Intellectual Property (“IP”) can be one of the most valuable business assets that a company may have and it is therefore crucial to ensure that this asset is protected and utilised. One way of achieving this is through the use of corporate structures, such as a holding company. A holding company may significantly reduce administrative costs and, in some jurisdictions, reap considerable tax benefits.
Placing intellectual property in a holding company is a practice exercised around the globe by various prudent parties ranging from tax professionals to famous musicians, car manufacturers and film production companies.
How It Works
The general purpose of the holding company is to own the intellectual property rights, granting a license to the trading company who, in turn, uses the intellectual property as part of its daily business operations. In return for the use of these rights, the trading company typically pays the holding company an up-front license fee and ongoing royalty payments for the duration of the license.
Vesting intellectual property rights in a holding company can offer significant protections. For instance, if the intellectual property is owned by the holding company, then it is likely to be beyond the reach of the trading company’s creditors should the trading company be at risk of insolvency. This is particularly important in the situation where the trading company is new and the risk of insolvency is greater. The holding company can also license the intellectual property rights to subsequent trading ventures which provides for business continuity.
If the trading and the holding company are structured in particular jurisdictions, the use of this structure can also lead to tax benefits. For instance, any up-front license fee will be taxed in the jurisdiction where the holding company is registered which may have a more favourable tax rate than the jurisdiction where the trading company is registered. Similarly, royalty payments can be classed as necessary business expenses and may therefore be classed as deductible expenses from the taxable income of the trading company.
However, in certain jurisdictions, the trading company as licensee is liable for withholding tax on the payments they make to the holding company as licensor. As the holding company will also be taxed on the royalty payments, it is important to consider whether a Double Taxation Agreement (“DTA”) exists between the two countries.
In terms of the administrative benefits, where the holding company owns all of the business’ intellectual property, this will streamline the management of the entire intellectual property portfolio, resulting in substantial cost savings. Furthermore, should the business be sold, it will be easier to facilitate the transfer of the intellectual property rights. When selling the business, it may also be commercially savvy to retain ownership of the intellectual property rights and license them to the new business owner, thereby profiting from an ongoing revenue stream (without much ongoing effort).
One final point to bear in mind is that before establishing a holding company, be sure to plan ahead, to value the intellectual property and to seek appropriate professional advice.