CIRD45055 - Intangible assets: related party rules: licence not granted at market value – how to apply market value
As explained in CIRD45050, when a grant does not fall to be adjusted for transfer pricing (CTA09/S849AB(1A)(a)(i)), CTA09/AS849AB requires a market value adjustment to be made in respect of the grant of a licence or other right between related parties. The guidance below covers some practical considerations.
Market Value
Market value is defined by CTA09/S849AB(12):
“Market value” means the price the licence or right might reasonably be expected to fetch on a sale in the open market’. “Sale” in this context is synonymous with grant.
Applying market value to the grant of a licence
CTA09/S849AB addresses the risk that a tax advantage may arise where rights in respect of an intangible asset are granted between related parties other than at market value. CTA09/S849AB does not, in general terms, require a licence granted in return for a royalty to be compared with a "sale". For example; there is no requirement to establish the net present value of a royalty licence or substitute a licence for royalties with an equivalent lump sum or upfront fee licence.
CTA09/S849AB requires a comparison of the amounts payable under the terms of the licence with the amounts that the market would expect to pay on the grant of that licence. The amounts payable in this context are all the payments due under the licence, or the undertaking to make such payments. This could include future royalties, up-front or lump sum payments and any other amounts payable under the terms of the licence. It is legitimate to consider whether a royalty licence should include an upfront fee, if that is what the market would expect on the grant of that licence.
If it can be concluded that the licence was granted at market value no adjustment will be due under CTA09/S849AB. For example, if a licence granted at a fixed 5% royalty with no upfront fee payable is what would be expected on a grant in the open market, no adjustment will be required. Conversely, a licence granted on terms different to those which would be expected on the open market might lead to the conclusion that some or all of the terms (such as royalty rate, steps in the royalties, up-front payment, contingent milestone payments etc.), require adjustment or imposition.
Each case must be considered on its own facts by reference to a sale/grant on the open market.