Tax Law

Global Positioning of IP

by William H. Byrnes IV and Marvin Petry * @

A multinational enterprise is ordinarily organized as a parent company having subsidiaries, branches, or joint ventures in foreign locations where the enterprise may have employees, agents, business assets, or customers. The parent and its subsidiaries are potentially subject to taxation on some part of the enterprise's income in any jurisdiction where factors of production giving rise to the income are located, in particular the jurisdictions from which employees or agents render services, the jurisdictions in which income-generating assets such as real estate are situated, and the jurisdictions in which a combination of assets and employees are engaged in manufacturing or other income-generating activities.

In order to remain competitive, a multinational enterprise must, so far as practical, position its personnel, assets, and activities in the lowest-cost jurisdiction. Relevant examples are the migration of U.S. manufacturing to jurisdictions such as China and Mexico and the migration of U.S. information technology development to India. Likewise, since taxes account for a very significant share of the earnings of an enterprise that are otherwise available for distribution to the owners, a central feature of multinational tax planning is to position personnel, business assets, and other "tax magnets" in jurisdictions with relatively low income tax rates. Of course the opportunities for repositioning factors of production in order to reduce taxes and other costs are not limitless. Distancing a plant from suppliers and/or customers increases transportation costs. Certain services are best provided in person to the customers. Bermuda imposes no income tax and is a lovely place to visit, but not everyone wishes to live there or to be so distant from the larger professional and customer communities in which they network.

In light of these practical difficulties in repositioning people and assets, it should come as no surprise that tax-motivated positioning has tended to focus on shifting responsibility for the enterprise's business risks and the ownership of the enterprise's intellectual property ("IP"). Risk can be transferred by a simple contract, which explains in part why so much of the global insurance industry is centered in Bermuda. The place where IP is owned is ordinarily irrelevant to its usefulness and, like the assumption of risk, ownership of IP can be assigned or licensed by a simple contract, which explains in part why so many multinational enterprises have positioned ownership of some or all of their most valuable IP in an IP holding company ("IPHoldCo") located in a zero-tax jurisdiction such as Bermuda or the Cayman Islands, in a low-tax jurisdiction such as Ireland or Switzerland, or in a multi-tiered structure involving both a zero-tax jurisdiction and a cooperative higher-tax jurisdiction. The IPHoldCo will then commercially exploit the IP by licensing it to third parties, to foreign affiliates, and/or to the U.S. parent.

When early-stage IP is transferred by a U.S. person to a foreign IPHoldCo, the parties must arrange for its further development. If some or all of the development will be conducted by the U.S. transferor or by its contractors. If so, IPHoldCo will need to remunerate the transferor with an arm's length services fee [Treas. Reg. § 1,482-9(a)], typically on a "cost-plus" basis. [Treas. Reg. § 1,482-9(e).] If there are business or tax reasons for the U.S. parent to retain IP rights for particular uses or territories (most commonly the U.S. rights), the U.S. parent and IPHoldCo may enter into a cost-sharing arrangement (discussed further below) under the applicable transfer pricing regulations. [Treas. Reg. § 1,482-7.] In either case, because IPHoldCo assumes the financial risks of unsuccessful development, it is entitled to the rewards of successful development.


Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.


* Professor William H. Byrnes, an Associate Dean of Texas A&M University School of Law. William has been commissioned by a number of governments for guidance on tax and professional education policy. In 1994 William pioneered online legal education, and in 1998 created the first online LL.M. acquiesced by the ABA. He speaks globally on best practices for distance education.

Marvin Petry, Esq, is Martindale Hubbell peer rated AV-Preeminent, and since 2009 has annually been included within the list of Best Lawyers(R) in America, Intellectual Property Law. Marv is a Member of Stites & Harbison, PLLC, Alexandria VA.

@ Contributor: William W. Chip, Esq., Covington & Burling, LLP


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