Intellectual Property Tax War
Things are moving very quick in the Intellectual Property Tax world.
A few years ago IP tax incentives were not considered by many countries. In the last years several countries have developed very attractive tax treatment for companies wanting to manage their intellectual property in a tax efficient way.
The last one is Luxembourg which from January 1st 2008 is offering a fantastic rate of 6% on certain types of Intellectual Property income.
A field that was not even considered 10 years ago, is coming today as one of the leading edge advisory services.
The savings on a sound IP international structure can be substantial for any corporation.
In the world of Intellectual Property Tax Planning, as in the broad international tax planning arena, there are many advisory firms proposing smart tax schemes and great ideas. Very little attention is given to materiality and providing a sound structure to implement those plans.
In the years to come more countries will be trying to make IP Tax one of their main competitive advantages. Advisers, in coordination with their clients, will need to assess their overall policies and how well are they catered to provide all the ancillary services needed to succeed on this enterprise.
Having been involved in IP international tax planning many years , the question I always ask my clients before starting an IP project is how committed are you to develop and implement a strong IP strategy?
Fernando,
It is true that, recently, many jurisdictions have put a lot of effort in designing special openly favourable IP tax regimes within the framework of their normal tax laws.
Luxembourg is neither the last nor the only example. Spain, the Netherlands and Belgium are notable players in this arena (Spain being the last to formally join the club in February 2008).
But I believe there are at least two comments, which deserve to be made at this point.
First, “IP Boxes� have always existed, although they were more complicated to design and run.
Indeed, they almost always required at least two companies located in two different jurisdictions, most often three:
• one company owning the IP (“IPCo�), often an offshore;
• another company, holder of a Master licensing agreement from IPCo, located in a onshore jurisdiction; and
• a third company (“HoldCo�), located in a jurisdiction that exempts the dividend income from the company that owns the IP, used to repatriate the untaxed IP income.
More recently, certain jurisdictions whose tax laws recognize the substance-over-form principle have ventured into two-company structures. A ruling granted by the tax administration allows deemed deductions and, basically, guarantees a tax treatment equivalent to that of the three-company structure.
I have seen effective tax rates of as low as 3%. The new 6% Luxembourg IP rate has however been well accepted as allows for a more open and transparent way to achieve a limited level of taxation over IP income.
My second comment concerns the reason for this sudden interest over IP tax.
What I believe is that many jurisdictions that have traditionally focused on holding structures, such as Luxembourg, the Netherlands and Belgium, have found themselves somewhat in competition with high-tax countries when the latter have started implementing their own holding regimes (Participation Exemptions).
In an effort to diversify their (international) tax offerings, IP regimes have started to appear.
Last but not least, let me say that I strongly agree with your approach to IP strategies.
An IP strategy is not as easy to implement as transfer pricing rules concerning IP are far from being clear or universally accepts. Also, clients often fail to understand that having their group’s IP in a company located in a more favourable jurisdiction will not do much good if they de facto continue to manage it as it had never left.
The recent D&G tax audit in Italy (which ended up with a 100 million € tax bill and various criminal charges) is a perfect example of this.
F.G.