Intellectual Property tax planning issues


 

IP tax planning

ObjectiveActionKey issues / comments
   
Minimize the after-tax development costCost-plus development in low-cost country or one with suitable DTA/tax frameworksIdentifying low-cost location bearing in mind loss of any R&D tax credits at home & availability of new R&D credits
 Maximise cash flowCentralise IP management & control in low tax jurisdiction to maximize marketing value of group
  • Partial migration could reduce overall IP value?
  • Third party rights (e.g patents)
  • Non-transferability of IP
  • Difficulty in locating IP
Maximise the no of periods for which the CF will be generated.Register IP in all sales locations & arrange for maintenance & development on “contract” basis if IP HoldCo does not do this itselfIP holding structure s/not compromise enforcement of rights or recovery of damages at local level.
 Minimise the effective tax rate.Purchase or creation of IP offshore or migration of existing IP.
  • Substance, transfer pricing or CFC challenges.  (see notes below)
 Minimise the risk re the IPEnsure IPHoldCo has capability to manage the development & exploitation of IP effectively.New ownership arrangements could make it harder to enforce legal ownership of IP e.g problems in CCAs, splitting trade-mark ownership, etc.
Minimise the country riskReview of local IP protection & enforcement of  IP rights, formal registrations, APAs & seeking to agree low tax risk status with local tax administration.
  • Legal decisions/willingness to enforce the law;
  • Political risk;
  • Regulatory risk.

 

Tax planning services relating to IP

 

Where to own IP & Migration of IP to that jurisdiction

How to structure outright sale of IP at an early development stage when the certainty of successful development, and the valuation, are low.

Formalising know-how into IP offshore.

Sharing the development costs, ownership and exploitation.

Structuring “Wither on the vine” royalty payment for the old IP with its subsequent maintenance & development being paid for by a low tax company which would have the sole rights to exploit it.

Transfer of the IP to a branch of the same company in a low tax jurisdiction followed by the tax-free or tax-deferred incorporation of that branch where permitted.

Charging for development / maintenance of IP

Formulating the basis of the charges from Holdco to Opcos (Operating subsidiaries) :

  • Up-front lump sums
  • Milestone payments
  • Fees per unit
  • Percentages of revenue
  • Combinations of the above?

 

Re-structuring & reviewing agreements between IPHoldco and various functions / business units such as R&D, marketing, shared services, distribution, suppliers, customers, etc.

 Review VAT-effectiveness of structures. Stamp duty issues.

Transfer pricing compliance health-checks:

  • Defining the IP in question
  • Documenting the commercial rationale for IP migration
  • Valuing the IP
  • Benchmarking the level of the new charges to the Opcos
  • Structuring the Cost Contribution Agreements
  • Entering into Advance Pricing Agreements with tax administrations.

 

How to effectively manage IP for tax purposes

Developing a “Franchise” model with the “Franchisor” in a low-tax jurisdiction; the central management in a suitable location and risk profiles being “centralised” or “de-centralised”.

Ongoing IP development in high tax jurisdictions.

Terms of the new licensing agreement and effect on royalty rates.

Risk of transfer pricing “re-characterisation”

Assisting clients to select a suitable tax jurisdiction for a IPHoldco

Could be both low-tax jurisdictions but sometimes also traditional “onshore” jurisdictions with special benefits:

 Special incentives such as the UK’s “patent box” system available from 2013 where a 10{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} tax rate is available on IP income.  Also the Netherlands’ “royalty box” system where a special low rate is available on qualifying royalty income.

Attractive depreciation mechanisms for IP rights so that accelerated amortizations can be used against other income.

Special structures for IP rights such as a IP Holdco that is resident in a high tax jurisdiction but with a permanent establishment in a low tax jurisdictions.  E.g. a Luxco with a Swiss or Irish branch.