Intangibles in transfer pricing:
DEMPE functions, HTVI and the end of royalty caps.

What an intangible is (for TP)

For transfer pricing, an intangible is not what accounting records as an asset, but what would be remunerated between independent parties in comparable circumstances. The law is explicit (Law 14.596/2023, art. 19, I): it is the asset that, being neither tangible nor financial, can be held or controlled for commercial use and whose use or transfer would be remunerated between unrelated parties — regardless of registration, legal protection or accounting recognition. The test is economic, not accounting. It includes patents, trademarks, know-how, trade secrets, designs, software, customer lists and commercial relationships, licensing rights and transferable commercial goodwill.

As a rule, mere group synergies, market conditions and location advantages (passive association / market features) are not intangibles for TP — these factors enter the comparability analysis, but do not by themselves create a right to intangible remuneration (aligned with the OECD, TPG ch. VI). The practical consequence is important: an item may be off the balance sheet (know-how, customer base) and still be a remunerable intangible for TP purposes — and an accounting item may generate no remuneration between third parties. It is art. 20 that performs the delineation of the transaction (identifying the intangible, the ownership and who performs functions, uses assets and assumes and controls risks), and art. 19, I, that defines what counts as an intangible.

DEMPE functions: who keeps the return

Law 14.596/2023 (art. 21) provides that the allocation of results from intangible transactions is based on the parties' contributions and, in particular, on the relevant functions performed and the economically significant risks assumed. The law lists the functions: development, enhancement, maintenance, protection and exploitation of the intangible — the OECD's DEMPE (ch. VI).

The consequence is direct and counters the "owner is owner" intuition: a group company that merely holds legal title (legal owner), but performs no functions and controls no risks, is not entitled to the intangible's residual return — it receives, at most, a financier's remuneration, if it provided capital and controls the financial risk. Whoever decides, develops, protects and exploits captures the value. That is why the functional analysis of the intangible maps, function by function, where each is actually performed — and it is common for a relevant part to sit in the Brazilian operation, even if the trademark is registered abroad.

The law itself enshrines the concept: the relevant functions are, in so many words, the activities of development, enhancement, maintenance, protection and exploitation of the intangible (art. 19, III) — the OECD's DEMPE written into the Brazilian rule. And it resolves the financier case: the party that merely provides capital, without controlling the risk of the investment, is entitled at most to a risk-free return; if it provides capital and controls the financial risk, to a risk-adjusted return (art. 21, §2). The residual profit — the intangible's "premium" — stays with whoever performs the functions and controls the economically significant risks, not with the cash and not with the registry.

Which method prices an intangible

Once it is settled who keeps the return, the value still has to be determined. The law's list of methods (art. 11) has six options — CUP, RPM, CPM, TNMM, Profit Split and "other methods" — and the choice is for the most appropriate one to the case (art. 11, §1). For intangibles, reality bites: trademarks, patents and know-how tend to be unique, and an off-the-shelf comparable is rare.

When a reliable comparable does exist — a third-party license for a similar intangible — the CUP resolves it. Where there is none, practice converges on the Profit Split (art. 11, V), which divides the result according to each party's contributions of functions, assets and risks (well suited to cases where two group entities contribute to the same intangible), and on the "other methods" (art. 11, VI), which is where the economic valuation techniques come in — in particular the discounted cash flow. The regulation (IN RFB 2,161/2023) recognizes discounted cash flow as the typical path precisely for hard-to-value intangibles.

The practical consequence: pricing a valuable intangible is almost never applying a margin — it is building a valuation, with defensible projections, discount rate and useful life. And it is exactly that valuation that becomes the target of the ex-post HTVI examination, addressed next.

HTVI: the ex-post adjustment

For hard-to-value intangibles — transferred when reliable comparables do not yet exist and projections are highly uncertain — Law 14.596/2023 (art. 22) provides a specific rule, aligned with the OECD (ch. VI, HTVI approach).

