BP, Nestlé and Vodafone are among a growing number of companies placing ownership of their trademarks and global brands into offshore holding companies in low tax jurisdictions. For some, the attraction is in greater tax efficiency, for others, the benefit is in exercising central control over licenses and global brands. Three experts examine the advantages and disadvantages of such arrangements.

WHAT IS THE TAX WORTH?
Mark Engelman looks at the tax worth of placing ownership of IP into offshore holding companies, and examines how the Inland Revenue is viewing this new trend.

There is serious contention growing over the attempt by multinationals to reduce their tax liability through the transfer and licensing back of brand portfolios. Many multinationals have already sought to take advantage of the opportunities posed by the recognition by the Inland Revenue of IP as balance sheet assets. In the UK, for example, the commonly adopted scheme permits a company with an existing trademark portfolio to transfer its trademarks to another offshore company generally located in a jurisdiction in which the receipt of royalties does not trigger tax. The countries of choice presently appear to be Switzerland or the Netherlands.

An advantageous rate of tax
The initial transfer of those rights is a transaction which represents a capital gain to the company for corporation tax purposes. Generally, however, UK companies through normal tax planning would ensure that the timing of the gain coincides with a coincident tax loss which is offsetable against it. Once transferred offshore, the brand portfolio is then licensed back to the UK corporate which is then permitted to deduct those royalty payments against corporation tax, potentially for ever. To the corporate group as a whole, the transfer, in effect, reduces the rate at which it pays corporation tax from the UK rate to that applicable in the offshore country.

The Inland Revenue can choose to investigate the company for conducting the transaction between related parties, which is almost universally the case. They might claim that the transfer was not conducted at arm’s length, or was not really of a commercial nature and therefore falls within the anti-avoidance rules. It can also argue that the original transfer valuation (which the UK corporate would wish to maintain at as low a level as possible) or the level of royalty charged to the licensee company, are not correct.

Has a transfer of IP taken place?
However, the real issue may well turn upon the legal effect of the transfers themselves. It has been a long established principle of trademark law that the goodwill in a business cannot be transferred without a transfer of the other assets of the business. For practical reasons, it is unlikely that the transfers of trademarks executed in pursuit of these tax benefits involve anything more than the paper transfer of registered and unregistered trademark rights.

While the registered trademarks can easily be assigned without any negative consequence because of the impact of TRIPS (the World Trade Organisation’s Agreement on Trade-Related Aspects of Intellectual Property) – which permits transfer of those marks with or without goodwill – the goodwill associated with the business of the company is unlikely to follow those registered trademarks, unless all of the other business assets go with it. The most important effect of this is that it may allow the Revenue to argue that no real transfer of IP has taken place, thus negating the very purpose of the transfer, thus assisting the Revenue in proving that the transaction is merely a sham.

It has been a long established principle of trademark law that the goodwill in a business cannot be transferred without a transfer of the other assets of the business.

Litigation on the horizon
Therefore, unless the transfer has been effected with a transfer of the business assets of the company, which of itself involves both other tax, legal and administrative consequences, the transfer might well not meet its designed effect of tax reduction.

It is very likely that we will begin to see more litigation arising because of the pressure placed upon the Inland Revenue to recover government revenue by challenging the rights of multinationals to take taxable assets out of jurisdiction.

Mark Engelman is a specialist IP counsel at 7 New Square. He was previously head of IP at The Body Shop



HOW TO MAKE THE MOST OF YOUR LICENCES
Michael Bilewycz weighs up the advantages and disadvantages of putting your trademarks in an offshore holding company from a licensing perspective.

In an effort to avoid or reduce corporate taxation, many businesses are placing ownership of their trademark portfolios in offshore holding companies in low tax jurisdictions, and licensing them onto sister companies or third parties. In many cases this will also generate additional income by way of royalties, which in turn are tax deductible in many jurisdictions.

Delegating the burdens
When setting up a third-party licence, the holding company will be able to pass on all the responsibility for providing the product or service to the licensee. This also means that the licensee will be accountable for any set-up tasks in the country concerned (which will also involve the necessary investment), as well as the risk and responsibility of employment and product liability.

Care must also be taken to ensure that quality control provisions are included within the license agreements to enable the owner to safeguard the trademark being licensed. This could include provisions to inspect the manufacturing of the article, or in the case of services, watch over their provision. Without such provisions, there is a real danger that the association between the owner and mark licensed may be broken, leaving the licensee in de facto possession of the property, and the registration invalid.

Choosing the correct licence
If the proprietor is a holding company, which does not intend to trade in the territory concerned, then if only one licensee is to be appointed, setting up an exclusive licence also brings its own benefits. In many territories, such a licence enables the proprietor to insert provisions into the licence agreement, whereby the licensee may be given the same rights and remedies as if the licence had been an assignment, including the right to bring infringement proceedings in the licensee’s own name. However, this will exclude the licensor from using the mark itself, or appointing another licensee in that territory, at least during the lifetime of the licence.

