Tax incentives are always a large part of a corporate law practice. Taxes can dictate the structure of a deal, help provide financing for an acquisition, or simply cause an organization to incorporate elsewhere because of better tax benefits. When a company is beginning an IP licensing program, tax penalties, benefits, or other incentives could play an important role in forum shopping (if a company should have the luxury of being able to do so). While many refer to those jurisdictions with better tax incentives as being “tax havens”, the reality is that there are few “havens” for tax purposes, unless that term is completely relative. Still, a breakdown of different jurisdictions’ tax effects on IP-based royalty streams would be helpful. And so, a recent post on the IP Finance Blog solicited the following comment from Anne Fairpo, a barrister and tax consultant for Atlas Chambers in the UK, including just such a breakdown (note that Anne is located in the UK):
For royalties (patent/innovation box):
Luxembourg - the innovation box reduces tax on royalties from IP to around 6%, with some restrictions
Netherlands - similar reduction in tax on IP to Luxembourg, but rather more restricted in scope
Belgium - similar reduction in tax but on patents only
Ireland - 0% tax on royalties relating to patents where the R&D was done after 1 January 2008
Switzerland - pick your canton carefully to reduce the tax rate, but don’t forget the federal rate of 8.25% isn’t so negotiable.
Channel Islands/other beaches and chocolate locations - 0% tax achievable but beware the lack of tax treaties. The Channel Islands have better IP protection than the tropics, in general.
But - beware withholding tax:
If you are paid royalties by (eg) a company in the US, the royalties will have tax deducted at 30% on the gross amount of the royalties paid; UK companies are required to deduct tax at 20% on royalties. This withholding is intended to ensure that the royalties are taxed somewhere and is not repayable. There needs to be a tax treaty in place between the payer and payee country to reduce the rate of withholding tax (the UK/US treaty reduces withholding to 0% in almost all cases, for example).
Tax havens (the 0% countries) don’t have tax treaties, so the full withholding will be payable - the EU countries generally have a reasonable range of tax treaties.
If you’re expecting the return on the IP to be in the form of royalties, tax treaties are probably the key thing to think about - pick a jurisdiction that has good tax treaties with the locations you are expecting to receive royalties from.
If you are not expecting the return on the IP to be by way of royalties, consider what you will do if the IP is infringed and royalties are all you can settle for - and be aware that some countries may regard any payment for IP as a royalty for tax treaty purposes, even if it’s a payment for the outright sale of the IP.
Finally, bear in mind that the tax authorities in the UK will usually scrutinise offshore IP holding structures rather closely. The arrangement will need to have substance in the offshore jurisdiction to ensure that UK tax is escaped, and that is not an inexpensive exercise.
If anyone has more to add with specific details about the U.S., Canada, Japan, and China, I would love for you to comment.
Along the lines of tax, IP, and planning for the efficient management of the two, I have spoken with an excellent Trust and Estate Planning attorney, Carter Ruml, (who, by the way, writes a fabulous T&E blog called KYEstates) about doing a post or a series of posts regarding the most efficient treatment of intangible assets in estate planning, including the valuation of IP in this context. Be on the lookout for this upcoming post, which should be quite interesting.
(pictured here is downtown Nashville at the height of its flood. I attended Vanderbilt University in Nashville and the scene after the flood was quite a shock to my system. I have never seen anything like it. Volunteer efforts are still needed in the city)