Benefits of IP-Holding Company

PATENTS

There are compelling business reasons for consolidating IP assets. Typical reasons for establishing intellectual property (IP) holding companies include:-

(i)                  Tax planning,

(ii)                Protection in the event of insolvency, and

(iii)               Administrative synergies, such as consolidation of legal costs.

(iv)              Centralizing of control of IP assets enabling the business to effectively manage its IP[1].

(v)         Centralized management allows the company to effectively monitor, protect and enforce its IP rights.

TAX BENEFITS

Intellectual property is often the principal source of value and revenue for pharmaceutical and biotechnology companies. To lessen the tax burden, companies should consider whether to place their intellectual property rights in a holding company outside India(country in which parent company is registered). IP Holding companies can be established in Switzerland, Netherlands and Cayman Islands[2] etc.

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The offshore holding company then grants a license to the parent company or other third parties in exchange for royalty payments. The goal, of course, is to minimize the parent company’s tax burden and limit taxation on revenue. Not only should the royalties generated by this offshore subsidiary be tax-free, but also generally the profits made abroad aren’t taxable in India until they’ve been repatriated[3].

The problem arises in fair pricing of taxes. For e.g. the Indian Government would want subsidiaries of domestic companies to pay very high royalty rates to the domestic companies for the use of intellectual property; because this would obviously bring cash flow to the parent company, and, as a result, tax revenue. At the same time, overseas governments would want royalty rate paid to the Indian parent company to be minimal; for the same reason that it would reduce the amount of outflows being paid by the overseas subsidiary in form of royalty rates, hence retaining more income in their own country and generating furthermore tax revenue for host country.

OTHER BENEFITS

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Apart from the Tax benefits the company saves on, the creation of IP Holding Company also increases the corporate efficiency in the operation of the business, by a strong regime of ownership, the separate entity provides a centralized and specific management of IP assets throughout and helps exploitation of IP assets financially, in broader terms we can say it’s like outsourcing your IP management affairs to a subsidiary company which will specifically deal with IP management and provide greater fruitful results. Secondly by assigning the intangible assets to the IP Holding Company the appointment of its (IP Holding Company) Officers and Directors would insulate Officers and Directors of the Parent Co. from involvement in the prosecution of lawsuits involving the IP. Also the Ip Holding is saved from expenditure due to claims of the parent company’s creditors, and the parent’s insolvency. It might also protect the IP from hostile takeovers of the parent company which could mean that in case the Parent company goes bankrupt the owner still has an opportunity to re-establish his company through the IP-Holding company.

Placing IP in a separate holding company may also ease objectifying and determining value of the IP assets, separate from the operations and goodwill of the parent. This may be of particular importance for obtaining financing and eventually selling the IP to a third party. 

TRADEMARKS

The Mobility of Trademarks

Some of the trademark rights are mobile (like use of trademark in other countries, Licensing etc.), and others are less mobile (based on the laws of the particular country the Parent company exists in). All of those are more or less based in one or the country at some point of time, but it will not affect the trademark owner for, the owner can be located anywhere on the planet, and still exercise effective control. As a result, the choice of the location of the owner of such rights and location of his IP holding company becomes driven by other factors, of which the primacy is held by the taxation policies[4] under which the owner and any licensee operate, whether there is a withholding in any royalty payments by the local tax authorities, and whether a reasonable infrastructure exists to support a trademark holding company. Often companies prefer countries which do not have very industrialized economy but should have well- structured laws, like the few nations of European Union, or developing nations of Africa.

Ballarpur Industries, Crompton Greaves, NIIT, HCL Technologies, ONGC Videsh, Jubilant Organosys, Infosys, Wipro, Satyam and iGate? These are some of the Indian companies that have set up, or are in the process of setting up, operations in the Netherlands. Also we can take the example of McDonald’s Corporation. It owns a number of famous trademarks, design rights, copyright and know-how which it utilizes in its own outlets and licenses to its franchisees. This gives the company at least three sources of income: by operating as a restaurateur; by supplying products to its owned and licensed restaurants; and by licensing rights to its franchise operations.

However, favourable locations are not open to all; they are the preserve of the actual or putative multinational, as only Multi-national Companies with huge revenues to incur the cost of broadening the affairs and managing abroad affairs have legitimate reason to locate its trademark rights anywhere other than where it carries on business. For the structuring of trademark rights, this means an operation which conducts business in at least two countries.

Once that occurs, especially efficient structuring becomes possible. Though this does not in any way mean that IP holding does not benefit Mid-sized companies or large companies involved only in domestic affairs since where only one country is involved, proper structuring to put all of the trademark rights into one place is good practice, as it leads to the ability to securitize the resultant royalty stream which can be created through a specially set up licensing vehicle and can still come in handy in availing tax-benefits.

The Trademark Rights should be consolidated and structured in one place.

The rights which affect trademarks are interlinked, and conflicting ownership creates limitations and if the companies are working on Arm’s length[5] basis, sometimes it might create the possibility of mutually overlapping injunctions that is the seeds of mutually assured destruction. 

Related Case Law

Federal Circuit of United States held that the plaintiff corporation was not entitled to claim damages for the profits lost by its sister corporation.[6] In that case, the plaintiff owned the patent, but licensed it on a non-exclusive basis to its sister corporation, which sold goods that competed with the infringing goods. The plaintiff argued that it operated with its sister as a single economic unit for purposes of producing, marketing and selling the patented products and shared a unity of interest that justified treating them as a single economic unit for a lost-profits analysis. The Federal Circuit rejected this argument, pointedly noting that the companies would have to live with the consequences of their separate corporate status.

Conclusion

We can conclude that the primary advantages of Intra-group Licensing are Tax evasion, better legal command and control and royalty but on the other hand there is the disadvantage of less royalty coming into the company, for example in the German case quoted above the subsidiary branch did not have to pay any amount for around 6 years after that also they paid only around 1.5 percent of the sales.

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[1] It provides the companies with the knowledge to evaluate the strength and weaknesses of its IP portfolio so that it can make well-informed decisions about whether for e.g., it should be increasing holdings in certain areas or expanding its market through licensing.

[2] There are no taxes in the Cayman Islands – government revenue comes from indirect taxes such as customs duties, stamp duty and annual fees levied on corporations.

[3] Though the recent Vodafone taxation case has changed the scenario, but the governments stand is still to be made clear on this issue.

[4] Government on Vodafone case: Can’t let India become tax haven. (http://timesofindia.indiatimes.com/business/india-business/Government-on-Vodafone-case-Cant-let-India-become-tax-haven/articleshow/12310019.cms)

[5] A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm's length transaction is to ensure that both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party.

[6] Poly-America, L.P. v. GSE Lining Technology, Inc., 383 F.3d 1303, 1310-12 (Fed. Cir. 2004)