The sensitive point: the tax authority may use actually observed later results (ex-post) as evidence of the reasonableness of the pricing set at the time of the transaction (ex-ante). If actual performance diverges greatly from the projection and the difference is not justified by unforeseeable events, room for adjustment opens. It is the rule that counters transferring a "cheap" intangible just before it appreciates. The defense is the contemporaneous documentation of the assumptions — projections, scenarios, discount rate — showing the pricing was reasonable given the information available at the time.

The law also gives a numerical safe harbor (art. 22, §3): the adjustment is set aside when the taxpayer presents the detailed projections used at the time and shows that the divergence resulted from a subsequent unforeseeable event — or, regardless of that, when the difference between the projected and the realized figure does not exceed 20% of the remuneration determined in the transaction. Where the divergence persists without support, the adjustment is made preferably through annual contingent payments, which track actual performance (§2), and not through a one-off retroactive recharacterization. It is the Brazilian translation of the OECD's HTVI approach (ch. VI, D.4).

Royalties: the end of the caps

Until 2023, the deduction of royalties paid abroad was limited by fixed percentages (1% to 5% by type of activity) under the old legislation. Law 14.596/2023, art. 46, repealed those caps as of January 1, 2024 — specifically art. 74 of Law 3,470/1958, art. 12 of Law 4,131/1962 and art. 52 of Law 4,506/1964. In place of the fixed ceiling, the full arm's length principle applies: the deductible royalty is what independent parties would pay, in light of the DEMPE functions and comparability.

However, deductibility limits remain: a royalty tends to be non-deductible when paid to a beneficiary in a tax haven or privileged tax regime, and when, between related parties, the deduction results in double non-taxation. Those who paid a royalty at the old ceiling gain room — provided they sustain the value with functional analysis; those who paid above what arm's length supports now face disallowance risk.

It is worth knowing where each rule lives, so as not to confuse the legal basis: art. 46 only repealed the old ceilings; the substantive limit lives in art. 44. Under it, a royalty paid to a related party is non-deductible when the deduction results in double non-taxation — whether because the same amount is already a deductible expense of another related party, because it is not taxable for the beneficiary in its jurisdiction, or because it funds, in a chain, expenses that produce those effects. In one sentence: the fixed ceiling is gone, but the door to hybrid arrangements was closed. There remains, moreover, the general rule that the expense must be necessary (art. 47 of Law 4,506/1964, not repealed).

A practical case: the 5% trademark royalty

Take an illustrative case, as if it were a client of the firm. A Brazilian subsidiary of a multinational group has net revenue of R$ 200 million/year and pays its parent abroad a 5% trademark royalty on revenue — R$ 10 million/year. Under the old regime, 5% was the ceiling and the deduction tended to clear on the mere percentage fit. Under Law 14.596, there is no longer a ceiling — but the tax authority now tests three things.

First, the arm's length standard: for how much would a comparable third-party trademark be licensed for this kind of product — 5%, or something like 2%-3%? Second, the DEMPE functions: if the Brazilian operation does the local marketing and helps build the brand in the country, part of the return should stay in Brazil, which reduces the arm's length royalty owed abroad. Third, art. 44: is the royalty effectively taxed at the parent, or does the arrangement generate double non-taxation?

Suppose the audit concludes that the arm's length standard would be 2.5% and disallows the excess of R$ 5 million/year. On that amount, IRPJ (25%) and CSLL (9%) apply = R$ 1.7 million of tax, plus the 75% ex officio penalty (~R$ 1.275 million) and interest — roughly R$ 3 million per year. Since the audit reaches up to five years, the accumulated exposure can exceed R$ 15 million. The price of not handling the functional analysis is high — and it accumulates silently, year after year, until the audit arrives.

