DEMPE in Transfer Pricing: Functions, Analysis and Examples

DEMPE is the analytical framework used by the OECD to work out which members of a multinational enterprise (MNE) group should share in the returns from an intangible asset. It stands for Development, Enhancement, Maintenance, Protection and Exploitation. It is a diagnostic framework for applying the arm’s length principle to intangibles, not a transfer pricing method in itself and not an automatic entitlement to residual profit.¹

This guide explains the five DEMPE functions, how they interact with legal ownership, funding and the control of risk, and how to run a DEMPE analysis in practice. It includes a reusable analysis matrix, a hypothetical software example and a short section on how the results feed into method selection and documentation. It is written in British English for transfer pricing practitioners, in-house tax teams and advisers, and assumes no prior knowledge of the framework.

What you will learn

• What DEMPE means and where it sits in the OECD Transfer Pricing Guidelines.
• How Development, Enhancement, Maintenance, Protection and Exploitation differ, with examples and evidence for each.
• Why legal ownership is only the starting point, and how performance, control, financial capacity and funding all shape remuneration.
• A step by step workflow for carrying out a DEMPE analysis, with a reusable matrix.
• A worked hypothetical software example, and how changing the decision making facts changes the arm’s length result.
• How DEMPE findings inform method selection, documentation and common mistakes to avoid.

The five DEMPE functions at a glance

DEMPE describes five categories of activity that may contribute to the value of an intangible. The framework asks who performs each function, who controls the economically significant risks associated with it and who provides the assets, including funding, that make it possible.² The United Nations Practical Manual uses the term DAEMPE, adding Acquisition, to make clear that intangibles can also be acquired from third parties rather than only developed internally; the UN intends no divergence from the OECD framework.³

Function	What it covers	Illustrative activities	Evidence to look for
Development	Creating a new intangible or taking a project through research and development.	Designing and controlling research or marketing programmes; setting priorities for creative work, including “blue sky” research; approving the research pipeline and budget.	Project charters, R&D steering committee minutes, approved budgets, personnel records showing who directed the work.
Enhancement	Adding to the value of an existing intangible.	Platform upgrades, new product features, brand extension into new markets, new formulations of an existing product.	Enhancement roadmaps, release notes, marketing plans for brand extensions, approvals of material changes to the intangible.
Maintenance	Preserving the value and useability of the intangible over time.	Patent and trademark renewals, quality control, routine updates, ongoing know how upkeep.	Renewal filings, quality assurance reports, service level records, maintenance budgets.
Protection	Defending the intangible against infringement and misappropriation.	Patent prosecution, trademark enforcement, trade secret controls, litigation strategy, decisions on defence and protection.	Legal opinions, litigation records, trade secret policies, IP watch records, enforcement spend.
Exploitation	Using the intangible commercially or allowing others to use it.	Manufacturing goods incorporating patented technology, marketing branded products, licensing to third parties, operating platforms.	Licence agreements, sales records, marketing plans, commercialisation decisions and the people who signed them.

The OECD identifies certain functions as particularly important for determining how the returns from an intangible are shared. These include design and control of research and marketing programmes, direction of and establishing priorities for creative undertakings, control over strategic decisions regarding intangible development programmes, management and control of budgets, and important decisions regarding defence, protection and ongoing quality control.⁴ Where the tested party performs significant portions of these important functions, the reliability of a one-sided method is substantially reduced. A routine cost-based return may fail to capture the value of that contribution.⁵

Why legal ownership alone does not settle the remuneration question

Legal ownership and contractual arrangements are the starting point for a transfer pricing analysis involving intangibles.⁶ They are not the finish line. The OECD is explicit: legal ownership of intangibles, by itself, does not confer any right ultimately to retain the returns derived by the MNE group from exploiting the intangible, even though those returns may initially accrue to the legal owner as a matter of contract or law.⁷

