With intellectual property playing an ever-increasing role in economic development, the need to harness, promote, and protect ASEAN innovation remains urgent as integration progresses. Among its objectives, the ASEAN Economic Community aims to transform the region into a hub of innovation and competitiveness and ensure that the region remains an active participant in the international IP community. With ASEAN member states increasing IP generation and further committing to global IP regimes, the region is increasingly looking toward sophisticated IP ownership and holding structures.
IP Holding Companies
ASEAN-based companies continue to centralize ownership of their IP assets in offshore holding and licensing vehicles—an approach multinational companies headquartered elsewhere have been using for a number of years. IP-intensive companies look to locate their IP portfolios in low-tax jurisdictions with strong IP registration and protection laws. The company then licenses the IP to operating companies in the group or to third-party licensees, franchisees, agents, distributors, and other partners in return for royalties or license fees. These special-purpose vehicles are typically referred to as IP holding companies.
IP holding companies are popular because they can help corporations minimize tax, gain tax benefits or concessions, protect IP from bankruptcy or other claims against the parent company, and focus management attention on the IP portfolio as an income generator.
Tax and IP Holding Companies
Tax is the primary reason most companies park their IP in separate IP holding vehicles. Sometimes, companies choose to establish their IP holding company in a no-tax, low-tax, or preferred-tax jurisdiction close to their home country.
The selected jurisdiction should also be a country with a large and well-established tax treaty network. Double taxation treaties are key considerations in jurisdiction shopping. If the IP assets need to be pledged as security for future borrowings or if they are to be included in the parent company’s asset sheets prior to a public listing, having those IP assets in a well-established, transparent country is always beneficial. Also, depending on whether any R&D is planned, many countries have attractive tax benefits for such activities as a way to encourage local innovation and technology transfer into the country. If the parent company has other business operations in the selected country, it very well may be that such items as development or operational costs, company losses in respect of certain activities, or amortization schemes may be available to offset against profit-generating activities.
Singapore
Singapore is one of the most IP-focused jurisdictions in Asia, with the government going to great lengths to encourage the transfer of technology and IP to the country.
Recently, Singapore has enhanced and added new tax deductions and allowances on qualifying expenditures (though some previously available tax deductions are no longer available). Additionally, eligible businesses may convert part of the total qualifying expenditures incurred for each year of assessment into cash.
Generally, the IP tax incentives offered in Singapore apply to a wide range of qualifying expenditures incurred on qualifying activities, such as R&D done in Singapore (with additional possible deductions on some R&D done outside Singapore), registration of IP rights (including registration of IP rights with an equivalent registry outside Singapore), acquisition of IP rights, training of employees, and innovation projects with qualified partners.
These tax incentives only apply to persons “carrying on any trade or business,” so the IP holding company will have to be structured to fall within this requirement. One of the main reasons Singapore is Asia’s go-to place to hold a company’s IP is that the country has a longstanding and comprehensive double-taxation treaty network—currently extending to about 100 countries. Coupled with a comparatively low prevailing corporate tax rate of 17%, most businesses find Singapore an excellent location to house IP.
In terms of international IP treaties, Singapore holds a distinct advantage over Hong Kong by being a member of a greater number of these agreements. This includes significant treaties such as the Brussels Convention, the Singapore Treaty on the Law of Trademarks, and the Hague Agreement Concerning the International Registration of Industrial Designs, among others. This broader participation underscores Singapore’s commitment to integrating with global IP regimes and enhancing its position as a leading hub for intellectual property in the region.
In considering whether to remove an IP portfolio from Thailand to a more tax-efficient jurisdiction, it is important to study the potential income streams that the IP holder will receive from potential users and licensors of the IP, as well as the associated tax implications. The issue here is withholding tax. Most jurisdictions impose withholding tax on the income streams derived from IP exploitation (as would be the case in Thailand). With an IP holding company incorporated in Singapore, withholding tax may be reduced under double-taxation agreements between Singapore and those countries from where the royalties will be paid.
Hong Kong
Unlike offshore financial centers, Hong Kong is not a zero-tax jurisdiction. However, its 16.5% profits tax rate is relatively low compared to the rates of other jurisdictions in Asia. Additionally, Hong Kong has introduced a two-tiered profits tax rate and lowered the tax rate for the first HKD$2 million of assessable profits. Additionally, while Hong Kong appears to have less comprehensive IP tax incentives than Singapore, the government established a “patent box” tax incentive to provide tax concessions for qualifying profits by reducing the existing 16.5% rate to 5%.
In relation to taxes on profits, Hong Kong taxes residents and nonresidents only on their Hong Kong–sourced income from the carrying on trade, profession, or business in Hong Kong. As for royalties, the Inland Revenue Department says they are taxable if the license or right of use is acquired and granted in Hong Kong. However, whether the profits are considered to come from Hong Kong depends on the specific details and circumstances of each case. This territorial tax regime provides an opportunity to design IP holding structures to reduce exposure to Hong Kong profits tax.
One potential issue is recent amendments to Hong Kong’s rules around foreign-sourced income exemptions in 2023 and 2024. Under the amendments, foreign-sourced income (including IP income) for multinational companies may be deemed to be sourced from Hong Kong and subject to profits tax unless an exception applies. This should be considered when considering the IP holding structure.
Although Hong Kong does not impose withholding tax on other types of outbound payments, it may impose one on outbound royalty payments. Hong Kong also has double-taxation agreements with about 50 countries that may reduce the withholding tax that another jurisdiction charges an IP holding company in Hong Kong.
If withholding tax is chargeable on royalty payments from Hong Kong, the payment would attract a withholding tax ranging from 2.475% to 16.5%. The rate that applies depends on (1) whether the royalty payment is made to an associate and the intellectual property has been owned, or partly owned, by a person carrying on business in Hong Kong and (2) the amount of assessable profit.
Outlook
IP holding companies bring together three complex legal fields: (1) IP, (2) tax, and (3) corporate structuring and insolvency. Transactions are cross-border in nature, thus adding to the complexity. But with proper investigation and planning, synergies do arise and IP holding vehicles can offer significant advantages when an IP owner seeks to streamline royalty and licensing intakes from multiple licensees.
For further information, please contact:
Alan Adcock, Partner, Tilleke & Gibbins
alan.a@tilleke.com
