Over the past ten years, there has been a very definite shift towards a knowledge-based economy in most legacy brand countries. More people are working online, and the creation of software and new innovations seems to be on an exponential growth curve. So, it’s no surprise that the protection of intellectual property (IP) has become central to the success of many entrepreneurs. This briefing will try and help you decide on what is the Best Jurisdiction for IP Holding Company.
Best Jurisdiction for IP Holding Company
In short, I conclude that Luxembourg, provides the best protection for intellectual property, and also provides an 80% corporate income tax exemption for most types of IP assets. Subsequently, Luxembourg provides those holding a patent, or another form of IP, with significant protection as well as reduced tax burdens.
Read on for more information on why I selected Luxembourg.
- Best Jurisdiction for IP Holding Company
- A Quick Introduction to IP Holding Companies
- The Impact of the OECD’s BEPS Guidelines
- Choosing the Best Jurisdiction for IP Holding Company
- How to Transfer Your IP Into Your Holding Company
- Should You Have an Operating Company?
- Third-Party IP Licensing and the Best Jurisdiction for IP Holding Company
- Final Thoughts and Next Steps
A Quick Introduction to IP Holding Companies
Firstly, we should probably discuss exactly what an IP holding company is and how it helps protect any intellectual property that it holds. An IP holding company is not a trading entity in the sense that it isn’t out there beating the weeds for business. Normally, an IP company simply licenses the use of its patent/trademark to someone for licensing fees revenue.
In many cases, the IP holding entity undertakes no manufacturing of the product nor provides any marketing or sales support. It simply holds the legal rights to the design or innovation and licenses it to others for use.
In practical terms, it is firewalled away from the operating company so that there is never any risk of the IP being directly attached to legal action. In fact, often the company that it licenses the IP to for use is also owned by the founder. In short, an IP holding company is effectively a liability shield.
It can also be highly tax-efficient to separate out your IP holding and operating entities. Many countries have additional taxes and fees upon IP royalty incomes. Subsequently, the tax impost can be lowered by ringfencing the IP ownership and placing it within an entity in a tax-friendly jurisdiction.
This is primarily why so many multi-national companies look to form their IP holding entities offshore. In this way, they legally protect the IP whilst also allowing that entity to receive tax benefits and to focus solely on licensing operations.
The Impact of the OECD’s BEPS Guidelines
Beware of any professional advisor that tells you to move your IP offshore without a discussion of the ramifications of the OECD’s BEPS guidelines. The Base Erosion and Profit Shifting (BEPS) has been identified by the G20 and OECD as a critical component of international tax reform.
Basically, the idea is that large multinational companies are very efficient at shifting profits around the world through the use of IP licensing arrangements. Apple is a great example where, profits might be earned in Australia from the sales of iPhones, but by the time licensing and other assorted fees have been paid to the parent company, there is almost no profit to be taxed within Australia.
This is a great example of what the OECD is attempting to largely stop through their tax priorities and BEPS guidance notes. Subsequently, any move to shift profits around, via an IP holding company, should be planned according to the BEPS requirements.
In short, any BEPS-related transactions need to be at arm’s length and significant documentation is required to be kept justifying the profit shifting arrangement.
Choosing the Best Jurisdiction for IP Holding Company
The first thing you should really be considering when looking at IP holding jurisdictions is the tax position of your current residency and where you are intending to operate within. If you are based in the EU and intend to operate within the continent, then you would be wise to consider a Swiss or Luxembourg-based entity for the tax treatment.
Subsequently, consider your personal and corporate circumstances and then start putting a list together of countries with strong IP laws that exist close to your operating region. You can then filter this list based upon the tax favorability from both royalties and personal perspectives.
Inevitably, you will end up with a relatively small list of appropriate jurisdictions to set up your IP holding company. Although I don’t know where you are based, or your current personal circumstances, I can almost guarantee you that the list will end up looking very close to the table below.
My Current IP Holding Company Rankings in 2022
|Best Province (if applicable)||Luxembourg||Singapore||Nidwalden||Limassol||Amsterdam|
|Tax Rate on Royalties||6%||10%||9%||2.5%||5%|
|Resident director Required||Yes||Yes||Yes||No||Yes|
|Access to Madrid Protocols||Yes||Yes||Yes||Yes||Yes|
|Company Tax Residency||Yes||Yes||Yes||Yes||Yes|
|Tax Haven List||No||No||No||Yes||Yes|
It shouldn’t come as any surprise that Luxembourg tops my list given its tax-effective status and juxtaposition to the EU. If you are operating in Europe, then Luxembourg is probably your best choice given the enforcement abilities (Andorra gets a honorable mention as well but didn’t make the list).
