The conclusion of the OECD’s BEPS-project (‘Base Erosion and Profit Shifting’) states that taxation should be aligned with a transaction’s economic reality rather than strictly focusing on the transaction’s legal/contractual terms. This principle also applies when determining transfer pricing for intangible assets and is described in action 8-10 of the BEPS-project (“Aligning Transfer Pricing Outcomes with Value Creation”). For example: the mere fact that an entity is the legal owner of an intangible asset does not mean that that entity is entitled to all the profits relating to the intangible asset. The revised OECD Transfer Pricing Guidelines for Multinational Enterprises (“OECD Guidelines”) state that if an entity only has the legal ownership of an intangible asset (and not the economic ownership), then that entity should only receive a limited amount of remuneration for its legal ownership. The residual profit resulting from that intangible asset, on the other hand, should be allocated to the intangible asset’s economic owner.

To determine whether an entity has economic ownership of an intangible asset, the OECD Guidelines prescribe that it should be delineated whether an entity performs the so-called 'DEMPE functions’. DEMPE stands for Development, Enhancement, Maintenance, Protection and Exploitation. There are three factors to consider when determining who is performing what function, which are:

1. control,

2. funding, and

3. risk.

Per DEMPE function it should be determined: who has control, who is funding, and who is incurring the risks related to the function. The determination of the functions performed and the consideration of the factors are combined in a DEMPE analysis. Such a DEMPE analysis should be prepared on a case-by-case basis and should be substantiated by objective documents such as annual reports, board meeting notes or any other internal documents that could provide further substantiation.

After having performed a DEMPE analysis, it can be determined which entity is entitled to the profits resulting from an intangible asset. However, it can also be concluded that multiple entities perform considerable DEMPE functions. In that case, multiple entities are entitled to the profits resulting from an intangible asset. The OECD Guidelines set out that the Profit Split Method is the most appropriate method for allocating the profits in such circumstances.