Is using a treaty non-resident (TNR) company better for R&D?


Building Trust
Beware of a complex question, but I am quite interested in the R&D regimes in EU.

In BEPS action 5, all "patent box" regimes now include (or will soon include) a requirement that R&D expenditures must be done by "the company" to get full credit.

In EU, the best super-deductions are in Lithuania for example, with a 300% deduction for R&D. Now as countries change their patent box regimes more often than they change governments, it is potentially easy to get stuck with R&D developed in the wrong jurisdiction. Then if copyrights or patents are sold to another company in your group, you might risk losing the "developed by the company itself" status, and thus get into a higher tax bracket.

Using a UK TNR company with a permanent establishment in, say Lithuania would make it possible to later move the company to, say Switzerland. My question is whether the R&D can still be said to have been done by "the company" in this case?


Building Trust
This is a very good question.

My guess is this is designed to go after something like the Cost Sharing Agreements Apple is so fond of using, sale of IP can't be an issue so although you might have issues simply moving the company (then again who is going to come after you, which jurisdiction?)

I've almost always tried hard to avoid much to do with shifting income via patents, etc. because it often triggers royalties, which are then subject to withholding in many cases (Royalties Directive of course excepted) so my approach would be to ask what's the substance of what's going on and can you structure in another way?

Looking at your example let's say you've got a UK company that owns a Lithuanian company, you're genuinely doing the research there and through that company so you can deduct the expenses (btw corporate law in Lithuania is...not the most amazing so there's going to be a trade off of going that route unless you can get a major benefit elsewhere). Now, you take advantage of those deductions and develop whatever you're working on. Monetization is now a separate issue there's a whole variety of ways you could spin this going forward it doesn't all have to flow through Lithuania. There's also an interesting question of what Lithuania is likely to change? Realistically, they are likely to remain competitive because they need to attract investment.