How to: Navigate Intangible Property Taxation

Intangible property (IP) can be defined as anything that one cannot feel or touch. These days, the term is used to describe concepts related to intellectual property, such as patents, trademarks, and copyrights. There are other types of intangibles; however, these are not as commonly held.

The taxation of IP is a hot topic, mostly because of the tax planning techniques used by large, multinational companies, like Facebook and Google. The UK government, among others, has proposed a digital services tax in an attempt to recover what is seen as lost tax revenues. It is likely that the EU will also introduce a similar kind of tax across its member states.

The income derived from IP is generally described as a royalty payment, which is essentially ‘rent’ for the use of the IP and is payable to the owner. In nearly all cases, the payer’s country of residence will impose a withholding tax on royalty payments to non-resident IP owners. This amount can range from 15% to 35% of the sum.

In addition, IP owners will pay tax on receipt of the royalty in their home jurisdictions. Evidently, this could give rise to double taxation, which is why most IP structures are situated in countries that have a double-taxation treaty in place. Such treaties generally reduce the rate of withholding tax to around 5% or 10% and give a tax credit to the recipient, thereby eliminating the possibility of double taxation. Within the EU there is a directive that enables royalties to be paid from one member state to another without any withholding tax.

As a consequence, many of the controversial tax arrangements that have involved EU member states, such as Google’s use of the Double Irish company structure, have emerged. Nearly all royalty structuring involves the use of either an EU member state or a country with access to a wide network of tax treaties. It is unusual to see IP held directly by so-called tax-haven companies, because they tend not to have any access to tax treaties.

The taxation of IP is a complicated area of international tax law that has been the focus of much scrutiny, not only from the press but also from the EU and the Organisation for Economic Co-operation and Development, an influential intergovernmental body with over 35 members. As such, the structuring of IP holdings should be undertaken only by specialists in the field. Do not try this at home.

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