Contract on Intellectual Property Rights

[Morrad]

Hi OffshoreCorpTalk,

I have some questions regarding intellectual property rights.

Let's assume that there are two companies, A and B. Company A is located in a heavily taxed country. Company B is located in a tax haven.
Now, Company A produces and sells goods or services to customers in its countries and gets taxed heavily.
If we assume that Company A sells its intellectual property rights to Company B, is it correct to assume that Company A now has to (or can) transfer a percentage of its profit PRE-TAX to Company B because of the rights being located there?

Of course, there has to be a contract on this. I just wanted to know if this is possible.

Does anyone know what these contracts are called?

 

[Onassis]

Yes, that can be done. You'll have to comply with transfer pricing rules of the jurisdiction Company A is resident in. There also might be some withholding taxes to pay depending on the residence of Company B. Contact a tax advisor as no one here will be able to give specific advice since you've withheld the specifics.

P.S. see if you can get the local tax authorities to approve the whole scheme / transfer pricing documentation.

 

[Sols]

It's maybe possible. Depends on local law, what the goods are, and how the IP is structured.

The kind of agreement you want depends on what type of IP it is. IP license agreements are very common.

Speak with a good tax lawyer from Country A. This needs to be done correctly from the very beginning to have a chance of holding up if tax authorities try going after you.

 

[Morrad]

But transfer pricing is just transferring money between companies between subsidiaries within the same company.

What if the companies are not subsidiaries?

 

[Onassis]

What if the companies are not subsidiaries?

That's not the only factor. If you own or operate both companies then they're considered related parties and in this case Company A will have to adhere to local transfer pricing rules.

 

[Sols]

Transfer pricing regulations is not only concerning subsidiaries. It can also be applied to companies under common control. So if you control Company A and Company B, even if they are legally separated, a court or tax authority could still decide that you control both so TP regulations apply.

Another thing you need to be mindful of is Base Erosion and Profit Shifting (BEPS). You have to be absolutely certain that the transfer from Company A to Company B is not seen as eroding the tax base of Company A by shifting the profits to Company B.

 

[Morrad]

In this case, I actually do not own Company A, only Company B. Just trying to make sure that Company A can pay for the rights pre-tax.

 

[Sols]

The general principle is that yes, it would be a normal business expense, so it would be before profit tax. But have a local tax lawyer confirm.

 

[Morrad]

Will do, thanks alot!