Intellectual property tax planning must be carefully managed in order to reap the most financial benefits from your IP assets. Some IP transactions have more tax consequences than others, so understanding how tax law affects IP is crucial to your company's bottom line.

Tax Implications of Intellectual Property

Most companies rely on the value of their intellectual property, intangible assets that set their work apart from everyone else's. Businesses often focus heavily on creating strategies that help them protect and monetize their IP.

All too often, these same companies don't place as much emphasis on properly aligning their IP management with their global tax planning strategy. When they fail to consider the tax liabilities of their IP, serious consequences may result.

It's possible for a poorly structured IP portfolio to lead to profit buildup in a high-tax jurisdiction. When businesses don't plan well, they may end up moving IP to another company or across borders and suffer increased tax liabilities or pricing risks.

Acquisitions and mergers can leave IP in places where it costs too much to own it for the little value it delivers. In addition, regulatory challenges may result from weak documentation of IP inventory and use of poor IP management.

When you don't make a tax plan that's in line with your business, it can be very costly.

Businesses need to have some certainty about where to keep core operating assets. This includes their IP and the organizational structure needed to develop and maintain it. 

For international companies, this is even more challenging, since they must balance the advantages of tax benefits in one country with the risks of anti-tax avoidance issues in another. 

However, the reality for many international technology companies is that they don't have to duplicate a major supply chain in every market they serve. Their technology actually enables them to serve many markets around the world from one headquartered location.

How to Effectively Navigate IP Tax Planning

IP refers to pretty much anything a person can think up, such as the following:

  • Literary works
  • Artistic works
  • Inventions
  • Designs
  • Symbols

These are an important part of your brand and marketing image. Legal protections, such as copyrights, patents, and trademarks, protect intellectual property, allowing individuals and businesses to earn money and recognition from the items they invent or create.

You can use your IP to differentiate your business from competitors. You can also sell or license IP to raise capital. You can also use your IP as security for obtaining a loan.

Mismanaging IP can have negative effects on your bottom line. Many businesses succeed in developing, protecting, and monetizing their IP, but they fail in creating a savvy tax plan for it. When senior management doesn't fully understand the tax implications of their IP, it can really hurt the business. However, if they know more about it, they can recognize value-creating opportunities that they can leverage to their benefit.

As the global economy has experienced an upswing, more businesses are investing in research and development and enjoying the IP benefits that have come about.

The right IP tax planning may involve licensing and transfers. You should be aware of increased scrutiny from U.S. and foreign governments when transfers involve profit shifting or related entities. Also, make sure you understand the many foreign tax rules, which are often ambiguous, and the complexity involved in calculating front-end tax incentives.

How you'll transfer IP varies based on the deal structure. IP sales are usually taxable, and they're defined by a fixed price or installment payments. When one division of an international company transfers IP to another operating division, the amount charged by one related party to another has to be the same price charged as if they weren't related — basically, the price is an open market valuation.

License agreements may result in taxable royalties, which could be subject to withholding. Another method in IP deals is “cost sharing.” There's no transfer, but the cost and risk are shared with an affiliate.

Because tax laws can be very complicated, you might wish to consult with an expert in the field, particularly one experienced in IP law.

If you need help with intellectual property, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.