Executive Briefings

When You Should Consider Transferring Tax Planning Rights to Foreign Subsidiary

Intellectual property is generally the most valuable asset held by technology companies and many other businesses across all sectors of the economy. Generally speaking, if sales attributable to IP will be used only in the United States, it's likely to be more tax efficient for such rights to remain here.

When You Should Consider Transferring Tax Planning Rights to Foreign Subsidiary

But if a corporation expects to commercialize IP internationally, the company likely should transfer the rights to the IP to a foreign subsidiary. Doing so enables companies to take advantage of lower corporate income tax rates available abroad. And while United States companies generally must pay tax on their worldwide profits at a rate of 35 percent, taxes on certain income earned abroad can be deferred indefinitely if the income remains overseas.

As IP gained more significance in the global economy, many European countries began to lure companies to their borders not only with lower overall corporate income tax rates, but also with significantly reduced tax rates specifically applicable to income derived from IP. The latter efforts have come to be known collectively as “innovation box” or “patent box” regimes. Google, Apple, Microsoft and many other well-known technology companies have taken advantage of this strategy.

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But if a corporation expects to commercialize IP internationally, the company likely should transfer the rights to the IP to a foreign subsidiary. Doing so enables companies to take advantage of lower corporate income tax rates available abroad. And while United States companies generally must pay tax on their worldwide profits at a rate of 35 percent, taxes on certain income earned abroad can be deferred indefinitely if the income remains overseas.

As IP gained more significance in the global economy, many European countries began to lure companies to their borders not only with lower overall corporate income tax rates, but also with significantly reduced tax rates specifically applicable to income derived from IP. The latter efforts have come to be known collectively as “innovation box” or “patent box” regimes. Google, Apple, Microsoft and many other well-known technology companies have taken advantage of this strategy.

Read Full Article

When You Should Consider Transferring Tax Planning Rights to Foreign Subsidiary