The return a legal owner is ultimately entitled to retain depends on the functions it performs, the assets it uses and the risks it controls, as well as the contributions made by other group members. If the legal owner performs no relevant functions, uses no relevant assets and assumes no relevant risks, and acts solely as a title holding entity, it is entitled only to arm’s length compensation (if any) for holding title.⁸ Where other group members contribute functions, assets or risks, they must receive arm’s length compensation. A legal owner can outsource performance and still retain an appropriate residual return if its own contributions, control and risk assumption support that result; it need not physically perform every DEMPE activity through its own personnel.⁹

This is a material clarification, not a reversal, of the pre BEPS position. The OECD Transfer Pricing Guidelines have long treated the arm’s length principle as requiring compensation aligned with functions, assets and risks. What the Base Erosion and Profit Shifting (BEPS) Actions 8 to 10 project changed, through the revisions adopted in Chapter VI, was to make explicit that bare legal title combined with contractual risk allocation is insufficient to support residual returns where the substance behind the ownership is absent.¹⁰ Chapter VI can be read as a clear statement that bare legal ownership alone, without the performance of DEMPE functions, does not entitle the legal owner to residual profit.¹¹

Performance, control, funding and financial capacity are distinct

DEMPE is often described loosely as “aligning profit with substance”. The more useful way to read Chapter VI is to separate four distinct enquiries:

• Performance. Who actually carries out the DEMPE activity, with its own personnel or through outsourcing? Each contributing entity needs arm’s length compensation for the functions it performs.¹²
• Control. Who makes the decisions that determine whether and how the activity is carried out, including decisions on taking on, laying off or declining the opportunity and on how to respond when risks play out? For outsourced DEMPE functions, control may sit with an entity other than the party performing the work, and the controller must be rewarded accordingly.¹³
• Funding. Who provides the capital that pays for development, enhancement, maintenance, protection or exploitation? Funding is an asset contribution and must be compensated, but the funder’s return depends on how much of the related risk it actually controls.¹⁴
• Financial capacity. Does the party contractually assuming a risk actually have access to funding to take on or lay off the risk, to pay for mitigation and to bear the consequences if the risk materialises? Without that capacity the contractual risk allocation will not be respected for transfer pricing purposes.¹⁵

Funding and risk taking are integrally related but not identical. A funder that exercises control over the financial risk associated with the provision of funding, without assuming or controlling any other specific risk, can generally expect only a risk adjusted return on its funding, not residual intangible profit.¹⁶ A funder may link continued funding to project milestones when controlling its financial risk. That monitoring alone does not establish control of development risk or an entitlement to residual intangible profit; the actual capabilities, decisions and risks must be examined.¹⁷ Performing one DEMPE activity does not automatically entitle an entity to residual profit. The question is always what the party actually does, decides, pays for and bears, and how that compares with the contributions of the other group members.¹⁸

How to perform a DEMPE analysis

The OECD sets out a six step framework in Chapter VI for intangible transactions, aligned with the general delineation framework in Section D.1 of Chapter I.¹⁹ The workflow below reorganises those steps for practical use.

1. Identify the intangible and the transactions. Define each intangible used or transferred with specificity: not just “the brand” but which trademarks, trade dress, know how, software, customer lists or data sets. Identify the specific, economically significant risks associated with the development, enhancement, maintenance, protection and exploitation of each one.²⁰
2. Examine the contracts. Map legal ownership on the basis of registrations, licence agreements and other contractual arrangements, and set out the contractual allocation of rights, obligations and risks between the group entities. Note where there are no written agreements and where oral or implied arrangements must be inferred from conduct.²¹
3. Map actual conduct and decision making. Identify, by means of a functional analysis, which entities perform each DEMPE function, which entities use which assets (including funding) and which entities control the economically significant risks, including the important functions in paragraph 6.56 and the control of any outsourced functions.²² This is the core of a DEMPE analysis: it is a factual mapping, not a conclusion.
4. Analyse functions, assets and risks (FAR). For each economically significant risk, apply the six step risk analysis in paragraph 1.60 of the OECD Guidelines. Confirm whether the party that contractually assumes the risk also controls it and has the financial capacity to assume it. Where it does not, the risk will be reallocated for transfer pricing purposes.²³
5. Compare contracts with conduct and delineate the actual transaction. Where the written terms do not match the conduct, the actual transaction must be deduced from the conduct of the parties. Delineate the transactions as they actually occurred, in light of legal ownership, contracts and conduct.²⁴
6. Assess arm’s length remuneration using an appropriate method. Price the delineated transaction using the most appropriate method, informed by the DEMPE findings. Where important functions sit on the tested party, a one sided method may be unreliable, and a transactional profit split or an ex ante valuation technique may need to be considered.²⁵

