Intellectual property is universally acknowledged as a key asset for companies across a wide variety of industries. Ownership of IP assets, such as patents and trade marks, can be valuable not just for protecting a company’s products and services, but also in generating revenue through licensing the IP to its affiliates and to unrelated companies. Many companies with significant IP assets have recognised the power of consolidating them into a separate holding company. This strategy can streamline the management of IP assets, provide a platform for maximising their value and can confer significant tax savings on the parent company.


Historically, IP ownership was viewed as a means of protecting a company’s products and services from infringement by competitors. IP was created and maintained in a variety of places throughout a company’s organisational structure. Over time, savvy companies with significant IP assets realised that they could generate considerable revenues from licensing their IP, and began focusing actively on this underdeveloped side of their business by granting licenses both to licensees who sought them and to others who were infringing.

The IP Holding Company Structure

Many of these same companies also realised that there can be a variety of significant benefits in consolidating their IP into a separate IP holding company, or IPHC. At the outset, the initial process of collecting and contributing IP assets to an IPHC forces a review of each property to determine if it is being enforced and exploited to its fullest extent, or if it has little value and is therefore not worth the cost of maintenance. An IPHC dedicated to holding and exploiting IP then imposes discipline on future IP creation and maintenance. Its managers can set a consistent vision and strategy for enforcement and licensing without regard to the particular business unit in which the IP was developed.

The creation and maintenance of an IPHC can also facilitate a potential sale of IP assets to a third party or a spin-off of the IPHC itself. The existence of this structure can, however, pose a challenge when bringing an infringement claim seeking damages for lost profits, as the IPHC generally does not conduct any business directly. In setting up a typical IPHC, a company creates a new corporate subsidiary and contributes its IP assets to it. This new IPHC then licenses the IP back to its parent and various third-party licensees. Under these license agreements, the parent company and third parties agree to pay the IPHC royalties.

While the structure of an IPHC can be straightforward, the choice of jurisdiction for its domicile, and the terms of the contribution and license of IP assets can involve significant planning. Tax considerations are of paramount importance.

Potential Tax Benefits

A significant potential tax benefit from the IPHC structure is the ability to deduct royalty payments to the licensee companies using intangibles in a high tax jurisdiction where goods are manufactured or sold. Frequently, the deduction which may be available against the income of such companies at the 35 per cent or 40 per cent rates applicable is a significant attraction to the establishment of IPHCs. However, among most high tax jurisdictions, sophisticated tax auditing by the tax authorities assures that deductions are limited to an arms-length royalty rate. US state tax authorities, for example, have aggressively attacked the use of IPHCs to reduce state income taxes by denying deductions to the licensee or subjecting the out-of-state licensor to the licensee state’s income tax. Accordingly, it is important to determine and set the royalty rate properly at the inception of the licensing arrangement. It is also worth noting that, if the IPHC sues a competitor for infringement, the royalty rate could potentially be asserted by the infringer as a basis for determining damages, even though it was set in an intra-company arrangement for different purposes.

Depending upon the choice of the domicile of the IPHC and the tax residence of its parent, the income flowing to the IPHC may be untaxed or lightly taxed. In some instances, companies have selected low tax jurisdictions such as Bermuda or the Cayman Islands as their IPHC jurisdiction, which do not impose tax on the income of locally domiciled companies. However, in addition to the tax imposed by the jurisdiction of incorporation, the IPHC must also consider the withholding taxes paid by the licensees who pay royalties to the IPHC. Because low tax jurisdictions rarely have tax treaties that reduce withholding rates, the choice of a low tax country can be ineffective unless used in combination with a subsidiary with a more favourable tax treaty network, such as the Netherlands. Many businesses have decided against the use of low tax jurisdictions and have sought instead to use higher tax jurisdictions such as Switzerland, where some favourable tax regimes exist. Switzerland has a very full treaty network and has negotiated low withholding rates on royalty payments to a Swiss company as part of these treaties.

In addition to direct taxes imposed upon the IPHC, the IPHC’s parent may also be taxed if the parent’s jurisdiction imposes a tax on income of controlled foreign corporations. The United States, for example, requires its corporations to report as a dividend the passive income of their controlled foreign subsidiaries. These requirements can eliminate much of the tax benefits, unless the IPHC is structured in a way that complies with certain exemptions from these rules.

Among the most significant tax detriments to the establishment of the IPHC are the potential tax consequences of transferring existing intellectual property to a foreign subsidiary. While it might normally be the case that IP assets could be transferred to a subsidiary without recognising the appreciation in value inherent in the assets, these rules are often superseded by special rules when the IP moves outside the taxing jurisdiction of the country where the IP was created. A company considering an IPHC structure could enter into a cost-sharing agreement whereby it would transfer only a portion of its existing IP assets to a foreign subsidiary in order to reduce the potential tax at inception.

Alternatively, cost-sharing agreements may sometimes contemplate sharing future development and maintenance costs so that the value of a particular technology moves over time to the IPHC, as a greater portion of the technology value relates to the developments and augmentations rather than from the original base technology.

Careful Planning Is Essential

While tax benefits and costs are important elements in the establishment of an IPHC, most companies will be motivated principally by their business and operational benefits. Indeed, if the IPHC lacks an economic substance, royalty payment deductions may be denied altogether. Careful planning at the outset is vital to ensure that an IPHC structure is set up correctly so that it confers the intended business and operational benefits as well as the anticipated tax benefits.