A Group of companies usually has one brand name, one trademark, etc.
It is natural that a Group of companies would run a unified promotional campaign. In most cases, these campaign expenses are included in the accounting of one of the members of the Group (usually the operating or holding company). This situation creates a question: how to account these promotional expenses correctly for tax purposes?
Position of the financial authorities in these situations is univocal: if a company incurred expenses for the advertisement of goods, services, a trademark, etc., which was legally related to the business activity of another company or several members of the Group of companies, the company may not include all these expenses in full in its accounting since they promote goods/services of other companies as well as its own. The Russian Ministry of Finance claims that the purpose of advertisement/promotion is to cultivate interest to the promoting entity and its services. Therefore, the expenses for such advertisements not conducted directly by the company offering the specific goods, services, brands, etc. may not be accounted for tax purposes, even if related to the company’s activity.
Russian arbitration courts have upheld this position.
In actual practice, usually the situation unfolds as follows: a trademark is registered by one company (usually the Custodian of the business assets), while the trademark identifies the whole group of businesses and is used by other member companies per contract or without official documentation for use.
In the absence of a contract stipulating the right to use the trademark by other members of the Group, promotional expenses may not be included within the fiscal accounting.
At times, reverse situations take place when companies who are not rightsholders for the trademark bear advertisement expenses without contractual documentation of rights for the use of the trademark. In this situation, the tax authorities may:
- Recognize that the company-holder of the rights to the registered trademark receives profit in a form of services that can be appraised according to its market value and assess additional profit tax to the company holding the trademark rights;
- Dispute the calculation of promotional expenses by the operating company due to the insufficient economic feasibility of these expenses (because promotional expenses for trademark advertisement are directed to increase the economic gain of the holder of the rights and not related to business activity of the operating company).
Based on abovementioned risks, in order to avoid possible disputes with the tax authorities regarding the validity of promotional expenses, it is necessary to confirm the relationship between members of the Group of companies through contracts.
It can be presented as a joint marketing campaign or through an agency contract allowing the company which incurs the advertisement expenses to pass some of these expenses to other companies in the group for their part in the marketing campaign.
A licensing agreement or a franchising contract between the companies in the Group allows for setting a predetermined operating range, including an option to divide marketing responsibilities between the rights holder and the rights users.
We must note that these agreements for transfer of usage rights must be registered through the Russian Federal Agency for Patents and Trademarks.
Special attention must be given to accounting of marketing expenses within the framework of a simple partnership agreement. Simple partnership is a contractual association of two or more legal entities / private entrepreneurs conducting joint business activity based on mutual agreement. At the same time, the simple partnership does not create a new legal entity, thus it does not incur the functions of a taxpayer. Therefore, as an example, a simple partnership is not subject to Tax Code norms regulating certain types of expenses, including advertisement expenses. Thus, by creating a simple partnership, companies may be able to decrease their marketing expenses, and their declared profit and profit tax bases.
Translated by Alinga Consulting Group.
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