A reusable DEMPE analysis matrix

The matrix below is a practical layout for recording the output of steps 3 and 4. One row per DEMPE function per intangible. Populate the columns from interviews, written agreements, delegation of authority schedules, project records and the financial systems. Keep it dated, name the author and reconcile against the intercompany contracts.

Function	Entity performing the function	Personnel and seniority involved	Key decisions and who approves them	Assets used (including funding)	Economically significant risks and who controls them	Supporting evidence
Development
Enhancement
Maintenance
Protection
Exploitation

Two refinements make the matrix more useful. First, where a function is split across entities, split the row and record the split rather than averaging. Second, for each economically significant risk, record separately (i) the entity contractually assuming the risk, (ii) the entity that controls the risk and (iii) the entity with financial capacity to assume the risk, so that mismatches surface early.²⁶

Hypothetical worked example: a software group

The scenarios below are hypothetical and are set out for illustration only. They are not based on any specific taxpayer, do not reflect any particular benchmark and do not purport to derive a specific profit split percentage.

Group structure. ParentCo (Country A) is the legal owner of the group’s proprietary platform software and the registered trademark. DevCo (Country B) employs the engineering team that writes and tests the software. SalesCo (Country C) is a limited risk distributor that sells subscriptions to local customers.

Scenario 1: ParentCo performs and controls the important functions

In Scenario 1, ParentCo’s senior product leadership sets the product roadmap, approves release scope, funds the development programme and approves all defence and enforcement actions on the trademark. DevCo’s engineering team writes the code under detailed specifications, with limited discretion. SalesCo markets and sells subscriptions on a short form distribution agreement, is reimbursed for approved marketing spend and bears no inventory or product risk.

On these facts, DevCo performs the development function but ParentCo performs and controls the important functions identified in paragraph 6.56 (design and control of research programmes, management and control of budgets, decisions on protection). DevCo is likely to be remunerated as a routine R&D service provider; SalesCo as a routine distributor. Assuming that ParentCo has the financial capacity to bear the relevant risks and that the other entities are appropriately compensated, ParentCo may retain the residual return from exploitation of the platform.²⁷ A cost based mark up for DevCo may be reliable; the OECD cautions, however, that where a research team possesses unique skills or assumes risk, a modest cost plus mark up will not necessarily reflect the arm’s length result.²⁸

Scenario 2: DevCo controls the development programme

Change the facts. Keep ParentCo as legal owner, but assume DevCo’s engineering leadership designs the product roadmap, selects which features to pursue, approves release scope and decides when to retire or redesign modules. ParentCo signs off on the annual R&D budget but does not have the technical capacity or the personnel to challenge DevCo’s proposals, and the funding decisions track whatever DevCo recommends.

Here ParentCo is still the legal owner, but DevCo controls the important development functions. Under paragraph 6.54, a legal owner that neither performs nor controls the DEMPE functions is not entitled to the ongoing benefit attributable to those outsourced functions.²⁹ DevCo would be entitled to compensation that reflects its performance and control of the important functions; depending on the facts, that compensation might be a material share of the return from the platform rather than a cost plus mark up. A one sided method tested on DevCo would be unreliable because DevCo performs the important functions.³⁰ This does not translate mechanically into a fixed profit split percentage; it requires further analysis of comparable contributions, options realistically available and the actual value created by each party.

