IP lawyers will focus on managing the validity and enforceability of IP in order to optimise its value. This is a process that must be prioritised, but equally important is efficient tax structuring, to ensure that the revenue generated by IP is isolated and appropriately taxed by the specific regime under which it is governed. Ideally, the various types of IP within a business will be held in an optimal structure, that allows for royalties and revenues earned from that IP to flow back to the business in the most tax efficient manner possible.
There are several different issues to consider when assessing such a structure. Initially we might look at tax incentive schemes, such as IP boxes, which allow for corporation tax deductions on IP-related income. They are designed to attract businesses with significant research and development spend, which are deemed to be healthy for the economies they are part of. Not all countries use IP boxes, but they are a powerful tool for boosting the attractiveness of a jurisdiction.
According to figures from the Tax Foundation, there are currently 13 out of 28 EU member states that have a patent box regime in place. The reduced corporation tax rates on qualifying income, provided under these patent box regimes, ranges from 0 per cent in San Marino and Hungary to 13.95 per cent in Italy. In Belgium, for example, the statutory corporate income tax rate is 29.58 per cent, while under the patent box scheme, it is just 4.44 per cent – a significant saving.
The Organisation for Economic Cooperation and Development (OECD) views some long-standing IP box regimes as potentially harmful and has implemented recommendations to make them fairer. These changes have generally focused on narrowing the definition of qualifying IP and limiting the tax benefits to IP generated in the country in question.
Beyond special tax regimes, there are other ways to structure tax efficiently, including deductions and tax credits. In the US, for example, patent box schemes do not exist, however costs incurred in the development of know-how qualifies for a 20 per cent credit against tax, called the Research and Development Credit. Expenses are also usually deductible from taxable income.
It is also possible in certain countries, to break down the revenue from product sales and apportion a certain amount of that to IP, thus taxing that value at a lower rate. This process involves ascertaining the residual value of IP and is linked to transfer pricing.
The sale or acquisition of IP also needs to be carefully structured from a tax perspective. Capital gains tax on the sale of IP such as patents and copyrights can be substantially reduced in some jurisdictions, while the cost of acquired IP can be amortised over its lifetime, therefore reducing the tax burden.
Another area of concern is the flow of IP-related royalties to owners, whether they are individuals or corporations. Payments of royalties to foreign jurisdictions may be subject to withholding taxes, unless the appropriate double taxation treaties exist to mitigate this.
Transferring IP to low-tax jurisdictions, in order to avoid tax on revenues, is another possible structuring method. Taxes on controlled foreign corporations are designed to mitigate this tactic, in circumstances where the bulk of the corporation’s operations are in a higher tax country.
It is clear from these examples, that understanding the taxation of IP is a complex process which requires significant expertise to master. Maximising the value of IP is critical to a healthy business, and tax structuring plays a major role in that. Over the following pages, you will hear from seven experts in IP taxation. They will offer insight specific to their own jurisdiction, on the most efficient methods of tax structuring with regard to IP, highlighting any potential challenges and opportunities IP owners might want to be aware of when operating in their country.