Taking IP offshore

What SA business owners need to know

IP Intellectual property (IP) is fast becoming an important asset class, and South African wealth managers have seen a growing interest, particularly as innovation in technology develops. However, IP often slips below the radar until its potential real value is realised.

“IP needs to be protected, particularly when the tax royalties that flow from it become more and more lucrative,” says Tim Mertens, Chairman of Sovereign Trust (SA) Limited.

Mertens explains that in certain circumstances it is possible to transfer, sell or assign IP offshore if done through the proper channels, and in line with the South African Reserve Bank. There can be advantages in considering low tax jurisdictions in countries such as Malta, Cyprus, Mauritius and Singapore where there are good Double Taxation Treaty networks and resultant regulation.

Typically, business owners are preoccupied with attention to profits, dividends from underlying share investments and brand building. “Yet it is the underlying know how, the innovative technology and the brand in the form of a trademark, copyright, patent or identifiable processes that can be the core foundations of a business,” says Mertens.

One of the most striking examples of IP in a tech-savvy world is software development which changes at an ever rapid pace. “What might be developed in year one, may look completely different in year three with add-ons and redevelopment as a necessary consequence of market demand.”

“In situations where there are legally acceptable opportunities for IP to be exploited offshore, it enables South Africans to expand their business internationally and to have access to global markets,” says Mertens. Building a compliant offshore asset base, enjoying lower tax rates, and being exposed to overseas markets are all extremely beneficial advantages to running a profitable business.

Sovereign maintains that the key lies in being able to identify potentially valuable IP early on and to structure it in a tax efficient manner. This is usually achieved by using company structures in jurisdictions with competitive tax advantages and a good tax treaty network. In this way, business owners can take advantage of exploiting IP in target countries, reducing resultant withholding taxes.

IP is an idea or design, by the person that came up with it and once a value is attached, it can be registered to ensure exclusive use. The owner then has exclusive use of the IP and the right to exploit it to third parties.

As an example, when IP ownership is registered in a Cyprus company, withholding tax on royalties paid can be reduced significantly – and in certain cases even eliminated. In addition, the corporate tax rate in Cyprus is 12.5%, and an IP holding company can apply for a special tax ruling after meeting certain requirements to qualify for a corporate tax rate of only 2.5%.

Malta also has a good regime where IP can be registered through a Maltese company and applied all around the world. In order to encourage the growth of international trade, Malta has put in place an impressive network of double tax avoidance agreements (DTAA’s) with important trading partners as well as with emerging countries. To date, there are over 50 DTAAs in place including countries such as Canada, USA, China and India.

When registering an IP holding company offshore, business owners need to comply with substance requirements. The company has to have an actual economic presence offshore. Factors to be taken into consideration include place of incorporation, non-resident directors and shareholders, non-resident bank account, web development, administration and where the IP was developed, just to name a few.

There is no doubt that intellectual property is a complex area of the law and there are various opinions on how it should be dealt with. “Structuring should be properly planned and coordinated and professional onshore tax advice should be sought so as to ensure proper tax and in some cases exchange control compliance,” concludes Mertens.