Scenario 3: SalesCo makes extraordinary marketing contributions

Keep the Scenario 1 facts for development and ownership, but assume SalesCo in Country C bears the cost of its own locally run brand campaigns under a long term, exclusive distribution contract, significantly outperforms comparable independent distributors on brand recognition metrics and feeds back product requirements that are incorporated into the global platform. The OECD treats this as a situation in which the distributor may have enhanced the value of a marketing intangible beyond what a routine distributor would do, and may be entitled to additional remuneration, which could take the form of higher distribution profits, a lower purchase price, a reduced royalty or a share of the profits associated with the enhanced value.³¹ A routine distributor return may be insufficient; additional remuneration depends on the rights, contributions and comparable arrangements, including whether the existing distribution return already rewards those contributions.

The three scenarios retain the same legal owner. Their outcomes may differ because actual functions, decision-making, risk control and, in Scenario 3, contractual distribution rights differ.

From DEMPE findings to method selection

The DEMPE analysis is a diagnostic step. It feeds into the selection of the most appropriate method under Chapter II, not an automatic choice of a profit split. Three practical implications of the OECD guidance are relevant.

• One sided methods remain available where only one party performs the important functions, uses the assets and controls the economically significant risks relating to the intangible, and the other party makes no unique and valuable contribution. The less complex party is the tested party and can be remunerated by a traditional method or by a TNMM.³²
• One sided methods become unreliable if the tested party performs significant portions of the important DEMPE functions, because the method will not capture the value created by those functions.³³
• Transactional profit splits may be appropriate where multiple parties make unique and valuable contributions, or where the business operations are highly integrated. The 2018 OECD revised guidance on the application of the profit split method, now incorporated into the Guidelines, stresses that the mere fact that an operation involves intangibles does not justify a profit split by itself; a profit split needs to be grounded in unique and valuable contributions, high integration, or shared assumption of economically significant risks.³⁴ For hard to value intangibles (HTVI), the OECD also permits tax authorities to use ex post evidence of financial outcomes as presumptive evidence of the appropriateness of ex ante pricing arrangements, subject to defined exemptions.³⁵

In practice, the DEMPE analysis also drives the choice of tested party, the identification of comparables and the set of comparability adjustments that will be required. The method is chosen after the facts are mapped, not before.³⁶

Documentation checklist

Documentation requirements vary by jurisdiction. The OECD expects contemporaneous documentation of intentions regarding ownership, and examination of agreements and actual conduct.³⁷ As a practical checklist, adapt the following evidence to the transaction and applicable local-file requirements:

• A specific description of each intangible and the economically significant risks associated with its development, enhancement, maintenance, protection and exploitation.
• The legal ownership position and the full set of intercompany agreements that govern the transactions.
• A completed DEMPE matrix, with named personnel, decision records and supporting evidence.
• A functional and risk analysis applying the six step process in paragraph 1.60, including the assessment of control and financial capacity for each economically significant risk.
• Where the written terms differ from the conduct, an explanation of the actual transaction as delineated.
• The choice of transfer pricing method, including why alternative methods were rejected and why a one sided method is reliable (or why it is not).
• Benchmarking that aligns with the delineated transaction, including any comparability adjustments.
• The ex ante remuneration arrangements and, where relevant, the mechanics of any year end true up.

