Tax effective planning with intellectual property

This is the case for say software licences paid as part of a computer support package. Less usual is IP developed by the owner of the UK company which is used in the business. This could take the form of software, designs, brands, patents or know how. In most SMEs this IP is owned by the UK company but is not shown as a separate asset on the company’s balance sheet. Larger companies however usually have this IP held in separate companies and leased to the UK operating company.

There is nothing to stop a UK company setting up an offshore company to own the branding and other IP rights of the UK company. The UK company pays a licence fee to the offshore company for the use of the IP which is deductible for UK Corporation Tax and rolled up tax free in the offshore company. In due course the entrepreneur moves offshore and takes a tax-free dividend from the offshore company. This way there is an immediate corporate tax saving in the UK.

There are two ways to structure this. The UK entrepreneur could own two separate companies in parallel, or the offshore company could be a subsidiary of the UK company. There will be commercial considerations here as to which structure is best. The arrangements should be clear from the outset with the leasing agreements in place from the start.

The first consideration is whether the payments to the offshore company are deductible for UK corporation tax. They will need to be wholly and exclusively incurred for the purposes of the UK company’s trade and the cost must be on a commercial basis and not a way of profit shifting. The safest approach is to have similar costs to open market arrangements. Costs can be increased annually say in line with inflation.

If there is a double taxation agreement in place, then this may have a specific provision covering this scenario. There are also specific rules which only apply to very large corporations. Transfer pricing rules may be applicable, but they do not apply to smaller businesses.

There is legislation (transfer of assets abroad rules) which apply when a UK resident transfers assets to a person resident abroad with a view to avoiding UK income tax. There is an exemption for commercial transactions. As noted above it will be helpful to have arrangements in place at the outset when the IP is more likely to be viewed as of minimal value rather than later on when the company is successful.

In summary, it is sensible to consider the different cross-border tax rules when it comes to IP structuring and to avoid creating tax liabilities, including the OECD Base Erosion and Profit Shifting recommendations (Action 5) and what qualifies as ‘IP’.

There are some other considerations which in practice are unlikely to present a problem but should be considered.

Anahita Barbe is a solicitor in the Private Client team at RWK Goodman and specialises in international private client law. She is bilingual in French and English, and has a Bachelor’s Degree from the university of King’s College London and a Masters in Taxation from Dauphine university in Paris.

David Anderson is a solicitor at RWK Goodman.