In the absence of careful planning, owners of intellectual property can find their profits seriously eroded by both taxes on profits and by withholding taxes.

Traditional royalty tax planning has involved transferring intellectual property (IP) to a company in a jurisdiction that imposes low tax or no tax on profits. However countries from where royalties are paid generally levy a withholding tax that can be as high as 35%.

It is important to take into account that if IP is transferred after it has become valuable, it is likely that there will be capital gains tax implications on the disposal of the IP to the low tax company. It is therefore preferable to aim to transfer the IP to the intellectual property holding company while it is at a low value, or, alternatively, to ensure that the IP is developed by the company that is to ultimately own it.

A case by case approach to tax planning for royalty routing needs to be adopted. Anti-avoidance provisions in the jurisdiction of the paying company must be taken into account.

In certain circumstances, the more traditional conduit approach may work. However, in other situations different solutions will be required. The jurisdictions of Malta and Madeira are definitely worth consideration.

Further information on Royalty Planning can be found by clicking the 'Download Document' button.

Lists of respective Malta and Portuguese Double Taxation Treaties can be provided by your usual Dixcart contact.

Article Date: 4th February 2010

Author: Sean Dowden