What protects the subsidiary in the example? A comparables study of trademark licensing for the sector, contemporaneous with the contract; a DEMPE functional analysis showing how much of the brand-building takes place in Brazil (and therefore how much of the return is legitimately local); the registration of the contract with the INPI; and the proof of taxation of the royalty at the parent, ruling out art. 44. With that combination, 5% may even be defensible — and, if the analysis points to 2.5%, it is far better to adjust the contract before the audit than to discover the difference years later, with a 75% penalty.

What CARF shows (and what changes now)

The administrative case law on royalties and intangibles was built, so far, under the previous regime — there is still no consolidated CARF decision applying Law 14.596 (mandatory since 2024; the first audit cycle is under way). But the old rulings remain valuable as a risk map: they show where the tax authority has always aimed, and two axes carry across the change of regime.

The first is formality: CARF has repeatedly disallowed the deduction of a trademark royalty without registration of the contract with the INPI (a requirement of Law 4,131/1962, art. 12, which was not repealed). The second is characterization: the tax authority recharacterizes as a "royalty" payments labelled otherwise — typically advertising amounts contractually tied to the use of the trademark — restricting the deduction. In CARF Ruling 1401-003.636, the obligation to fund campaigns tied to the use of the trademark was treated as a royalty; in the case known as "O Boticário" (Ruling 1102-001.868), the non-deductibility of the trademark royalty without INPI registration was upheld, but it was recognized that the franchisor's genuine advertising expense is not the same as a royalty — and is therefore deductible.

The lesson crosses the regimes: the substance and the correct characterization of the payment matter more than the label. What changes with Law 14.596 is the test of how much is deductible — before, the percentage ceiling; now, the arm's length standard sustained by the functional analysis. The formalities (registration) and the discipline of characterization remain; added to them, now, is the requirement to demonstrate market value. (The rulings cited adjudicated facts of the previous regime, before Law 14.596; they serve as a risk reference, not as a precedent of the new regime, and each case requires verification of the full text.)

The evidence that sustains everything: the Local File

Everything said so far — allocation by DEMPE, HTVI defense, arm's length royalty — is worth only what is documented. Under the principle-based regime, the burden of proof shifted to the taxpayer, and its home is the Local File of Law 14.596/2023, detailed by IN RFB 2,161/2023.

For intangibles, the Local File must map the DEMPE: identify the intangible, its legal ownership and — function by function — who develops, enhances, maintains, protects and exploits, who uses the assets and who assumes and controls the risks, with the corresponding financial capacity. It is this map that justifies why part of the return stays (or not) in Brazil. For hard-to-value intangibles, more is required: recording the uncertainties existing in the pricing, the detailed projections actually used at the time and how they were addressed (adjustment clauses, contingent payments). It is exactly this set that activates the safe harbor of art. 22, §3 and sets aside the ex-post adjustment.

The difference between a solid defense and an expensive assessment rarely lies in the thesis — it lies in the contemporaneity and consistency of the documentation. A trademark comparables study produced in a hurry during the audit is worth little; the same study, dated and filed at the time of the transaction, sustains the value. Documenting is not bureaucracy: it is the defense asset.

Restructuring and the exit charge

When an intangible (or a function/risk associated with it) migrates between related parties — for example, the centralization of a brand or of R&D in another jurisdiction — the transfer must be remunerated at arm's length value, as an independent party would demand to give up the asset and its future return (the exit charge / business restructuring compensation; Law 14.596/2023, art. 26; OECD TPG ch. IX).

Reorganizations that strip the Brazilian entity's return without adequate compensation are a natural audit focus. Modeling the compensation (based on the present value of the transferred return) and documenting the business rationale are what sustain the operation.

The exit charge starts from the present value of the transferred return — how much the Brazilian entity will stop earning by giving up the intangible, the function or the risk — calculated by the same valuation techniques (discounted cash flow) used to price the intangible itself. It is not enough that there be a "business reason" for the reorganization: the party giving up the return must be compensated as a third party would demand. It is the point where transfer pricing and corporate planning meet — and where poorly documented reorganizations turn into assessments.