EU IP Locations for Corporate Tax Planning
Here are some prominent European Union (EU) locations often utilized for corporate tax planning involving intellectual property (IP). Approximately half of the 26 EU member states offer IP-related incentives, and we summarize some of the key factors to consider.
The Netherlands is recognized for launching its pioneering patent box in 2007.
Within this framework, known as the “innovation box,” taxpayers have the option, subject to specific conditions, to apply a reduced effective tax rate on taxable profits arising from these intangible assets. The effective tax rate within the innovation box stands at 9%.
The innovation box is applicable if a minimum of 30% of the profits have originated from a patent. Furthermore, companies that have incurred particular qualified research and development (R&D) expenses for the creation of intellectual property (IP) for which no patent has been granted also qualify for the favorable effective tax rate.
This lower effective tax rate solely applies to positive income, allowing for the full consideration of innovation-related losses. Moreover, it’s feasible to incorporate profits from an intangible asset generated during the period between patent application and patent grant into the innovation box regime (excluding R&D assets).
Luxembourg, despite its compact size, has leveraged its tax and legal flexibility to become a significant player in IP tax planning, particularly in fields like information technology, e-commerce, and biotechnology. Major internet companies, including Amazon and eBay, have already established personnel and operations there. Luxembourg has invested substantially in its high-tech infrastructure, featuring high rankings in various key ICT operational criteria.
The IP box regime in Luxembourg offers an effective tax rate of 5.8 percent and encompasses a wide range of IP rights, including patents, software copyrights, trademarks, designs, models, and domain names (although certain IP types like know-how and trade secrets remain excluded). The government actively seeks to attract IP-related activities and talent. Conventional IP tax planning methods can also lead to efficient tax rates, further enhancing the business case. The newly formed coalition government has announced comprehensive reforms aimed at fostering innovation and IP, such as updates to the IP box regime.
Malta is another noteworthy contender. Malta’s patent or copyright box can potentially result in a zero effective tax rate, the lowest among common EU locations for IP planning. However, Malta’s shortcomings may relate to substance and infrastructure, which are becoming increasingly vital for sustainable IP tax planning.
Ireland has successfully attracted substantial IP investments across diverse sectors, including ICT, e-commerce, and biotechnology. This is attributed in part to its 12.5 percent corporate tax rate, a robust 25 percent R&D credit system, and a comprehensive IP tax regime covering various IP types, such as patents, copyrights, marketing intangibles, know-how, and more. Additionally, Ireland provides a related capital allowance of 15 years or the economic life of the IP.
From a business perspective, Ireland’s Industrial Development Agency maintains highly active promotional offices, with a presence even in Silicon Valley. Ireland appeals to US multinational corporations due to its large English-speaking population, competitive labor costs, and flexible common-law legal system. However, Ireland’s fiscal stability is now under scrutiny due to its national debt exceeding 100 percent of GDP. This has attracted attention related to anti-tax avoidance measures, both within the EU, pressuring Irish tax reform, and in the US Congress. Ireland has already made changes to its domestic law to address tax loopholes commonly used in IP tax planning, such as the ‘stateless’ non-Irish resident companies.
Double Irish Arrangement
The double Irish arrangement is a tax strategy employed by some multinational corporations to reduce their corporate tax liability. This approach utilizes payments between related entities within a corporate structure to shift income from high-tax jurisdictions to low-tax jurisdictions. It capitalizes on the fact that Irish tax law does not include US transfer pricing rules. The structure typically involves the first Irish company not being tax-resident in Ireland and the second Irish company being a tax haven resident, with the profits transferred to offshore destinations.
A variation of the double Irish with a Dutch sandwich includes multiple entities. Payments for intellectual property move from a German advertiser to a subsidiary in Ireland. Tax payable in Ireland is typically at a rate of 12.5 percent, but it may pay royalties to a Dutch subsidiary, allowing for an Irish tax deduction. The Dutch company further transfers the funds to a different subsidiary in Ireland, free from withholding tax due to inter-EU transaction regulations. The last subsidiary in Ireland, despite its location, remains untaxed as it is controlled outside Ireland, often in a tax haven like Bermuda or the Cayman Islands. This structure minimizes the full revenues visible to Irish authorities and, as a result, reduces the taxable base.
It’s important to note that various major companies have employed the double Irish strategy to optimize their tax positions, including Abbott Laboratories, Apple Inc., Facebook, Google, IBM, Microsoft, and others. However, anti-tax avoidance measures and changes in tax laws have led to increased scrutiny of such practices.
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