Transfer pricing of intangible assets: Royalties, software, brands and patents (Switzerland & Europe)

Setting a royalty or valuing a brand, patent or know-how intra-group at arm's length.

Introduction: transfer pricing of intangibles, where a group's value is at stake

When a subsidiary pays a brand royalty to its parent company, or when a patent developed in France is held in a Swiss holding, which price should be set, and how can it be defended before the tax authority? Transfer pricing refers to the price of transactions between entities of the same group, and its cardinal rule is the arm's length principle, the price independent enterprises would have agreed. Applied to intangible assets, brands, patents, know-how and intra-group royalties, this exercise becomes one of the most scrutinised areas of international taxation, because that is where a group's value and margins concentrate.

« Where conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits may be included in the profits of that enterprise and taxed accordingly. », Article 9 of the OECD Model Tax Convention.

The stakes in 2026 rest on three converging developments. First, the OECD's DEMPE analysis has shifted the focus: it is no longer the legal owner of an intangible who captures the return, but the entity that actually performs the key functions. Second, Switzerland applies the arm's length principle through Article 58 of the Federal Act on Direct Federal Taxation and aligns with the OECD Guidelines, while a European harmonisation directive is under discussion. Third, valuing an intra-group intangible has become the point where a tax audit crystallises, because a poorly substantiated figure is paid for in a reassessment. This article sets out the definition, origin, motivations, method, timing, advantages and limits of intangible valuation in transfer pricing, the five mistakes to avoid, two worked cases in Switzerland and Europe, a word from the founder, a ten-question FAQ and an operational summary.

Secure the arm's length value of your intangibles with Hectelion

Before setting an intra-group royalty or transferring an intangible, have its arm's length value established by an independent valuer, alongside your tax advisers. Hectelion works on the valuation of intangible assets and the structuring of intra-group flows, in Switzerland as in Europe. To discuss it, book a first thirty-minute call through our online calendar, then read on to understand each mechanism of the method.

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Definition: what is the transfer pricing of an intangible asset?

The transfer pricing of an intangible asset is the price, or royalty, set when one entity of a group makes an intangible available to another, whether by outright sale, licence or provision within a production chain. The rule is the arm's length principle: this price must be the one independent parties would have agreed in comparable circumstances. The range of intangibles concerned is broad, from brands and patents to know-how, designs, software and databases, as long as they can be owned or controlled for commercial purposes.

The difficulty specific to intangibles lies in their uniqueness. A patent or a brand has by nature no strictly comparable equivalent on the market, which often deprives the valuer of direct references and requires financial valuation techniques. Chapter VI of the OECD Guidelines enshrines this reality and introduces the DEMPE analysis, named after the five functions, development, enhancement, maintenance, protection and exploitation, that determine which entity is entitled to the intangible's return. The value of a brand or a patent is therefore built at the crossroads of finance and functional analysis.

Origin: from the OECD arm's length principle to DEMPE analysis

The arm's length principle is not new. It has appeared in Article 9 of the OECD Model Tax Convention for decades and runs through the bilateral treaties. The Transfer Pricing Guidelines, published and regularly updated by the OECD, give it operational form, method by method, transaction by transaction.

The decisive turn dates from the BEPS work of 2015, since integrated into the 2022 edition of the Guidelines. Before it, the legal owner of an intangible captured most of the return, which allowed a patent or a brand to be housed in a low-substance entity to concentrate profits there. The DEMPE analysis reversed this logic: the return now goes to the entities that actually perform and control the functions of development, enhancement, maintenance, protection and exploitation, and that bear the related risks. Legal ownership is no longer enough, substance commands. The 2022 edition completed the framework with an annex on hard-to-value intangibles, allowing tax administrations to adjust ex post a value ex ante contradicted by the facts.

Why rigorously value an intra-group intangible

First, tax security. A poorly substantiated royalty or transfer value exposes the group to a reassessment, double taxation and penalties, in two or more jurisdictions at once. A solid valuation is the best insurance policy.

Second, defensibility. In the event of an audit, the tax authority expects a documented functional analysis, a benchmarking study and a reproducible valuation. A figure without a method does not withstand a trained inspector.

Third, economic consistency. The intra-group price must reflect the reality of functions and risks. A royalty disconnected from each entity's effective contribution weakens the group's entire value chain.

