Where your company's intellectual property should sit, and what it costs to move it later

For software and technology companies, intellectual property is usually the most valuable asset: code, patents, brands, data and know-how. Which company in the group owns it decides where much of the profit is taxed. Placing IP in a low-tax company with no staff no longer works, and the rules now tie the profit from IP to the people who create and manage it.

Legal ownership and DEMPE

Under the OECD transfer pricing guidelines, legal ownership of IP is only the starting point. The return from IP belongs to the entities that perform and control the functions known as DEMPE: development, enhancement, maintenance, protection and exploitation. They must also have the financial capacity to bear the related risks. A company that owns patents on paper while engineers and managers elsewhere make every decision is entitled to little more than a modest return for holding title.

In practice this means the IP owner needs people who direct research, decide on product roadmaps, manage registrations and enforcement, and decide how the IP is licensed. Development can be contracted to other group companies on a cost-plus basis, provided the owner genuinely controls it.

IP box regimes and the nexus approach

Several countries tax qualifying IP income at a reduced effective rate, including the UK patent box, the Netherlands innovation box, Ireland's knowledge development box, and regimes in Belgium, Cyprus, Luxembourg and some Swiss cantons. Since the OECD's work on harmful tax practices, these regimes must follow the modified nexus approach: the benefit is available in proportion to the qualifying research and development spending the company incurs itself, or pays to unrelated parties, relative to total spending on the asset. Acquired IP and development bought from related parties reduce the proportion. Marketing assets such as trademarks are generally excluded. The qualifying assets, rates and conditions differ by country and should be checked for each case.

Large groups, with consolidated revenue of at least €750 million, are also subject to the global minimum tax of 15%, which can reduce or remove the benefit of an IP box.

Moving IP later

IP is cheapest to place when it is worth least. Once a product has customers, transferring the IP to another group company is a sale at market value, and the country it leaves will tax the gain. EU member states apply exit taxes on transfers of assets out of their jurisdiction, with an option to pay by instalments in some cases. Valuing the IP is contentious, and tax authorities can adjust the price later for hard-to-value intangibles if actual results differ markedly from the projections used. Transfers can also carry withholding tax on royalties and trigger reviews by both countries.

Before you sign

• Before signing development, licensing or employment contracts, decide which company should own new IP.
• Put the people who direct development and exploitation in that company.
• Document intra-group development and licence arrangements at arm's length.
• Track research and development spending in a way that supports a nexus calculation.
• Model the exit tax before any transfer of existing IP, and consider timing.

If you are deciding where your IP should sit, call us before you sign the contracts that create it. The first 30-minute consultation is free, your dedicated consultant is available 24/7, and every request is answered within 24 hours.

General information, not advice. Tax rules change and depend on your facts. Greyridge Global coordinates and delivers cross-border tax and corporate work through appropriately licensed professionals in each jurisdiction. Legal, tax, immigration, fiduciary, and regulated services are provided by qualified advisors engaged for your matter. Nothing on this page is tax or legal advice.