Parent-charged royalties are the most scrutinized — and most often denied — intragroup charge in transfer-pricing audits. Authorities reuse the same 4 reasons, and every business should know all four by heart to defend proactively.
This article examines the 4 reasons, the defense file, and appeal rights after denial.
The 4 reasons authorities use to deny royalties
Reason 1 — No proven benefit: the company pays but cannot show what value the intangible delivers (failed benefit test). Typical: brand fees while products sell on low price, not brand; technology fees for lines the company has run proficiently for years.
Reason 2 — The recipient has no DEMPE contribution: the royalty recipient is a shell (mere title holder, performing no development/enhancement/protection/exploitation functions). The fee then lacks economic basis — money paid to a “mailbox”.
Reason 3 — Duplicative fees: obsolete or commoditized technology still charged like proprietary tech; or the Vietnamese company developed its own improvements yet pays the full rate — self-created value not netted off the fee.
Reason 4 — Disproportionate rate: the fee percentage (e.g., X% of revenue) “self-set” by the group with no independent benchmarking, or well above industry practice for equivalent intangibles. No comparables, no defensible rate.
Building the defense file — and appealing a denial
The royalty defense file has 4 pillars: (1) DEMPE analysis for the intangible — who created the value; (2) benefit test — what quantified benefit the intangible brings the Vietnamese company; (3) independent benchmarking for the rate — what independents pay for equivalent intangibles; (4) contracts, payment proof, and evidence the technology is current (not obsolete).
The crux: the 4 pillars must be mutually consistent. DEMPE crediting the parent’s value-creation while the benefit test shows no concrete benefit, or benchmarking supporting 3% while the company pays 8% — internal contradiction is a fatal weakness.
After denial: statutory appeal rights apply — first complaint to the deciding authority, then administrative litigation if the complaint outcome is rejected. Mind the appeal deadlines, build the appeal file on all 4 pillars (filling gaps from the audit), and consider experienced tax-litigation counsel from the complaint stage.
Frequently asked questions
On what grounds are intra-group royalties disallowed?
Common cases: brand fees while products sell on price, not brand; technology fees for lines long since mastered in-house — generally, paying without proving what concrete value the intangible delivers (failed benefit test). Defend with quantified benefit analysis: how much the intangible lifts revenue or cuts costs.
What are the 4 most common grounds tax authorities use?
The 4 most-used reasons: (1) no proven benefit (failed benefit test); (2) the recipient is a shell with no DEMPE contribution — the fee lacks economic basis; (3) duplicative fees — obsolete/commoditized tech charged like proprietary, or self-created value not netted off; (4) disproportionate rate — “self-set”, no benchmarking, above industry practice.
How to prepare a defense dossier?
Four pillars, mutually consistent: (1) DEMPE analysis — who created value; (2) benefit test — quantified benefit to the Vietnamese company; (3) independent benchmarking for the rate; (4) contracts, payment proof, technology-currency evidence. Internal contradiction between pillars (DEMPE says one thing, the rate another) is fatal.
After disallowance, can it be appealed?
Yes. First complaint to the deciding authority; administrative litigation if the outcome is rejected — mind the deadlines. The appeal file needs all 4 pillars (filling audit-stage gaps), and experienced tax-litigation counsel is advisable from the complaint stage.
Intragroup royalties are denied not because “authorities are tough” but because files fail the 4 classic questions: where is the benefit, who created the value, is it duplicative, is the rate grounded? Answering all four with evidence protects the fee.
This article has been quality-reviewed by the FLAW AI Legal Council