Most companies possess some form of intellectual property (IP) rights, and these are often some of their most important strategic assets, representing very substantial value.

IP assets are often used in more than one country, and can be both expensive and time consuming to protect and maintain. This is often a worthwhile investment since IP is an important ingredient for a successful business, although there are several ways for a company to increase the earnings from the IP rights in addition to simply relying on the protection afforded by the right.

With groups of companies that conduct cross-border business, and which use IP assets in more than one country, there are several reasons to contemplate how these assets are protected and managed. There is in fact as much reason to treat the protection of IP rights as a company group matter, as there is to treat every company’s tax liability within the group as a matter for the group as a whole.

Strategies

There are multiple ways of extracting maximum value from your IP assets. One must take into consideration the different international systems that are available for registration of rights, as well as the time and cost involved. A tax-driven IP restructuring can be beneficial for a group conducting cross-border business, especially when coupled with appropriate IP asset management strategies.

Intellectual property and tax

There is an ever greater need to appreciate the relationship between IP and tax law. The overall tax burden of a group of companies can be significantly affected by which company is liable to pay corporate tax on royalty income, for example. The generally transferable nature of IP creates possibilities for tax planning in order to reduce a company group’s total tax burden.

Optimal management of a group’s IP rights and an optimal group structure demands a balancing of the requirements of tax and IP law. It is therefore recommended that experts within both legal areas are consulted.

 

Tax-driven IP restructuring

A restructuring for tax purposes often involves the transfer of IP assets to a group company taxable in a different jurisdiction. However, there are several complications to overcome for successful restructuring of this nature. The
restructuring must consider the tax consequences of a cross-border transfer itself and the repatriation of revenues to the parent company. Swedish companies must also comply with the Swedish Tax Board’s new guidelines on the preservation of transfer pricing documentation concerning intra-group transfers.

One possible form a restructuring could take is through the transfer of, for example, patent and trademark rights to an overseas company (a so called ‘licensing company’), coupled with a royalty payment by other members of the group for the use of the IP asset. In this way, profits can be relocated to a jurisdiction where the corporate tax rate is
lower. Switzerland, Ireland and Iceland are countries that could be suitable for such royalty flows.

The Swedish Supreme Administrative Court has in two rulings from 3 April, 2008 stated that management of an IP portfolio and licensing the right to use IT systems did not have significant financial elements and income in foreign companies should thus not be subject to CFC-taxation in Sweden. The court's rulings mean that the CFC-rules are not an issue in respect of such IP activities and the rulings open up for tax efficient solutions.

An alternative for patents granted after the 1 January, 2007 is the so-called ‘Dutch patent box’. If certain conditions are met, income on patents held in a Dutch patent box is taxed at an effective tax rate of 10%. Belgium’s 80% deduction for tax on income from the exploitation of patents is also interesting from this point of view since the outcome is an effective tax rate of only 6.8%.

Worth taking into consideration

The sale of an IP asset to an overseas group company must be done at a fair market value in accordance with the transfer pricing rules. As a consequence of the so-called ‘arm’s length principle’ of valuation, it is preferable that the transfer is made at an early stage while the value of the asset remains relatively low.

A tax liability may be incurred by a Swedish company that owns IP assets used by other group companies without any consideration (for example, the house trademark). Where on the other hand, the owner charges other group companies for their usage, the tax consequences of matters such as the distribution of profits will need to be considered.

A simple example illustrates how the value of an IP asset can be maximised by effective tax planning. If overseas subsidiaries pay a royalty for the use of an IP asset owned by a Swedish limited liability company, the royalty income will be taxed in Sweden at the normal corporate income tax of 28%.

The tax charge for the group could be lowered by instead placing ownership of the asset in an overseas subsidiary located in another EU country with a lower corporate tax rate. Royalty paid by the using company to the owner of the IP asset (including by its own subsidiaries) might be taxable by that company at a rate of 10%, for example.

Because dividends from so-called ‘business-related’ shares are tax exempt in Sweden, the funds could be repatriated in the form of dividends paid to the Swedish parent company without incurring further liability to tax given that there will be no withholding tax on the outbound dividend in the other jurisdiction.

Conclusion

There are sound economic reasons for companies with cross-border activities to consider how their IP rights are protected and how they are treated from a tax perspective. Rydin Carlsten would be pleased to present solutions for the reduction of your company’s costs for protection of its IP rights, for abstracting the best value from these rights, and as to the best treatment of these rights from a tax perspective.

Erik Björkeson and Håkan Borgenhäll are partners and members of the tax practice group at Rydin Carlsten.