Plain English
Owning a patent on paper does not entitle you to its profits. What matters is who does the work, who controls the risk, and who funds it with the ability to bear the downside. A legal owner that does nothing but hold title is generally entitled to little more than a risk-free funding return.
Technical definition
Chapter VI requires identification of the intangible and its legal owner, the DEMPE functions performed, assets used and risks assumed by each associated enterprise, and confirmation of consistency between contractual arrangements and actual conduct, before determining arm's length compensation.
Why it matters
It dismantled the cash-box structure. Post-BEPS, intangible income follows substance, and DEMPE is the analytical route authorities use to reallocate it.
How it works in practice
- 01Identify the intangible with specificity — not 'the brand' but which registered marks and know-how.
- 02Identify the legal owner under contract and registration.
- 03Map who performs each DEMPE function and who controls each function.
- 04Assess who assumes and controls economically significant risks and has financial capacity.
- 05Compensate functions, then attribute residual return to control of risk.
Worked example
Funder without control
An IP-holding company funds 200m of R&D but has no technical staff and cannot evaluate or halt projects. It is entitled to a risk-free return on the funding, not the residual intangible profit. The operating company performing and controlling R&D takes the residual. The difference can be tens of millions annually.
Common mistakes
- Equating legal ownership with entitlement to residual profit.
- Confusing outsourcing a function with losing entitlement — control, not performance, is decisive.
- Failing to evidence board-level decision making in the funding entity.
Audit red flags
- IP owner with no employees.
- R&D services charged at cost-plus while all upside accrues offshore.
- Board minutes signed by non-resident directors after the decisions were taken.
Documentation & data
Documents to hold
- DEMPE matrix by function, entity, and control evidence.
- Board minutes and delegation authorities.
- Cost contribution or licence agreements aligned with conduct.
Data you need
- R&D headcount and spend by entity.
- Decision-rights documentation.
- IP registers.
Who owns this internally: Group tax with R&D leadership and legal IP counsel.
Jurisdiction notes
- OECD
- Chapter VI, introduced by BEPS Actions 8-10, sets out the DEMPE framework and hard-to-value intangibles approach.
- United States
- Cost sharing regulations and the platform contribution transaction rules address similar economics through a different mechanism.
Notes by role
CFOs & finance leaders
If a restructuring depends on moving IP, budget for substance: real people, real decision rights, real board process in the owning jurisdiction.
Students & job seekers
Memorise the five letters and, more importantly, the point that control of risk outranks performance of the function.
Frequently asked
- Does outsourcing R&D lose you the intangible return?
- Not if you retain control over the outsourced function and bear the risk with financial capacity to do so.
- Is DEMPE a method?
- No. It is an analytical framework that informs which method and which allocation of return is appropriate.
Sources & status
- Primary source
OECD Transfer Pricing Guidelines, Chapter VI
OECD, 2022
- Primary source
BEPS Actions 8-10 Final Reports
OECD, 2015
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
Careers
How this shows up in the job
DEMPE questions dominate intangibles interviews. Prepare one concrete example of substance evidence you would ask for.
Careers in transfer pricing