Tax Planning for Inbound Licenses of IP: What Is Left After Tax Reform?

In simple terms, intellectual property (IP) rights include things like patents, copyrights, trademarks, and trade secrets. Sometimes, the owner of these rights may want to let someone else use them in exchange for money. However, recent changes in U.S. tax laws have made it more difficult to do this in a tax-efficient way. Non-U.S. taxpayers licensing their IP for use in the U.S. may have to deal with U.S. withholding tax and make sure the payment is deductible for U.S. taxes. This can get complicated, but it’s important to understand the tax implications when dealing with IP rights. If you receive royalties from the U.S., you may have to pay a 30% tax on them. However, if your country has a tax treaty with the U.S., you might not have to pay this tax. To qualify for this exemption, you need to be a resident of that country and meet certain rules. There are also some U.S. laws that could stop you from getting this tax break. If a non-U.S. taxpayer licenses their intellectual property (IP) in the U.S. through a company that is not taxed in the U.S. or any other country, they may not be able to get certain tax benefits under international tax treaties. This also applies if the taxpayer uses an intermediary company to license their IP. The IRS may ignore the intermediary company and tax the royalty payments as if they were paid directly to the original company. This means the original company may have to pay a higher tax rate on the royalties. A “financing transaction” is when someone gives money or property to someone else and expects most of it to be paid back. Stock in a company usually doesn’t count, but there are some exceptions. In the past, people from other countries would use a special type of financial tool to invest in a company’s intellectual property. This allowed them to avoid certain tax rules. New rules prevent non-U.S. taxpayers from getting U.S. tax benefits through certain financing arrangements. If a foreign company uses a special type of loan to fund a licensor in another country, it can’t claim U.S. tax benefits on money it makes from the license. The same goes for a foreign licensor that buys intellectual property using a loan and then licenses it to the U.S. These rules apply because these transactions are seen as financing deals. The rules for financing transactions say that if a payment from one company to another is different from the payment made back, the first payment is considered to be the same as the second one. But if the second payment would have been exempt from U.S. tax (like if it was interest), then the whole transaction may not have to follow these rules. This exception is based on what the IRS said in 1995 about similar types of deals. So if a foreign company buys something and then leases it to a U.S. company, it might not have to follow these rules if the foreign company wouldn’t have had to pay U.S. tax on the lease payments anyway. There are rules that prevent companies from using certain tax strategies to avoid paying taxes. One rule says that if a company pays interest or royalties to a related party and that party doesn’t include the payment in their income for foreign taxes, the company can’t deduct that payment from their taxes. This impacts how companies structure their deals, especially when licensing intellectual property. Some common tax strategies are no longer allowed under these rules. The rules in the tax law have made it harder for foreign companies to use certain structures to minimize taxes on money they make from licensing their technology in the U.S. One option that might still work is for a foreign company to license their technology through a company in Hungary, because Hungary has a tax treaty with the U.S. that exempts them from paying taxes on the money they make from licensing. Plus, Hungary has a low corporate tax rate. So, they might be able to make more money by using this structure. For this article, we assume that the money a U.S. taxpayer pays for using someone else’s ideas or creations is considered U.S. income. The rules for this can be complicated, and some treaties may affect how much tax a non-U.S. taxpayer has to pay. The U.K., Bermuda, and the Netherlands have treaties with the U.S. that could reduce the amount of tax owed on this income. There are some rules and exceptions to consider, though, so it’s best to get advice from a tax expert. The tax law has rules about financing between companies. For example, a financing company can’t own more than 10% of the company it’s financing. There are also regulations about how payments between related companies are treated for tax purposes. These rules can get complicated and might involve international treaties. Jeffrey Rubinger and Summer Ayers LePree, who are tax lawyers in Miami, wrote about these rules.

Source: https://www.floridabar.org/the-florida-bar-journal/tax-planning-for-inbound-licenses-of-ip-what-is-left-after-tax-reform/