Spain: The price of products purchased from the group may implicitly include a royalty for the use of intangible assets, subject to a nonresident income tax withholding

In a judgment dated May 4, 2026, the Madrid High Court examined a case involving a Spanish subsidiary acting as a limited risk distributor in Spain of goods of its European parent company. The sale and distribution agreement signed by the subsidiary included a clause in which the parent company granted the right to use the group’s intangibles with an express statement that the right was granted for no consideration. Tax auditors concluded that the overall price that the subsidiary paid to the parent company for the purchase of goods must be regarded as including an implicit royalty for use of the intangibles, on which the subsidiary should have made a nonresident income tax withholding.

The Madrid High Court confirmed the auditors’ reasoning by holding that the distributor subsidiary did not simply purchase and resell products under a trademark. Instead, it made intensive use of the intangibles which went beyond distribution alone. The court based its finding of a royalty payment on the following reasoning:

1. First, the general presumption of consideration applied under article 12.2 of the Revised Nonresident Income Tax Law, pursuant to which transfers of rights capable of generating income subject to nonresident income tax are presumed to be made for consideration, unless proven otherwise. The appellant failed to rebut that presumption.
2. It further invoked paragraph 6.82 of the OECD Transfer Pricing Guidelines which states that, where the use of a trademark confers an economic benefit to a member of the group other than the legal owner of the intangible, it is reasonable to conclude that, under the arm´s length principle, a payment would have been made for that use.
3. Moreover, it highlighted the reasonableness of the tax authorities’ inferential reasoning: if it were not understood that a royalty is included in the price, the European parent company would incur net loss from use of the trademark in Spain, which defies all business logic.
4. Lastly, the court noted that, generally speaking, in the group there were up to twenty-five subsidiaries that paid royalties for use of the intangibles.

In relation to the pricing of the royalty, the court accepted the reasonable apportionment principle applied by the tax auditors as set out in comment 11.6 to article 12 of the OECD Model Tax Convention, breaking down the total purchase price of the goods as follows: 92% as the purchase of goods and 8% as a royalty, a percentage that matches that paid by the European parent company to the owner of the intangible assets and is consistent with the comparability study provided by the taxpayer itself. It was further determined that, with this breakdown, the subsidiary's gross margin falls within the arm’s-length range of its own comparables, which was not the case when the royalty was not separated from the purchase price.

Lastly, the court rejected the subsidiary’s claimed comparability with an independent distributor of the group in Portugal, after finding fundamental differences: that distributor was contractually prohibited from using the trademarks as a store sign, trade name, or domain name and had to obtain prior approval for any such use. These restrictions did not apply to the Spanish subsidiary.