Intellectual Property Holding Companies
An IP holding company is an entity created by the parent company, which controls and owns the business group’s IP assets, and an operating / subsidiary company handles the day-to-day business activities.
This structure ensures that the valuable IP portfolio is protected from alleged plaintiffs, and the parent company can use the holding company to license IP to their operating companies, subsidiaries or third parties. Consolidating the company’s IP assets creates efficiencies in management, simplifies licensing and it may even attract potential investment. IP Holding companies can be used not only for IP asset protection but also for risk management, tax planning, and improving operational efficiency. The model becomes complex when parent companies, holding companies and operating / subsidiary companies are in different countries.
IP Holding companies offer several advantages: they become a single and central entity that holds the IP, automatically accrues the IP rights generated by any affiliated /operating/ subsidiary companies, and they leave no uncertainty regarding IP ownership. Setting up an IP holding company requires performing an IP audit across all entities to ensure all relevant IP is identified and captured. This step will provide a clear understanding of all IP the group holds, and it can highlight any operational or managerial inefficiencies in current IP creation, protection, and management policies. Holding IP in a separate legal entity can shield it from the complications of an operating/subsidiary company’s insolvency, ensuring it is ring-fenced and protected. Subject to stipulations of applicable accounting standards, structured IP holding could potentially help the company recognize its IP assets on the balance sheet at market value. Even if accounting standards require disclosure at cost, fair market value of the aggregated bundle can be assessed with greater ease if there is aggregated holding and domicile of group IP. Such transparency around the revenue-generating assets of the business can attract investors or secure additional funding.
IP holding companies can have a tax structure that properly recognizes and accounts for the presence of critical IP within a business. Royalty outflow and inflow both could have direct and direct tax implications specific to geography of domicile and tax treaties with international group entities. Hence, it is critical to ensure that the structure is also tax efficient and compliant with transfer pricing requirements while meeting strategic business and R&D goals. IP-related profits are accrued by the holding company, which are taxed in its country of incorporation. The costs associated with the royalty fees paid to the IP holding company can be deducted from the company’s income tax base as operating costs.
Since holding companies can be used not only for IP asset protection but also for risk management, tax planning, and improving operational efficiency it is important that an appropriate jurisdiction is chosen for incorporating it. One needs to consider the type of legal structures available, the underlying holdings and economic activities, taxation, and tax treaties between jurisdictions as well as the needs and availability of financial services. A jurisdiction suitable for a holding used to raise funds and provide financing to underlying subsidiaries might not be the same as the one for holding and exploiting intellectual property rights. When it comes to structuring, there is no ‘one-size-fits-all’. The most suitable jurisdiction for the IP holding structure will largely depend on the location of its subsidiaries and the parent entity, the type of assets held, and activities conducted. To sum up, the strategic use of a parent company, holding and operating companies is required to protect its IP assets.
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The information provided by A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.