Fourth, legitimate optimisation. Well conducted, allocating value to the entities that create the intangible allows real incentives to be used, such as the Swiss patent box, without tipping into the artifice sanctioned by DEMPE.

Fifth, preparing operations. A sale, a reorganisation or an intangible migration requires a defensible starting value, often reviewed by several administrations, which drives the tax cost of exit.

How the arm's length value of an intangible is built

The approach follows a rigorous sequence. The first step is the precise identification of the intangible and the transaction: is it a sale, a licence, a provision? The second step is the DEMPE functional analysis, which establishes which entity develops, enhances, maintains, protects and exploits the intangible, and which controls its risks. It determines who the return should go to, before any figure is discussed.

DEMPE function	What it covers
Development	Research, design and creation of the intangible
Enhancement	Enrichment and updating over time
Maintenance	Technical and commercial upkeep of the asset
Protection	Legal defence, patents, trademarks, litigation
Exploitation	Bringing to market and revenue generation

The third step is the choice of valuation method. The International Valuation Standards, in particular IVS 210 on intangible assets, structure the analysis around three complementary approaches. The cost approach rebuilds either the costs actually incurred to create the asset, or the replacement cost of an asset offering equivalent utility. The market approach relies on comparable transactions, sales or licences of similar assets. The income approach, the most frequent for brands and patents, takes the present value of future cash flows attributable to the asset, notably through the relief-from-royalty method. The OECD transfer pricing methods, comparable price, relief-from-royalty or profit split, map directly onto these three approaches.

Approach (IVS 210)	Principle	When to use
Cost approach	Costs actually incurred (reproduction cost) or replacement cost of an asset of equivalent utility	Intangibles without identifiable own cash flows, such as internal software or a database
Market approach	Prices of comparable transactions, sales or licences of similar assets	When real comparables exist (comparable price, CUP or CUT)
Income approach	Present value of future attributable cash flows, via relief-from-royalty or excess earnings	Brands and patents generating identifiable revenue

Whatever the approach, a preliminary step is often decisive: the financial due diligence of the targeted asset. The cost approach, in particular, is only worth as much as the costs actually incurred are reliable, which requires auditing them, restating irrelevant items and verifying their effective connection to the intangible. Hectelion carries out this targeted financial due diligence upstream, to base the valuation on verified data rather than on declarative figures.

The fourth step is the benchmarking study, essential to calibrate a royalty rate from real licence agreements. The fifth step is building the model, with a consistent discount rate, often derived from the weighted average cost of capital, and a realistic economic life. The sixth step is documentation, which traces each assumption to make it auditable.

How to set an arm's length intra-group royalty

The intra-group royalty, the price a subsidiary pays to use a group brand or patent, is set through a benchmarking study. One looks for licence agreements concluded between independent parties in the same sector, then adjusts them for differences in territory, exclusivity, scope of rights granted and underlying profitability. Specialised databases provide reference points, but none dispenses with adjustment work specific to the transaction.

A rate is never adopted without a consistency check. The rule of thumb of a quarter of profits, long used, is now set aside by the OECD. A margin test is preferred: the royalty must leave the operating company a reasonable operating result, neither loss-making nor abnormally high. A royalty that deprives the operator of any margin, or leaves it too much, signals a mis-calibrated rate. And the rate is only valid if the entity receiving the royalty actually performs the DEMPE functions: without substance, the royalty is recharacterised.

Transfer pricing in Switzerland and France: the practical differences

Both countries apply the same arm's length principle from the OECD, but their framework differs markedly. France has codified the rule in Article 57 of the General Tax Code and attaches to it a formal documentation obligation, with a master file and a local file for groups above certain thresholds, on pain of penalties. The tax authority is active there and litigation frequent, which makes documentation and rate consistency essential.

Switzerland, for its part, has no dedicated transfer pricing legislation. It applies arm's length through Article 58 of the Federal Act on Direct Federal Taxation, under the heading of assessable benefits, and refers to the OECD Guidelines as an interpretive tool. There is no formal documentation obligation as detailed as in France, the practice of cantonal rulings is well developed, and the patent box arising from the TRAF reform offers a real incentive on patent income. For a Franco-Swiss group, the challenge is to satisfy both logics at once: French documentary rigour and the substance required on the Swiss side.

