We are often asked “How can I hold a patent or brand using a tax free Offshore Company?”.
A patent or Brand is a piece of Intellectual Property (“IP”).
In the case of a Patent, whilst you might save on tax by having the brand owned by a tax free Offshore IP Holding Company, you’ll want to firstly make sure that your Patent is recognized and capable of enforcement world-wide. The starting point therefore should be to ensure that your IP Holding Company is incorporated in a country which is a member of the World Intellectual Property Organization. The full list of member states can be viewed here: http://www.wipo.int/members/en/
Zero or low tax countries in that list where we can incorporate a Company for you include:
Say you’ve developed and applied for a Patent for a breakthrough eyewear related product.
What you could/should do is:
(a) Set up a zero tax Company to own the Patent/IP (‘the IP Company”)
(b) Incorporate a 2nd (nil tax or low tax) Trading Company.
How it would work is:
1. You would transfer ownership of the patent now (ie whilst its almost valueless) to the IP Company. See below which explains the process
2. The IP Company would grant the Trading Company an exclusive license to market the IP
3. The Trading Company would pay the IP Company licensing fees (eg a percentage of the sale every time a product containing the brandname/patent is sold)
The advantages of the twin Company structure are in essence:
(a) The Trading Company is the one in the market place. It will incur the debts and pay staff/suppliers etc. Any law suits (or potential liability) will fall on its head thus protecting the key asset at the core of the business
(b) It enables you to later on sell the business (ie The Trading Company) but retain a passive income stream (ie royalties or license fees paid to the IP Company)
How 2 Transfer Ownership of IP 2 an Offshore Company
Intellectual property (“IP”) is a creation of the mind and includes things like inventions, literary and artistic works, designs and symbols, software code, names and images used in business.
IP is commonly protected in law by way of patents, copyright and trademarks which enable the person who came up with the idea to securely earn recognition or financial benefit from whatever it is he/she has invented or created.
An Offshore IP company is an ideal vehicle for the administration and management of licenses and intellectual properties including computer software, technical know-how, patents, copyrights and trademarks.
The first step is to transfer ownership of the IP rights to the Offshore Company/Entity.
Once that’s done the Trading Business then enters into a legal agreement (contract) with the IP Company whereby, in return for being allowed to use the IP, the Trading Company agrees to pay the Company royalties or license fees. The income arising from these agreements can then be accumulated offshore in a nil or low tax environment.
Timing is of critical importance – It is clearly preferable to acquire the IP (for example, a patent) at the earliest possible time (e.g. at the patent pending stage) before the IP becomes highly valuable. That way the capital payment for the acquisition of the IP (e.g. patent) can be set at a lower amount i.e. before its true worth has been determined in/by the market. (These capital payments may even be deferred and or staggered by way of an instalment contract such as would enable the IP Company to use subsequent royalty payments to fund the cost of the IP).
If a deal is struck for the Offshore IP Company to buy the IP before the IP gives rise to a product or service which is offered/advertised in the market the IP might even be transferred for nominal consideration enabling the IP inventor/creator to transfer patent, copyright or trademarks in favour of the low/nil tax company before the IP suffers significant appreciation in value.
Alternatively you might transfer ownership of IP to a tax free Offshore Company (“OC”) for an agreed price but subject to a deferred or gradual payment basis. How that would work is you would transfer ownership of the IP up front and agree for the OC to pay you in stages in consideration of a price premium and/or in consideration of the OC engaging you in an ongoing/consultancy capacity.
However you transfer ownership of IP to an OC the transaction should be seen to be on commercial terms for fair market value. If you are unsure of market value you could either brief a licensed Valuer for an opinion or advertise the IP for sale publicly. The highest bid would be fair market value. At the end of the day in the market place a piece of property is only worth what someone else is prepared to pay for it!
Local law can have an impact. Hence you should seek local legal and financial advice before committing to incorporate an Offshore Company for such purposes.
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