For companies that rely heavily on their intellectual property (IP) assets not only for their market position, but also for their financial value, protecting those assets needs to be a top priority. While many companies choose to hold their intellectual property domestically, moving IP assets offshore can have significant benefits, not only in terms of protection but also in terms of minimizing tax liability.
Of course, like all legal strategies, transferring IP assets into a foreign corporation is not going to be the best option for all companies. Should you consider “offshoring” your company’s intellectual property? If so, what are the steps you need to take to get this done?
Considerations for Moving IP Assets Offshore
1. Cost-Benefit Analysis
As you would expect, there are certain costs involved in setting up an offshore corporation. While these costs can be relatively low, they still need to be factored into the decision of whether to move IP assets offshore. Like forming a domestic corporation, forming an offshore corporation requires payment of government filing fees, you may need to appoint a resident agent, and in some international jurisdictions there are annual filing requirements as well. You will also need to hire an attorney to prepare the documentation required to legitimize your offshore corporation and document its relationship with your domestic operating entity(ies), though this too can be a fairly straightforward process.
What are the benefits? We’ll get into these below.
2. Mitigating Tax Liability
Moving IP assets offshore can result in significant tax savings – either absolute or in terms of potentially indefinite tax deferral – for US-based companies. Assets held offshore may be exempt from local property taxes under some circumstances, and royalty payments can be used to transition income from a US entity to a foreign corporation established in a jurisdiction with no corporate income tax. To maximize the tax benefits, these royalty payments (fees paid by the US entity(ies) to license the IP from the offshore company) should generally be consistent with the rates that would be charged in an arm’s-length transaction between unaffiliated companies.
3. IP Asset Protection
When structured appropriately, offshore holding companies can shield IP assets from domestically incurred liabilities. For example, suppose your company incurs a substantial judgment in a civil lawsuit and is facing the prospect of filing for bankruptcy (an all-too-common scenario). If your company owns its IP assets directly, those assets could be at risk when the judgment creditor and other commercial creditors seek to collect as much as possible. If, on the other hand, those assets are held in an offshore corporation set up in a jurisdiction that does not recognize US judgments (such as Belize), they can remain secure.
However, as we have discussed previously, when it comes to going offshore for asset protection, timing is important. If you wait too long to set up your offshore corporation, any IP transfers to the holding company may be set aside as “fraudulent conveyances.”
While the asset protection benefits of moving offshore will not necessarily result in a direct offset of the costs involved (unlike the tax benefits discussed above), the value of protecting your company’s IP assets from creditors should be obvious. How much are your company’s IP assets worth? Millions? Like insurance and other asset protection strategies, moving your company’s intellectual property offshore is a sound risk mitigation strategy that merits careful consideration.
Steps Involved in Establishing an Offshore IP Holding Company
If the concept of establishing an offshore holding company is new to you, it can be helpful to gain a clearer picture of the steps involved in moving your IP assets overseas. Here is a high-level overview of the process involved in establishing a foreign IP holding company:
- Choose your offshore jurisdiction. When setting up an offshore corporation, you literally have almost the entire world to choose from. Should you incorporate in the Caribbean? Europe? Asia? How do you choose? When you focus on the tax and asset protection benefits of offshoring, the list of candidates actually gets pretty small pretty quickly. Practical considerations (e.g., Does your company have operations in a favorable jurisdiction?) can come into play, as well, to help you arrive at an informed decision.
- Form your offshore corporation(s). Once you decide on a foreign jurisdiction, it is time to incorporate. Your attorney and tax advisor can help you decide whether one entity is enough, or whether it will be more beneficial to create a structure of offshore entities. Adhering to the local formalities is important, and navigating foreign bureaucracies can take time, so you want to get started on this as soon as possible. Beyond the basic filing requirements, it will also be important to take all of the other steps necessary to create an entity that is capable of withstanding legal challenges.
- Assess your company’s IP portfolio. In order to transfer your company’s intellectual property offshore, you need to make sure you have a clear picture of the universe of your company’s IP assets. Is everything registered? Do you have any trademark or patent applications pending? We recommend actively maintaining an IP portfolio that includes up-to-date information on all of your company’s registered and unregistered intellectual property. Once you know what you need to protect, then you can move to the next step of transferring those assets offshore.
- Transfer your company’s IP. Once your offshore entity(ies) have been established and you have fully updated your company’s IP portfolio, it is time to transfer the assets overseas. As we referenced above, the documentation for this transfer should reflect terms consistent with an arm’s length transaction. The offshore holding company will then need to license the IP to your US operating entities (or any intermediate entities) with a right to sublicense and to make appropriate business use of the assets. The license agreement should also include controls consistent with a third-party licensing transaction designed to prevent allegations of “naked licensing” or forfeiture of exclusivity.
- Keep it going. Offshoring your company’s intellectual property is not a one-time event. As you continue to innovate and launch new brands, you need to have an efficient structure in place for moving your company’s new IP assets overseas. Your accounting department also needs to actually make the royalty payments on an ongoing basis – remember, this is a real legal structure with real legal implications. If you ignore the formalities, you will risk losing the benefits of moving your company’s IP offshore. The same goes for the requisite corporate and tax filings (both foreign and domestic).
If moving your company’s IP assets overseas makes sense, then employing a broader international asset protection strategy will likely make sense as well. From bank accounts to physical assets, under the right circumstances there are benefits to moving virtually all types of business assets offshore. Once again, pursuing an offshore strategy will not be right for all companies; but, if it is right for yours, taking a comprehensive approach can maximize the financial benefits while mitigating the risks of domestic liability.
Contact Jiah Kim & Associates | International Business Law and Asset Protection
Are you ready to talk about moving your company’s intellectual property offshore? If so, we invite you to schedule an initial consultation. To speak with an international business law and asset protection attorney at Jiah Kim & Associates, please call (646) 389-5065 or schedule an appointment online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.