Protecting new product lines and setting up licensing operations

A team of optometrists, plastics and mould technicians have been developing a new type of motorised instant camera over the past few years, to be known as the Visimatic and have now finalised the specifications required to enable worldwide patents to be taken out. Prototype models have attracted a healthy response from potential customers, many of whom may be serviced by existing group companies. However, there are a number of countries in which the Polycon Group has no representation, or it is considered that the representation is inadequate for the requirements of the market and its potential. It is therefore considered expedient to enter into licensing arrangements with distributors in those countries, rather than incur the heavy expenditure of setting up organisations in those countries. Visimatic (Holdings) is the registered owner of the patent rights which have been taken out on a worldwide basis, and Visimatic (Holdings) then sub-Licenses an intermediary licensing company, Visimatic Franchise Company, which in turn enters into licensing agreements with distributors in those countries in which group representation is considered inadvisable."

Most of the development costs in respect of the new camera comprise salaries to a research staff permanently employed by Polycon Lens Company and its subsidiaries. If the patent rights are then registered in the name of Visimatic (Holdings), then in actual fact an asset has been transferred at an arm's length price from Polycon Lens Company to Visimatic (Holdings), and should be acknowledged to the tax administration of Country A. The value of that asset may be the research and development costs connected therewith, or may be a higher value if orders have already been placed following a demonstration of the prototypes. Alternatively, the value could be lower than the research and development costs to date. Polycon Lens Company may of course forget about the research and development costs to date, which costs have been deducted against highly taxed profits. The full future income resulting from the patent's exploitation is received in a jurisdiction where taxes are low, such as Country M.

Of course trying to find an arm's length price can be very difficult, particularly where there are no standard values within the industry. The transfer consideration should take into account the geographic area permitted under the licence, the right to grant sub-Iicenses, the extent to which there are substitutes in existence and the extent of costs incurred by the research and development company. Even a true market value at the time may be challenged subsequently by the tax authorities if excessive income flows into the transferee.

Visimatic (Holdings) may well be in a low tax jurisdiction. Therefore, it is unlikely that Country M would have entered into many double tax treaties with high tax countries, since the avoidance of double taxation becomes irrelevant where one of the treaty partners levies little or no tax on income and profits. It may be preferable to sub-licence Visimatic Franchise Company, which has entered into many double tax treaties with countries and offers special concessions to intermediary licensing companies. In this way, foreign withholding taxes on royalty payments receivable by Visimatic Franchise Company will be reduced to nil or a nominal amount, and if no withholding tax is then levied on royalties paid from Visimatic Franchise Company to Visimatic (Holdings), the after-tax royalty income receivable by Visimatic (Holdings) can be considerably increased.

Countries may levy a withholding tax on the payment of royalties or know-how, but may not levy a tax on non-residents who simply perform services for domestic companies, provided that the non-resident does not have a permanent establishment in that country. The services often referred to as "show-how" rather than "know-how" payments, may enable payments to be made from high-tax to low-tax jurisdictions within the group, without incurring a withholding tax liability.

Date: 2015-01-29; view: 802