Common mistakes to avoid

• Treating DEMPE as a method. DEMPE is a framework for analysing contributions. The arm’s length pricing still requires the most appropriate method applied to the accurately delineated transaction; valuation techniques may also be relevant for intangibles.³⁸
• Treating the performance of any DEMPE function as entitlement to residual profit. Performance is one of four distinct enquiries (alongside control, asset contribution and risk assumption). An entity performing a routine piece of a DEMPE function remains routine; residual returns follow the party or parties that perform and control the important functions, contribute the assets and control the economically significant risks.³⁹
• Equating funding with risk taking. A funder that controls only the financial risk associated with the provision of funding is entitled to a risk adjusted return on funding, not to intangible residual profit.⁴⁰
• Respecting contractual risk allocation without testing it. If the party contractually assuming a risk does not control it or does not have the financial capacity to assume it, the risk is reallocated for transfer pricing purposes.⁴¹
• Picking a profit split by default whenever intangibles are involved. The method requires unique and valuable contributions, high integration or shared assumption of economically significant risks, not simply the presence of intangibles.⁴²
• Reconstructing DEMPE after the fact. Contemporaneous evidence of decisions, approvals and funding is far more credible than a narrative built in response to an audit.⁴³
• Confusing OECD guidance with local law. OECD guidance and domestic rules must be distinguished. Check the applicable legislation, administrative guidance and case law before finalising a position for a particular jurisdiction.

Historical context

Chapter VI of the OECD Guidelines was rewritten as part of the output of BEPS Actions 8 to 10 (Aligning Transfer Pricing Outcomes with Value Creation), with the revised chapter adopted in 2015 and consolidated into the 2017 edition of the Guidelines. The DEMPE framework in Section B of Chapter VI was a central component of that rewrite and remains in the 2022 consolidated edition.⁴⁴ The pre 2017 Guidelines also required compensation for functions, assets and risks under the arm’s length principle; what Chapter VI added was an explicit, structured framework for intangible transactions and an explicit statement that bare legal title does not entitle a legal owner to retain the residual return without substance. It is accurate to describe the change as a shift of emphasis, not a reinvention of the arm’s length principle.

Frequently asked questions

What does DEMPE mean?

DEMPE stands for Development, Enhancement, Maintenance, Protection and Exploitation. It is the OECD’s framework for identifying which members of an MNE group should share in the returns from an intangible asset. The United Nations Manual uses DAEMPE, adding Acquisition to make clear that intangibles can also be acquired from third parties.⁴⁵

Does legal ownership of an intangible still matter?

Yes, as the starting point. Legal ownership and the contractual arrangements set out the baseline position and identify which entities would, absent further analysis, be entitled to the income. The OECD then tests whether that baseline is consistent with the functions performed, the assets used and the risks controlled by each entity. If it is not, remuneration is reallocated accordingly.⁴⁶

Can a legal owner outsource DEMPE functions and keep the residual return?

Yes, but only if it continues to control the outsourced functions and the related risks and provides the related assets. The outsourcing of performance does not change the entitlement; the outsourcing of control does. Where the legal owner neither performs nor controls the outsourced functions, it is not entitled to the ongoing benefit attributable to those functions.⁴⁷

How is pure funding remunerated?

A party that funds the development of an intangible, exercises control over the financial risk associated with the funding, but does not control any other specific risk, is generally entitled to a risk adjusted return on its funding and not to the residual return from the intangible.⁴⁸

What documentation does a DEMPE analysis require?

Contemporaneous evidence that supports the mapping of functions, assets, risks and decisions to specific entities and people. In practice: intercompany agreements, delegation of authority schedules, project and R&D committee minutes, approved budgets, patent and trademark filings, personnel records and the completed DEMPE matrix. The OECD expects written agreements to be in place at or before the time of the relevant transactions.⁴⁹

Does DEMPE always lead to a profit split?

No. A profit split is appropriate where multiple parties make unique and valuable contributions, where business operations are highly integrated, or where the parties share the assumption of economically significant risks. Many DEMPE analyses conclude that one entity performs and controls the important functions and that a one sided method remains the most appropriate. The DEMPE findings drive the method choice; they do not pre determine it.⁵⁰

Does DEMPE apply to brands and marketing intangibles?

Yes. The DEMPE framework applies to all intangibles within the Chapter VI definition, including trademarks, trade names and brands.⁵¹ Where a distributor’s marketing activities enhance the value of the owner’s trademark beyond those of a routine distributor, additional remuneration may be due.⁵²

Related transfer pricing guides

• Valuation of intangibles
• Transactional profit split method
• Transactional net margin method (TNMM)