Below are a few common international licensing structures aimed at reducing the effective tax rate applied to royalty income:
BVI / NLD
IP owner: BVI Co
Intermediary licensee: NLD Co
NLD has an extensive DTA network that typically zeroes withholdings tax in respect of royalties.
The NLD tax rate is approximately 34.5%, which is levied on the spread between sublicensing income and royalties paid in terms of the head licence with the BVI Co. Typically a spread of 7% is accepted by NLD authorities. This yields an effective NLD tax rate on royalties of 2.415% (i.e. 7% x 34.5%).
Royalty payments by NLD Co to BVI Co do not trigger royalty withholdings tax. However, dividends (i.e. 4.585% of sublicensing receipts) are subject to dividend withholdings tax in NLD (but see DTAs for rate adjustments).
To mitigate the dividend withholdings tax, one may consider interposing a Luxembourg holding company between the BVI Co and the NLD Co.
But see the anti‐avoidance provisions below.
Austria / Cyprus
IP owner: BVI Co, owned by a Jersey trust
Intermediary licensee: Independent Cyprus resident company
As per above, only the royalty spread (typically 4% ‐ confirmed in advance by Cyprus fisc) is subject to tax in Cyprus.
An offshore Cyprus Co is taxed at 4.25% but is excluded from treaty benefits under treaties with various countries. It is also likely that this tax rate will rise.
Cyprus does not levy withholdings tax on outgoing royalties.
Cyprus Co could even be substituted by a UK Co, provided that the IP owner and UK Co are both independently owned. The UK does not levy withholdings taxes in respect of IP that did not have a UK source (i.e. IP registered and exploited outside the UK). However, it is preferable to pay the royalties into a non‐UK bank account and on‐pay such amounts to the BVI Co to emphasise the non‐UK source.
But see the anti‐avoidance provisions below and, in respect of arrangements including a UK Co, beware of anti‐avoidance provisions specific to DE sublicensees.
Ireland is popular since many of the Irish double tax treaties do not have limitation of benefit clauses, which require a reasonable spread to be retained by the Intermediary Co.
Consider routing royalties from a final licensee through an Irish company to a Cyprus onshore or offshore company and finally to the IP holder in a low tax jurisdiction.
A Hungarian intermediary company typically requires a royalty spread of 5%, which is subject to tax at 18%. But see withholdings tax levied by the sublicensee country (as revised by the DTA).
Where an IP owner (in a low tax jurisdiction) wishes to license his IP for a period much shorter than the useful economic life of the IP (e.g. 5yrs) and the royalties can be forecast accurately, the IP owner may wish to sell the right to exploit the IP for the licence period to an independently owned NLD Intermediary Co for a capital sum (which may even be payable in installments). The NLD fisc will permit an allowance for the purchase price over the life of the licence term (in this case, 5yrs), and this is taken into account when fixing the sales price. This will significantly reduce NLD tax, and the lump sum payment is not subject to withholdings tax in the NLD.
This arrangement may trigger fewer anti‐avoidance issues and inquiries into the beneficial ownership of the royalty payments.
Switzerland may limit the rights to Swiss double tax treaty protection where Switzerland is used merely as a conduit. However, Switzerland typically charges federal tax on IP held by a Swiss domiciled company at an effective rate of 7.8%. However, the arrangements can be structured to ensure that only 50% of the Swiss Co's income is subject to this tax, with the rest constituting "outgoing" expenditure (typically paid to a NLD Co) in the form of management fees or interest payments.
However, Switzerland requires at least 25% of such passive profits retained by the Swiss Co to be distributed by way of dividends, which distributions may trigger dividend withholdings tax at 35%. Accordingly, Swiss "companies" are typically structured as branches of Dutch companies. Such an arrangement may reduce the effective tax rate to less than 5% in Switzerland, and the corresponding income is exempt from tax in NLD.
One should always take into account controlled foreign company and transfer pricing legislation; the concept of beneficial owner of royalties; Exchange Control Regulations; and offshore trust rules.