When to use an intangible valuation in transfer pricing

The need first arises when setting up or revising an intra-group royalty, for example when a parent company charges its subsidiaries for the use of its brand. It also arises during an intangible migration, when a patent or know-how changes entity or country, which often triggers an exit tax reviewed by several administrations.

It becomes unavoidable during a reorganisation, a centralisation of intellectual property in a dedicated entity, or the setting up of a patent box regime that requires demonstrating consistency between the tax incentive and the substance of the functions. It is finally triggered on the occasion of a tax audit, a request for a ruling or an advance pricing agreement, or ahead of a sale where the value of intangibles weighs heavily, a subject we also address through purchase price allocation. In all these cases, a value established before the operation is better than a figure reconstructed under the pressure of an inspector.

Who to call on

Three criteria should guide the choice. The first is the independence of the valuer, because an arm's length value produced by an interested party loses all probative force. The second is the joint mastery of finance and the transfer pricing framework, valuing an intangible requiring both rigorous financial modelling and a fine reading of the DEMPE analysis. The third is knowledge of the Swiss and European context, so much do regimes and audit practices differ from one jurisdiction to another.

Hectelion acts as an independent boutique firm, alongside your tax advisers, to produce the intangible valuation and the arm's length royalty rate, using a multi-method methodology aligned with IVSC standards and the OECD Guidelines, in the extension of our business valuation engagements. Our role is neither to draft the transfer pricing documentation nor to deliver tax advice, but to provide the independent and defensible value brick on which the whole rests. We support groups and transactions of 2 to 500 MCHF, in full independence from traditional financial intermediaries.

Advantages: security, defensibility, consistency

The first advantage is tax security: a value established under the OECD Guidelines reduces the risk of reassessment and double taxation, and facilitates obtaining an advance agreement. The second advantage is defensibility: a documented, reproducible valuation backed by a functional analysis withstands an audit and provides a solid base in the event of litigation. The third advantage is consistency: aligning the value and the royalty on each entity's real contribution makes the transfer pricing policy stable over time and legible for all the administrations concerned. Well conducted, the valuation turns a risk area into a compliance asset.

Limits: uncertainty, substance, regulatory change

The first limit is the uncertainty inherent in any intangible: its future cash flows rest on projections, and the hard-to-value intangibles approach allows the tax authority to revise ex post a value contradicted by results. The second limit is the substance requirement: no valuation, however solid, will make up for an allocation of income to an entity that does not actually perform the DEMPE functions. Value follows substance, never the reverse.

The third limit is regulatory change. The framework is moving, with a proposed European directive aiming to enshrine the arm's length principle and the OECD Guidelines in Union law, still at the negotiation stage. An intangible valuation must therefore be revisited periodically, as regimes and case law take shape. It secures a position at a given moment, it does not freeze it forever.

The 5 mistakes to avoid

Mistake 1: Relying on the legal owner and ignoring the DEMPE analysis

This is the structuring mistake since BEPS. Housing an intangible in an entity solely because it holds the legal title no longer suffices to attach the income to it. If the functions of development, enhancement, maintenance, protection and exploitation are performed elsewhere, that is where the return must go. Any valuation that neglects the functional analysis starts from a false base.

Mistake 2: Setting a royalty without a defensible benchmarking study

A royalty rate chosen for convenience, without reference to real licence agreements or a recognised database, does not withstand an audit. Calibration must rely on comparables selected methodically, adjusted for differences in sector, territory and scope of rights granted.

Mistake 3: Housing an intangible in a substance-less holding

Placing a brand or a patent in an entity devoid of human resources and decision-making capacity, a mere shell, invites recharacterisation. The entity must effectively control the risks and have the financial capacity to bear them, failing which it receives only a financing return, not the intangible's return.

Mistake 4: Neglecting hard-to-value intangibles and the risk of ex post adjustment

For a highly uncertain intangible, transferred while its potential is not yet proven, the OECD allows tax administrations to compare the value adopted with the results actually observed and to adjust accordingly. Ignoring this mechanism means exposure to a reassessment years later. It is better to document assumptions and provide for price adjustment clauses.

Mistake 5: Confusing book value, tax value and arm's length value

The net book value of an intangible, its tax base and its arm's length value are three distinct quantities. Using book value to set a transfer price, or the reverse, leads to inconsistencies that the tax authority immediately spots. Each use calls for its own measure of value, established under the appropriate framework.

