Tuesday 26 January 2010

Offshore IP holding companies - UK discussion document

HM Treasury has published the discussion document on the future of taxation of controlled foreign companies. Of particular interest for companies with IP are the questions (pages 15-19) on how they should treat overseas companies with IP, proposing to distinguish between those that actively manage the IP and those that passively receive it. The document is part of an ongoing process to establish tax rules that ensure UK parent companies are not taxed on the profits of IP holding subsidiaries in certain circumstances (circumstances to be defined!)

A controlled foreign company is an overseas company which is (generally) majority owned by a company in the UK and, generally, is in a location with a low tax rate. Tax authorities tend to be wary of such companies because they could be used to divert profits from a higher tax country (such as the UK). The portability of IP means that tax authorities are particularly concerned when such companies are used to hold IP and receive royalties. The introduction of a tax exemption for dividends received from overseas brought this issue into sharp focus because such companies could receive royalties, pay little tax on them, then dividend the profits to the UK company - which would not pay tax on the dividend. HM Revenue & Customs is, perhaps understandably, concerned that (without any checks in law) UK companies would simply put all profitable IP activity into non-UK companies and minimise their tax costs.

The discussion document simply asks questions at this point, rather than suggesting any particular line of thought. In particular, it seeks responses on what constitutes active management of IP - this is likely to be an interesting area of discussion, as many of the characteristics of active management would seem to reflect well-managed investment IP activities as well.

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