Tax: IP / software structures for Russian groups


The tax issues involved in a IP owning / licensing structure are complex.  Below is a summary of the key tax issues.

Scenario:

The Russian ultimate beneficial owners want to set-up a structure that will not only be tax-efficient in operation but also for their ultimate “exit” via sale or IPO as well as the “legal” protection of their valuable IP.  The IP “owning” company might be a Jersey company which will then “grant” a license in the IP to a UK “licensing” company. The UK company then “sub-licences” the IP to operating companies worldwide which pay royalties to UKCo.  A Russian company can act as “agent” in procuring services for software importers.

Tax issues:

1. The UK’s extensive tax treaty network will ensure that royalties paid to UKCo suffer only the minimum rates of withholding tax at operating company level.  The UKco must apply an arm’s length mark-up on the licence fee charged to Opcos for transfer pricing reasons.  The mark-up will be taxed in the UK at the UK’s corporate tax rate (20{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} from 1 April 2015).

2. The UKCo may be used as a “holding” company and may benefit from exemption from capital gains and also exemption of foreign distributions in order to avail the WHT at the treaty rate it may be necessary to elect to “tax” the dividend in the UK but to claim the underlying tax credit.

3.  There may be UK WHT issues on royalties paid to the Jersey company but it is possible to plan for mitigating this.  There is no UK WHT on dividend payments by a UK company.

4.  VAT issues:  “Input” VAT incurred is fully recoverable by UKco.  The supply of B2B  services to Jco is an “outside the scope” of VAT supply, the place of supply being Jersey.

5.  The transfer pricing issues in the cross-border transaction chain between related entities must be carefully thought through and planned.

RKG Consulting can advise on the UK and international tax structuring of IP and software transactions.