Trademarks: Accounting and Taxation of Transactions Related to Trademarks

1. Trademarks: Accounting and Taxation of Transactions Related to Trademarks Alexey Anatolievich Spirihin Auditor «Alinga Consulting Group» June 6, 2007

2. Contents • Account of exclusive right to trademark. • Establishing initial cost in bookkeeping and tax account. • Amortization of exclusive right to trademark. • Retirement of trademark. Bookkeeping and tax aspects. • Granting of exclusive right to trademark by licensing agreement. Account of grantor of license. Account of grantee of license. • VAT in trademark licensing agreements.

3. Bookkeeping account(governed by Rules of Accounting 14/2000 «Intangible assets account» Absence of material-physical form; Possibility of distinguishing from other property; Use in production of product or for management needs of organization; Use over a long period of time (more than 12 months); Organization does not propose further re-sale of the property; Capability of bringing the organization economic benefit (income) in the future; Presence of appropriate documents confirming existence of the asset and exclusive right of the organization as a result of intellectual activity (patents, certifications, other protective documents, agreement of surrender (acquisition) of patent or trademark). Trademark – one kind of intangible asset (IA). Conditions for considering it an IA in accounts. Tax account(governed by Tax Code of RF (TCRF) – p.3 art.257 TC RF“Procedure for determining value of amortized property” • Use in production of product or management needs of organization over a long period of time (more than 12 months); • Capability of bringing economic benefit (income); • Presence of appropriate documents confirming existence of the intangible asset and the organization’s exclusive right to it Intangible assets include: • Exclusive right to an invention; • Exclusive right to a computer program; • Exclusive right to a trademark; • Possession of “know-how”, a secret formula or process.

4. Bookkeeping account The initial cost of an acquired trademark, according to p.6 Rules of Accounting 14/2000,is considered to be the sum of the actual expenses incurred in its acquisition (for example, sums paid to the rights holder, for information services, government registration fees,remuneration paid to intermediary organizations, etc.), except for value added tax (VAT)and other reimbursable taxes; The initial cost of a trademark created by an organization itselfis considered to be the actual expenses incurred in its development,preparation (including material resources, salaries, payments to outside organizations, fees, etc.),except for reimbursable taxes. Establishing initial cost of trademark. Tax account • The initial cost of an acquired trademark,according top.3 art. 257 TC RF, is considered to be the sum of expenses incurred in its acquisition (creation) and bringing it to the pointwhere it can be used, except for a value added tax (VAT); • The initial cost of a trademark created by the organization itself, according top.3 art. 257 TC RF, is considered to be the sum of actual expenses incurred in its creation, preparation (including material expenses, salaries, payments to outside organizations, patent fees), except for a taxestaken into account in the list of expenses.

5. Bookkeeping account Methods of calculating amortization (linear, proportional to production volume, declining balance); Procedure for reflecting in bookkeeping account – accumulation of amortization deductions in separate account or by means of declining balance of trademark value; Procedure for allocating calculated amortization of trademark to expenses – as usual kinds of activity and other expenses. Amortization of the exclusive right to a trademark. Tax account • Methods of calculating amortization (linear, nonlinear); • Procedure for allocating calculated amortization of trademark to expenses connected with production and sales or non-sales expenses.

6. Bookkeeping account Writing off trademark (IA) from account. Reasons for right off of trademark (ceasing of production, expiration of period of validity of patent, certification, granting (sale) of exclusive rights to the results of intellectual activity, etc.); Procedure for reflecting income and expenses from the writing off of trademark in bookkeeping account. Retirement of trademark. Tax account • Retirement of trademark (IA). Procedure for reflecting income (losses) (p.1 art. 249 TC RF, art.323 TC RF) when trademark is retired; • Procedure for reflecting expenses (losses) when trademark is retired (no definite code established). Is the procedure analogous to the account for write offs of fixed assets? (pp.8 p.1 art.265 TC RF“Non-realization expenses”, taking into account the provisions of pp.1 p.1. art. 268 “peculiarities in determining expenses in the sale of goods and/or property rights”)?

7. Granting the right of exclusive use of a trademark under licensing agreement. Account of grantor of license. Account of grantee of license. • Account of grantor of license (rights holder): procedure for reflect the income in bookkeeping accounts (Rules of Accounting 9/99 “Income of organization”)and in tax account (art. 249 “Income from sales”and art. 250 TC RF“Nonsales income” • Account of grantee of license (entity conducting business activity involving goods for which the trademark is registered): procedure for reflecting expenses on the bookkeeping account (Rules of Accounting 14/2000 “Intangible assets account”, Rules of Accounting 10/99 “Expenses of organization” and in tax account (pp.37 p.1 art. 264 TC“Other expenses connected with production and sales”, pp.8 p.2 art. 256 “Amortized property”, letter of Ministry of Finance of RFdatedJune 23, 2006 №03-03-04/1/542 Licensing agreement. Kinds of remuneration in licensing agreements (royalties,lump-sum payments, combined payments).

8. VATon trademarks granted under licensing agreements. • Upon the granting of a trademarkin a licensing agreement the object of taxationis determined by taking into account the provisions of article 148 “Place of sale of services”, and specifically pp.4 p.1 of that article; • Moment of determination of tax basis for VAT if one-time payment (lump sum) or periodic payments according to agreement (royalties); • Account“incoming”VAT per licensing agreement. Official position (LetterDept. of Tax Ministry RFfor MoscowdatedAugust 10, 2004 №24-11/52247).

9. Thank you for your attention! Respectfully, and with best wishes, Tel: (495) 223 6595 (495) 506 5086 www.acg.ru In filling out your tax declaration, don’t forget in the box for “dependents”to write “the government”! (folk saying)