All You Need to Know About an Offshore IP Holding Company

Innovating and creating Intellectual Property (IP) is the key to catapulting your business to profitability. But it is equally critical to protect your IPs from misuse or false litigation. That’s where an offshore IP holding company comes in. Through it, you can license your intellectual property across the world and manage your taxes accordingly.

Wondering what an intellectual property holding company is and how to establish one? Then this blog answers all your questions.

What is an IP Holding Company?

An IP holding company is incorporated to hold, manage, and license your IP assets to other companies. The company earns an income by licensing the IP it has. However, it does not engage in business-related trading activities; it simply holds and manages IP to ensure your intangible assets remain protected from legal action and infringement.

However, in some offshore jurisdictions such as Seychelles, the British Virgin Islands, and the Cook Islands, your company must also demonstrate economic substance to affirm its legal validity.

Why Should You Set Up an IP Holding Company?

You can avail yourself of numerous advantages by forming a holding company for your intellectual property. Here are a few key ones for you to consider:  

• Has significant IP assets that are critical to operations
• Wants to protect the IP assets from unwarranted lawsuits
• Operates in multiple jurisdictions
• Plans to license IP to various parties

What are the Benefits of Setting Up an IP Holding Company?

Maximize your income and enjoy numerous other benefits via this company structure:

1. Protection from Lawsuits

Holding IP in an offshore company protects it from lawsuits filed against the operating (parent) company.  However, transferring IP just before a lawsuit is filed against you can be deemed fraudulent.

2. Licence IP Easily

You can license your intangible assets to multiple subsidiaries, including the operating company or a third party. An intellectual property holding company creates standardized control and revenue by simplifying global IP licensing agreements, especially if you have multi-jurisdictional operations.

3. Reduce Overall Tax Burden

There are various tax benefits to an IP holding company. Numerous countries across the world have implemented a patent box regime, which is designed to save tax on the income generated by a holding IP. Moreover, these regimes are designed to support in-house innovation and R&D. They allow companies to pay much lower corporate income tax on their income from intellectual property.

For example, countries such as Cyprus and Malta have standard corporate income tax rates of 15 percent and 35 percent. However, the implementation of the patent box regime has brought the effective tax rate to 3 percent and 1.75 percent, respectively. However, these rates only apply to qualifying assets such as patents and copyrighted software. On top of that, Malta requires your company to comply with the Nexus approach and prove that R&D happened in the country. Aside from this, you may still have to pay taxes in your home country.

Moreover, in the USA, you can also benefit from Foreign Derived Deductionible Eligible Income (FDDEI). It allows corporations to pay an effective tax rate of 14 percent on income from licensing IP to foreign customers.

4. Risk and Valuation Management

It helps you manage risks by segregating your intangible assets from your primary business. Thus, it makes it harder for third parties to claim the IP in disputes against it. Moreover, centralizing IP under a holding company makes assessing, valuing, and demonstrating its worth to investors and buyers easier.

Risk and Challenges of Forming an IP Holding Company

Here’s a quick glance at a few challenges you may face while setting up this company structure:

1. Legal and Enforcement Risk: If the license between your intellectual property holding company and operating company is not drafted or is non-exclusive, the parent company may be legally barred from suing infringers for lost profits.
2. Economic Substance Failure: Maintaining an offshore company in most jurisdictions requires demonstrating proper economic substance. Thus, core income-generating activities, such as decision-making and patent filing, must occur in that country.
3. Double Taxation: If you don't choose a jurisdiction with strong tax treaties, your offshore IP holding company may end up paying tax on the same dollar twice.

IP Holding Company Structures - Which Is The Right One For You?

Choosing the ideal structure for holding IP helps you plan taxes and licensing properly. Here are some common structures typically used for this firm type:

Legal Nuances to Keep in Mind While Setting Up a Holding Company

Adherence to the legal framework of the chosen jurisdiction is a must to ensure your firm runs smoothly. So, while forming a company, you must remember the following pointers:

• Ensure every single transfer is evidenced by the Deed of Assignment.
• As per the OECD BEPS rules, transfer pricing must be the same as what two strangers would agree to.
• Meet the economic substance requirements of the country of settlement and perform core income-generating activities (CIGA).
• Ensure that the economic power lies in your selected jurisdiction.

Which Documents Are Required for Registering an IP Holding Company?

Documents can vary based on the jurisdiction and company structure you opt for. Here is a list of documents that you typically require:

• Incorporation application/registration form
• Memorandum of Association (MoA)
• Articles of Association (AoA)
• Shareholder details and shareholding structure
• Director details and consent to act
• Ultimate Beneficial Owner (UBO) documents
• Proof of registered office address
• Business plan or activity description
• IP asset documents (patents, trademarks, copyrights, assignments)
• IP valuation report (if applicable)
• Board resolution
• Bank account opening documents
• AML/KYC and due diligence documents

How to Set Up an IP Holding Company?

There are numerous requirements that you have to follow while setting up a firm. You can follow the steps below to incorporate a firm:

Step 1 - Avail Professional Guidance

Business Setup Worldwide can help form an offshore holding company to protect your IPs. We help you choose a jurisdiction and company structure that meets your requirements. Moreover, we keep you compliant with local legal requirements as well.

Step 2 - Audit the IP

Make a list of all the intellectual properties your company owns, including registered patents, copyrights, trademarks, and so on. Additionally, make a list of the intangible assets that are yet to be registered, such as computer codes, processes, and so on. Once you have compiled the list, verify ownership and choose the IPs you wish to transfer to the holding company.

Step 3 - Choose a Jurisdiction

There are numerous points to consider before choosing a jurisdiction to set up your holding firm. You must keep in mind the tax treaty framework, economic substance requirements, reputation of the location, and so on.

Step 4 - Submit Documentation

Hand over the necessary documents to your BSW dedicated manager. They will take care of document submission as and when required.

Step 5 - Company Setup and Transfer

From the IP holding company structures mentioned in the previous sections, you must choose the one suit your business best. Transfer your intangible assets to the company after successfully registering it. However, you must sell the IP to the holding company at fair market value (FMV).

How Can Business Setup Worldwide Help?

Forming an intellectual property holding company can help you manage and license your IP effectively across numerous jurisdictions. However, choosing the right jurisdiction and then meeting the ever-evolving requirements can be tedious for anyone. That’s where offshore business consultants, such as Business Setup Worldwide, can be of service. We help you comply with international regulations and plan your IP strategy effectively. Contact us now to get started with intellectual property services.