-border transactions with intangible assets particularly intensively, as they offer considerable potential for profit shifting.
- A frequent point of contention in tax audits: The allocation of income, the structure of license models and the valuation of transfers are among the classic areas of conflict in international tax audits.
- Long-term impact of tax decisions: Errors in structuring or valuation often have an impact for years and are difficult to correct later.
About MAVARO
As a specialized boutique firm for international tax law, we support companies in the tax classification, valuation and structuring of intangible assets in a cross-border context.
Further topics for international companies
– Expanding abroad – recognizing and avoiding tax pitfalls
– Tax advantages abroad – How to benefit from low tax rates
– Taxation of add-backs – understanding and averting tax traps
Disclaimer
The article uses simple language for better understanding and presents the legal requirements in abbreviated form in some cases.
The legal framework in tax law – particularly in an international context – is subject to ongoing changes through legislation, case law and administrative directives. No guarantee can therefore be given that the content presented is up-to-date, complete and correct.
This article does not constitute legal or tax advice, but is for general information purposes only. Every tax situation is individual. To avoid tax disadvantages, we therefore always recommend professional advice tailored to the specific individual case.
Last updated 09.03.2026
