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 and/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.
So how does it work from a practical perspective?
At core the Offshore IP Company (which is usually set up in a nil or low tax country) is used to divert income from Trading Companies or Businesses trading in developed or high tax countries.
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 arrangement. 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!