Intellectual property (IP) is now one of the most valuable asset classes in global terms and yet establishing IP value and exploiting the economic potential of IP assets remain much of a mystery to businesses, financiers and investors, writes Tim Mertens, chairman of Sovereign Trust (SA) Limited
Typically, business owners are preoccupied with growing revenue, maximising profits and building their brand. But it is often the underlying know-how, the innovative technology or the brand that can be the core foundation of a business.
In knowledge-based economies, economic value is captured through the IP system, and the rights it confers which transform intangibles into tradable economic assets. Up to the 1980’s, tangible assets accounted for 80% of company value; the rest was made up by intangibles, including IP. Thirty years on, the reverse is true with 80% of company value made up of intangibles.
Knowledge-intensive businesses, which have the greatest need of finance for growth, therefore often struggle to raise funds because their intangible assets do not appear on the balance sheet and are therefore not considered by financiers and investors.
Whether your IP is in the form of a trademark, copyright, patent or identifiable processes, it needs to be protected – particularly when the royalties that flow from it become more and more lucrative.
In certain circumstances it may be possible to transfer, sell or assign IP offshore, provided it is done through the correct channels and in line with the rules of the South African Reserve Bank. This would assist South Africans to expand their business internationally and to have increased access to global markets.
The key lies in being able to identify potentially valuable IP early on and to structure it in a tax efficient manner. This is generally achieved by using a company structure in a jurisdiction that offers tax neutrality and an effective legal system and infrastructure. This can help to reduce or avoid unnecessary layering of fiscal and regulatory obligations.
More importantly, the jurisdiction should have a good tax treaty network that enables IP owners to receive royalties and pay dividends at reduced rates of withholding tax – or in certain cases even zero withholding tax. Malta, Cyprus, Mauritius and Singapore all have excellent double tax treaty networks.
Cyprus, for instance, is an attractive location for the establishment of an IP holding and development company, which offers an efficient tax rate as well as the legal protection afforded by EU Member States and by the signatories of all major IP treaties and protocols.
Under the Cyprus IP regime, 80% of the qualifying profits generated from the qualifying assets are deemed to be a tax-deductible expense for qualifying taxpayers. With a standard corporate tax rate of 12.5%, this can result in an effective tax rate of as low as 2.5%.
Malta has also established itself as a good location to hold intellectual property rights. In addition to a tax exemption on income derived from patents, copyrights and trademarks, it also provides for various forms of relief from double taxation as a result of more than 70 double tax treaties.
When registering an IP holding company offshore, business owners will need to comply with the new economic substance requirements, which specifically list ‘intellectual property business’ as a ‘relevant activity’.
In addition to the general substance requirements, IP companies must provide additional information including:
• Detailed business plans which clearly lay out the commercial rationale for holding the Intellectual Property asset(s) in that jurisdiction
• Concrete evidence that the decision making is taking place in that jurisdiction, and not elsewhere, and
• Information on employees in that jurisdiction, their experience, the contractual terms, their qualifications, and their length of service.
IP is a complex area. But if the real value of the intangible, technology-based assets of the 21st century is to be fully unlocked, IP must be properly structured and planned. Professional onshore tax advice will be needed to ensure proper tax, legal and, in some cases, exchange control compliance.