The rate of taxation on Royalties and Intellectual Properties (IP) can be legally reduced by the help of proper documentation and careful planning. The very first step is to transfer the IP to a company which is an offshore company. We will call this company ABC Limited. And this can be placed in any zero tax jurisdictions.

The next step is to license out from there by charging a Royalty on every onshore company on its sales. The charge should be sufficient to reduce or even eliminate the profit and therefore the tax. And so the profit gets shifted to ABC Limited which is structured in such a manner that it will operate tax-free. For extracting the royalties a treaty is necessary so that the royalties are not withheld at the source.

This is generally done by ABC Ltd. Licensing a Dutch company and that Dutch company then licensing the local companies. For example, the UK has the rule that any royalty which goes out to a non-UK resident must be taxed at 22%. The payment of royalties by UK to Netherlands can be made without withholding any tax pursuant to the UK/Netherlands Treaty.

The standard procedure is for the UK to pay 100 to Netherlands pursuant under the UK/Netherlands sub-licensing agreement. With a margin of 7 the ABC Ltd. /Netherlands licensing agreement would require a payment of 93. Anti-treaty shopping is a part of the modern day treaty. There are many companies in Netherlands which offer royalty collection service.

Standard procedure is for the UK to pay 100 to the Netherlands pursuant to the Netherlands/UK sub-licensing agreement. The ABC Ltd/Netherlands license agreement requires a payment of 93 so the margin is 7 and that is the amount subject to tax in Netherlands so your effective rate of tax is around 2%.

Companies under common ownership trade have to model its pricing structure after the standards of the industry. So you may face problems under the transfer pricing rules if you try to open your own Dutch company. However involvement of a third party wards off these problems, besides saving your resources which would have been utilized for running your own Dutch company. Generally royalties come pre-tax rather than post-tax and this is the reason for which most countries don’t like royalties. This is the reason for which it is very efficient at reducing tax rate at the end-user countries. All the set-up has to be done keeping the various revenue legalities in mind.

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