Case 1: a brand transferred to a Swiss IP holding, a 2% royalty and a value of CHF 11 million

A Franco-Swiss industrial group wishes to centralise its brand in an intellectual property company established in Switzerland, which will then license it to its operating subsidiaries. Two questions arise: which transfer value to adopt for the brand, and which royalty rate its subsidiaries will have to pay? The brand generates attributable revenue of CHF 6,000,000, set to grow by about 3% per year before stabilising at 2%.

The benchmarking study, based on licence agreements in the sector, results in an arm's length royalty rate of 2.0% of revenue. The brand's value is then estimated using the relief-from-royalty method: the after-tax royalties the group saves by owning the brand rather than licensing it are discounted. With a tax rate of 15%, a discount rate of 10% and long-term growth of 2%, the brand's arm's length value comes out at around CHF 11,000,000.

The substantive condition is the DEMPE analysis. The Swiss company will only capture this return if it actually performs the functions of managing, protecting and developing the brand, with the corresponding human resources and decision-making capacity. A substance-less holding would receive only a financing remuneration, and the brand's return would be reallocated to the entities that keep it alive. The patent box regime, reserved for patents and comparable rights, does not apply to a brand, which must be clearly distinguished. Well built, this scheme combines a defensible 2% royalty, a documented CHF 11,000,000 transfer value and real substance in Switzerland, secured where needed by a cantonal ruling.

Case 2: a patent licensed in Europe, DEMPE analysis before the royalty rate

A European group developed a patent in its French research centre, then wishes to house it in an intellectual property company in another Member State, which will license it to production subsidiaries. The product protected by the patent generates revenue of EUR 80,000,000. The benchmarking study sets the arm's length royalty rate at 5%, being EUR 4,000,000 per year. With a tax rate of 25%, the after-tax royalty stands at EUR 3,000,000.

The patent's value is calculated over its remaining economic life, here eight years, because a patent expires, unlike a brand which renews. By discounting the after-tax royalties at 11%, the patent's arm's length value comes out at around EUR 15,000,000. This figure will serve as the basis for the transfer, reviewed where applicable by the two administrations concerned.

But the rate and the value are only the second half of the reasoning. The DEMPE analysis comes first: the French research centre developed, enhances and maintains the patent. A substantial share of the return must therefore go to it, whatever the location of the legal owner. An intellectual property company without a research team or real control of risks would receive only a financing return, and not the patent's residual profit. If actual results diverge significantly from the projections adopted, the hard-to-value intangibles approach further allows an ex post adjustment. The lesson is constant: the value of a patent is never read independently of the functions that create it.

A word from the founder

« On intangibles, I see two symmetrical mistakes. Some groups understate the value to minimise the royalty and draw the tax authority's attention. Others overstate it to inflate a deduction, and get caught the same way. The right value is neither the lowest nor the highest, it is the most defensible. »

« The DEMPE analysis changed our profession. You can no longer house a patent in a mailbox and hope to concentrate profits there. The question I always ask first is not where the legal title sits, but who actually develops, maintains and defends this asset. Value follows those who do the work. »

« Our role is precise: we do not replace the tax adviser, we give them the independent value brick that holds up in an audit, in Switzerland as in Europe. A substantiated, reproducible figure, aligned with the OECD. It is this rigour that turns a reassessment risk into a secured position. »

Aristide Ruot, Ph.D.
Founder | Chief Executive Officer, Hectelion SA

FAQ: the 10 essential questions on the transfer pricing of intangibles

Introduction: what to remember before the questions

The transfer pricing of intangibles follows a now settled logic: value follows substance, the royalty follows comparables, and everything must be documented under the OECD Guidelines. The following questions answer the most frequent queries of the finance and tax departments of groups active in Switzerland and Europe.

Q1: What is the arm's length principle applied to intangibles?

It is the rule that the price or royalty of an intangible exchanged between related entities must be the one independent enterprises would have agreed. For a unique intangible, without a direct comparable, it is rebuilt through financial valuation techniques framed by Chapter VI of the OECD Guidelines.

Q2: What is the DEMPE analysis and why does it prevail over legal ownership?