A non-exclusive licence, on the other hand, will enable the proprietor to continue to produce and sell its own products, provide its own services, or appoint another licensee as it sees fit. This may well be appropriate, for example, if the first licensee does not meet the proprietor’s requirements or is unable to meet unanticipated extra demand for the products produced.

Where the system can fall short
Such complex licensing systems, however, require constant administration and review. The enforcement of licences against licensees also presents its own problems, including those of jurisdiction and applicable law. In many companies such as Shell, entire departments exist to administer and enforce the licensing structure. This may well be a cost effective exercise since they have the resources to do this, but this structure may not be suitable for all companies. Essentially it comes down to what is the most cost-effective strategy to adopt; smaller companies may well find such an arrangement too burdensome.

Michael Bilewycz is the director of Markforce Associates Ltd



HOW TO MANAGE YOUR BRANDS
Jan Lindemann asks what offshore holding companies can do to help build stronger brands.

In most economies around the world, brand management has become a key driver of corporate value. Brands influence the choices made by customers, employees, investors and government authorities, and according to the annual survey of Business Week/Interbrand on the world’s leading global brands, can account for between 30% and 70% of stock market value. Given this figure, it is not surprising that companies are searching to ensure optimal management of their brands, and many are doing so by creating dedicated holding companies for their management.

A positive input
Such holding companies – and the royalties paid by their subsidiaries – reflect the economic importance of brands as assets. The holding companies become accountable for the use of the brand and, therefore, need to provide value-added marketing services to justify the charge for brand royalty. Subsidiary companies, meanwhile, feel the need to apply the brand more wisely and efficiently to warrant the price they are paying for its use. As a result, brand management is converted from a cost centre into an accountable profit centre that receives royalties from subsidiaries. These royalties are then reinvested into global brand management initiatives, creating a positive cycle of brand return and brand investment.

Joint responsibility
A central brand management function also offers a more effective means of maintaining the legal rights of a brand. Registration and renewal of trademark registrations, policing, prosecuting infringement and passing-off actions can be better co-ordinated and carried out consistently by a brand holding company, rather than being left to the interests or abilities of a subsidiary companies’ management.

That is not to say, however, that brand management becomes the sole responsibility of the brand holding company. Both the company and its subsidiaries need to manage and invest in the brand, but with such a set up, these tasks can be split. Global marketing initiatives and investments (such as the design and management of the brand’s global positioning, identity guidelines, trademark protection, brand extensions, licensing, and global advertising campaigns or sponsorships) becoming the key responsibility of the brand holding company; and local marketing initiatives (such as regional advertising, channel marketing, promotions, and local sponsorships) carried out by the local subsidiary instead. These different brand management tasks are then reflected in the royalty arrangement.

A valuable contribution
Through central control, brand holding companies can make a valuable contribution to the management of global brands by creating consistent development of the brand asset, financed by the fair returns that the management of the global brand brings to the shareholder value of the company.

Disadvantages
Putting the ownership of the brand into a separate holding company is not without risks. The relationship and reporting structure between brand holding, group and subsidiary needs to be arranged in a way that ensures optimal operational use of the brands by the subsidiaries. There needs to be clear control and feedback procedures that ensure that all parties feel ownership of the brand. Otherwise the structure can become restrictive and turn operating companies away from properly using the brand asset.

Jan Lindemann is global marketing director, brand valuation at global branding consultants, Interbrand

SHOULD YOU MOVE YOUR IP OFFSHORE?
Our experts propose four key questions you should be asking yourself before you opt to place your IP into offshore holding companies

Tax
• Does the tax structure of your jurisdiction allow you to move your brands into tax-free offshore holding companies? Are these laws looking to change?
• What tax (federal, state/province/region, and local) obligations must be accounted for in the country where the offshore company is based? How will they be managed and accounted?
• If tax obligations apply, who will pay them?
• What effect will placing your trademarks offshore have on the goodwill associated with the business of your company?

Licences
• Is the Licensee able to deliver the quality required both in the product (or service) and in related matters (such as marketing the products, distribution within the market, and sales support)?
• Does that Licensee act for a competitor? Can you be sure that sensitive information will not flow from your company to theirs?
• How will you express the quality control provisions within the licence, and how extensive or detailed will they be?
• What degree of exclusivity (if any) will be given to the licensee? What powers will the licensee be given by the licence (such as the power to litigate, and the choice of marketing/advertising agency)?

Brand management
• What sort of management and reporting structure would you like to put in place to manage your brand?
• How much of your marketing strategy would you like to be run from a global perspective?
• What part or parts of your brand management and IP are you happy to place under the control of the offshore third party?
• Will any important business knowledge be lost through an outsourcing arrangement?

This article first appeared in IP Review, issue 9

User Comments

Post a comment