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Tax Efficient Collection of Royalties

Early planning in the licensing of Intellectual Property across different jurisdictions can lead to significant savings in tax and other associated costs.

Payment of intellectual property license royalties is subject to deduction of withholding taxes in the jurisdiction of the licensee, a rate that will vary from one country to another. For example, countries with top rates of withholding tax are France with 33% and USA with 30%.

Over the years, various Double Tax Agreements (DTA) between trading countries have been signed in order to promote international trade, the intention being to reduce the percentage of withholding taxes levied on such royalties. In many cases the terms of the DTA reduce the percentage of withholding taxes to zero.

By way of example, a licensor of copyright works may choose to assign his or her copyright to a company in an offshore location that has a DTA with the country where the licensee resides, so that withholding tax is avoided and royalties can be collected in the lower tax regime (e.g. a licensor could be located in the Isle of Man and collect royalties from licensees in the UK). The same approach may be adopted by a patent licensor, especially a technology start-up in an early phase of licensing, when the assignment to the offshore company is low and does not itself attract high tax. In addition to having a thorough understanding of DTAs, a strategy geared to achieving optimal tax savings and asset protection will normally involve the use of entities, either in the form of limited companies, limited liability partnerships, trusts and foundations in the formulation of a structure that is specific to the clients’ individual circumstances, always bearing in mind, however, the possibility that the rights of the prospective licensor under various intellectual property treaties (PCT, EPC, etc.) may affectin the proposed location. The proper use of these entities in the structuring of a plan may also achieve benefits of increased protection of the IP rights, for example from future claims by creditors.

Using an international tax approach that involves the careful interpretation of DTAs, coupled with a knowledge of the various corporate vehicles that are available in the tax planner’s arsenal, an approach to the efficient collection of royalties and profits can indeed be realised. Planning for the tax efficient collection of royalties needs to be done at an early stage of the development cycle of the Intellectual Property. Further details can be obtained through Jenkins.