DEMPE refers to the five functions related to an intangible: development, enhancement, maintenance, protection and exploitation. Since the BEPS work, the return of an intangible goes to the entities that actually perform and control these functions, and not to the one that merely holds the legal title. Substance prevails over form.

Q3: Which method to value an intra-group intangible?

There is no single method. Depending on the case, one uses the comparable price where it exists, relief-from-royalty for a brand or a patent, excess earnings for a dominant intangible, or profit split for an asset developed jointly. The choice follows from the functional analysis and the availability of data.

Q4: How to set an arm's length royalty rate?

Through a benchmarking study based on real licence agreements, selected by sector, territory and scope of rights, then adjusted. Specialised databases provide reference points, but the analysis must remain tailored to the precise transaction, otherwise it is set aside.

Q5: Does Switzerland have transfer pricing rules?

Switzerland has no dedicated legislation, but applies the arm's length principle through Article 58 of the Federal Act on Direct Federal Taxation, which allows assessable benefits between related parties to be corrected. The tax authority and courts refer to the OECD Guidelines as an interpretive tool.

Q6: What is the Swiss patent box and how does it interact with transfer pricing?

Arising from the TRAF reform that came into force in 2020, the patent box allows cantons to tax the income of patents and comparable rights at a reduced rate. It does not remove the need to set arm's length transfer prices, and its benefit presupposes real substance of the DEMPE functions. It does not apply to brands.

Q7: What is a hard-to-value intangible?

It is an intangible transferred while its prospects are highly uncertain and without a reliable comparable. The OECD then allows tax administrations to compare the value adopted with the results actually observed and to adjust it ex post. Hence the importance of documenting assumptions and, often, of providing price adjustment clauses.

Q8: Where does European harmonisation of transfer pricing stand?

The European Commission presented in 2023, in the BEFIT package, a proposed directive aiming to enshrine the arm's length principle and the OECD Guidelines in Union law, with particular attention to transfers of intangibles. This text is still at the negotiation stage between Member States and is not in force.

Q9: Can a position be secured by a ruling or an advance agreement?

Yes. In Switzerland, a cantonal ruling can confirm the treatment adopted. Internationally, an advance pricing agreement, bilateral or multilateral, secures the method with several administrations. In all cases, an independent valuation of the intangible is the prerequisite.

Q10: What is the role of an independent valuer alongside the tax adviser?

The tax adviser defines the strategy, drafts the documentation and manages the relationship with the tax authority. The independent valuer provides the intangible's value and the arm's length royalty rate, using a reproducible financial method aligned with the OECD. This separation of roles strengthens the probative force of the whole.

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Conclusion: value follows substance, never the reverse

The transfer pricing of intangibles is one of the most technical and most audited areas of international taxation, because that is where a group's value and margins concentrate. The rule is simple to state, demanding to apply: the price of a brand, a patent or know-how exchanged between related entities must be arm's length, established by a defensible financial method and backed by a DEMPE functional analysis. Since the BEPS work, legal ownership is no longer enough, and it is the substance of the functions performed that commands the allocation of the return. For a group active in Switzerland and Europe, security comes from a value established before the operation, documented, reproducible and aligned with the OECD Guidelines, and revisited regularly as the framework evolves.

Article summary

The transfer pricing of an intangible asset is the price or royalty set between entities of the same group, subject to the arm's length principle of Article 9 of the OECD Model Convention. For a unique intangible, without a direct comparable, value is rebuilt through financial techniques, relief-from-royalty, excess earnings or profit split, framed by Chapter VI of the OECD Guidelines. The DEMPE analysis conditions everything: the return goes to the entities that actually develop, enhance, maintain, protect and exploit the asset, not to its sole legal owner.

The two worked cases illustrate this. In Switzerland, a brand centralised in an intellectual property company calls for an arm's length royalty of 2% and a transfer value of around CHF 11,000,000, provided there is real substance. In Europe, a patent developed in France and licensed to production subsidiaries is worth around EUR 15,000,000 over its remaining life, but the DEMPE analysis requires that a substantial share of the return go to the research centre that creates it.

The success of the exercise rests on an independent, multi-method valuation aligned with IVSC standards and the OECD Guidelines, and on close coordination with the group's tax advisers. Hectelion provides this defensible value brick, in Switzerland as in Europe, for groups and transactions of 2 to 500 MCHF, in full independence from traditional financial intermediaries.