Protect and benefit from your IP - Business Works
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Protect and benefit from your IP

Simon Portman, Managing Associate, Marks & Clerk Intellectual property is a valuable asset, for many companies their most valuable one. On the plus side, this means it can have a substantial book value and, if exploited properly, it can generate significant revenue. The downside is that such success can be accompanied by a significant tax burden and the IP portfolio, like the companys other assets, can be vulnerable if it incurs significant liability, for example the need to pay damages as a result of being on the losing end of litigation.

The good news is that measures can be taken to mitigate both these problems.

Putting a business IP portfolio in a holding company can result in tax savings and ring-fence that IP against potential liability. If the holding company licenses that IP to trading companies which then contract with third parties such as customers and licensees, if any trading company incurs liability to any such third party, the holding company (and the IP within it) will be one step removed and beyond the reach of the third party.

Specialist advice should be sought as to which jurisdiction would be best for the holding company. Factors to consider include:

  • If the IP is held in one jurisdiction but generated in others, will resulting royalties suffer from a significant tax liability? What will the effect of withholding tax be?
  • Can a low tax, off-shore jurisdiction be found?
  • If the IP is infringed in a trading companys jurisdiction, can the holding company, if located in another jurisdiction, take legal action and claim damages? Often, the solution is to grant the trading company an exclusive licence, enabling it to do these things as if it were the owner of that IP.

Specialists in off-shore structures can advise on the options available, taking into account anti-avoidance provisions, tax considerations and any tax treaties which can be taken advantage of. It may be possible to put the IP in such a holding company while incurring minimal corporation or capital gains tax. The HMRC is seeking to shut down loopholes which in their view (and the public's) constitute outrageous abuse of the offshore mechanism, but many legal and prudent options remain for an IP portfolio.

Furthermore, any licence between the holding company and its subsidiaries should always be in writing and should provide that:

  • Any improvements to that IP generated by a subsidiary will be passed up to the holding company.
  • Any goodwill accruing from the subsidiarys use of the groups trade marks will likewise be assigned to the holding company.

The holding company should also have ample scope to terminate the licence, particularly if the subsidiary is sold or undergoes a change of control, meaning it is no longer part of the group. Otherwise, licensed rights might even end up in the hands of a competitor.

In the UK, the Patent Box regime has accentuated the importance of tax efficient structures. All companies will, from this year, pay a reduced rate of UK corporation tax of 10% on their global profits derived from products covered by a UK or European patent, compared with the usual 26% rate. The regime will be phased in over five years, starting at 60% of the potential benefit, rising to 100% in year five. Under the new system, the qualifying company may be the owner or the exclusive licensee of the patent rights exploited, but it must be able to determine whether the patent is exploited or not. Thus an owner who has granted exclusive rights and can no longer control the grant of sub-licences or other transactions may not be able to rely on the benefit of the scheme. Businesses will need to bear this in mind if they wish to take advantage of the scheme.

tax efficiency and ring fencing arent the only considerations

Tax efficiency and ring fencing arent the only considerations. A business with a variety of products or services may wish to distinguish them, putting the IP for each arm of the business in a separate company with its own name, branding and get-up. As well as compartmentalising the business potential liability, this can enhance market penetration and profile with customers. It also means that, should the business wish to sell any of these concerns, they are already arranged in separate packages which can be valued and sold off separately.

IP organisation is a complex and expensive business. It is therefore always crucial to ensure that the tax tail doesnt wag the company dog and that one doesnt spend an inordinate amount of time and money finessing a fiendishly complex structure which costs more to put in place than the amount that may be saved in tax some way down the line. Minimising the tax liability on revenue derived from IP exploitation must always be secondary to making that IP exploitation a success in the first place. After all, one way to pay less tax is to make less money but few prudent businesses or individuals would recommend it.

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