One of the very real issues in many European countries is enforcement and security lodgment for costs. Using a Luxembourg holding company means that you can easily enforce your IP rights without the need to lodge megabucks with the court to cover potential costs.
As mentioned previously, Luxembourg also offers an 80% corporate tax exemption for those with royalty income. This exemption, coupled with an overall effective tax rate of 6% (on royalty revenues) means that the country is a very tax-advantageous place to set up your IP holding company.
Singapore also has strong IP laws and an LLC based there can easily operate as an IP holding company. In fact, this would probably be my second choice and is especially prescient for those doing business within the broader Asia-Pacific region.
However great Singapore is, it is important to note that its banking sector is under scrutiny due to AML irregularities of the past. This means their reputation has taken a small hit and it may be harder to do business internationally due to this. Overall, they are still a great location for IP to be based and they are quite reasonable with their taxation regime as well.
Cyprus also has a reputation for strong IP protection, but it comes along with some caveats. In the past, the country has seen bank bail-ins, government bankruptcy, and issues with money laundering. They have taken significant steps to clean up their act, but the reputation is still prevalent.
Subsequently, there is some question as to just how “safe” any intellectual property is in Cyprus. It really only comes up when dealing with annual audits as most auditors view any records out of the island nation with significant skepticism. It really isn’t a major issue, but you should be aware that the country’s reputation as a bolthole for Russian money is pervasive.
How to Transfer Your IP Into Your Holding Company
Transferring intellectual property is normally relatively straight forward but it does depend on what jurisdiction your IP is located. Typically, what occurs is that you need to approach the IP offices (patent office) and request to change the ownership of the IP. Ownership changes are normally fairly simple to do and, in most cases, are a single form to be completed.
However, some jurisdictions will require a formally signed assignment of that IP to your new holding company. This requires some legal paperwork, and, the stricter locations, may require very specific language to be included within the assignment.
Additionally, you need to make sure that there is a commercial transaction underpinning the transfer. I would also advise an actual contract to be drafted and executed between you and the holding company which includes the terms and actual consideration for the sale. This way no one can come back in the future and claim it was not a commercial transaction.
Should You Have an Operating Company?
In short, yes you should utilize an operating company if you intend to actually do business using your innovation rather than just pure licensing to third parties. Without an operating company, you are co-mingling business operations and your IP holdings. This is a bad idea for lots of reasons, least of all the joined legal risk.
If you choose to co-mingle your business and IP holdings in one entity, you are giving up the protections of having an IP holding company and placing your innovation/patent at risk of potential legal action. Imagine that there is some sort of failure with the production of the item you are selling, and it injures someone. In this case, it isn’t simply your operating company getting sued, it’s the company that holds your intellectual property.
Do yourself a favor and don’t co-mingle your IP holding company and your business operations.
Third-Party IP Licensing and the Best Jurisdiction for IP Holding Company
However, you are always three to do third-party licensing of your innovation through your holding company. This still largely retains the liability shield for the IP and allows you to charge heft royalties and centralize those profits in the holding entity.
In the event you are looking at doing lots of third-party deals, then it may make sense to set up a subsidiary of the holding company and ringfence all those licensing deals inside that single entity. This provides added protection in case one of those licensing deals sours.
Ultimately, the concept of separation is simple to understand when you consider the legal risks. Your operating company must handle the sales and production and your holding company must only touch the licensing and royalty side of the business. As long as you keep those functions separate then your IP should remain safe within the holding company structure.
Final Thoughts and Next Steps
Hopefully, this guide has given you some of the basic considerations that you need to think about before establishing your IP holding company. Such a move should never be contemplated without both legal and tax advice given the significant implications of moving the ownership across jurisdictions.
Additionally, if your operation is relatively large in scope you should have specific policies in place to protect your IP and trade secrets. Industrial espionage and revenge are far more prevalent in the innovation space than people realize. Take the time to draw up a strong set of internal policies that all employees and contractors need to agree to and abide by. Also, work out how you are going to handle any issues around this because, trust me, issues will pop up if you have a successful invention or brand.
In conclusion, setting up a holding company structure is a good idea and Luxembourg remains, probably, my major choice for those of us doing business within the major western markets.
Best of luck with any potential IP jurisdictional change.