How Companies Profit from Intellectual Property
Intellectual property, including trademarks, patents, copyright, designs, and corporate secrets, are incredibly valuable assets for businesses across the world. In many cases, intellectual property isn’t just important for running the company, but it actually can help companies increase their profits. In fact, intellectual property is arguably the dominant asset of many companies out there.
Companies are able to significantly increase their profits from intellectual property using offshore intellectual property structures to minimize withholding tax on royalties. For many businesses in today’s world, this strategy is a valuable way to significantly increase profit by reducing tax liability.
Understanding Offshore IP Structures
Companies often profit from intellectual property (often abbreviated as IP) using offshore IP structures, holding their intellectual property in low tax or no tax jurisdictions. A company typically does this by incorporating an offshore affiliate company and then transferring the title for the intellectual property to this offshore entity, whether a patent for a new technology or a copyright for a song. The company can then sub-license this piece of intellectual property for use in the other jurisdictions in which it operates. The company will receive franchise fees and royalty payments from the branches of its operations in other jurisdictions that are sub-licensed to use the intellectual property, and because this income accumulates in a low tax jurisdiction, the company is able to increase its profits.
For example, let’s say a US-based tech company has operations across North America and Europe. If it registers its intellectual property – the patent on the technology it has developed and commercialized – at an affiliate in the Cayman Islands and then sub-licenses this intellectual property to its affiliates in other jurisdictions, it will pay lower taxes on the franchise fees and royalty payments than if the intellectual property was registered in the US. This serves as a lucrative way for the company to reduce its tax liability.
Planning Around Offshore IP Structures
For companies considering using offshore IP structures, it should be noted that careful planning is required. The key is to transfer intellectual property early if that is the route a company wants to take. The more valuable the intellectual property becomes, the greater the possibility that transferring it will incur costly exit liabilities.
If you need assistance with offshore IP structures and planning for your company, your best bet is to contact a professional.
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