Your IP assets are not only valuable, they can create new revenue streams, cut your taxes and secure company financing. But if you keep your IP assets locked inside your business entity, you’re overlooking a strategy that lets you capitalize of these opportunities and better protect and manage your IP assets.
Recently Donald Trump moved his valuable trademarks (over 110) into a Delaware LLC – a holding company for his IP – saving him tax on the income from tens of millions of dollars in royalties paid by licensees. But that’s not the only use for his IP Holding Company (IPHC). It also protects the trademarks from litigation, consolidates them for use as collateral for IP funding, and as an estate planning vehicle to transfer ownership of the IP to his heirs.
Trump isn’t the only one to use an IPHC. Many of the worlds largest companies with significant IP assets combine them into a separate holding company. These include big names as Apple, Google, Disney, P&G, McDonald’s, Yahoo, Amazon and Microsoft to name a few. They stash their IP assets (and royalty revenue) offshore, to streamline management, leverage their value, and get significant tax savings.
The rising value of IP assets and the revenue it’s generating is one of the biggest reasons many companies are forming and using IPHC’s. US companies generate hundreds of billions of dollars each year licensing out their IP around the world. According to the US Bureau of Economic Analysis, IP (and the revenue it generates) is the 3rd largest export from the US behind travel and business services. A study from the USPTO reports revenues from licensing IP rights generates over $100 billion annually, and exports from IP intensive businesses (both products and services) generate over $800 billion annually.
One example is the copyright industry, particularly entertainment and publishing, where IP is the main product, generating billions of dollars in licensing revenues from computer software, video games, books, newspapers, periodicals and journals, motion pictures, recorded music, radio and television broadcasting, and theatrical productions. In many cases, setting up a foreign based IPHC is the best way to manage these assets in different foreign territories.
Creating an IPHC for your intellectual property is one of the best ways of protecting, managing and exploiting it. All types of IP – patents, trademarks, copyrights and trade secrets – can be placed in an IPHC, and developed and registered anywhere in the world.
An IPHC typically handle important IP functions such as filings, assignments, marketing and licensing business opportunities. It’s often better to manage these types of activities in an entity which is not part of your main business, especially if you have a lot of IP’s to manage.
The structure of an IPHC is fairly simple. You form a corporation (parent company) and create another subsidiary corporation, the IPHC (typically a LLC). Your IP transfers to the IPHC. The IPHC then licenses the IP back to you and / or other non-related companies who in turn pay royalties in exchange for an exclusive or non-exclusive right to use the IP.
Lower taxes is one of the biggest benefits of an IPHC. Countries such as Bermuda, Cayman, and Ireland are tax havens for intangible income (i.e. royalty revenues generated by an IP). Big corporations park billions of dollars in royalties paid to their IPHC’s as profit in countries with favorable tax codes for IP related revenues. This is how Google got its tax rate down to 2% or 3% in some places by using IPHC’s in the Cayman Islands and Ireland. Dunkin Donuts charges its franchisees for using its trademark name, and shoves all the income into its IPHC, the DD IP Holder LLC subsidiary. In both cases, they then use a host of other tax benefits to get some of that income through dividend payments and borrowing.
In the US, there are a number of states (Nevada and Delaware are two examples) that are IPHC friendly. Depending on where you set up your IPHC, the royalty income is lightly taxed or not taxed. Keep in mind that as states and the U.S. are looking for ways to increase tax revenue, closing this tax benefit is one of the options underway in many states.
The second benefit of an IPHC is it serves to shield your IP (assets) from litigation or a financial disaster which might happen to your operating company. If your business is sued, your IP is protected from any creditor claims. Here’s a quick example of how an IPHC might work. You invented a new widget and created a new business entity , “XYZ Widgets Marketing LLC” to make and sell the widgets. You then form a second company, XYZ Intellectual Holdings, LLC” ( in Nevada or Deleware), that owns your IP assets. Royalties are paid to XYZ IPHC who receives the tax benefits. If litigation is filed against the XYZ Widgets Marketing LLC and it goes bankrupt, the IPHC enables you to keep your IP intact and continue generate licensing revenues.
IP Holding Companies are also used for IP funding deals. You retain ownership and control of your IP, and the financing deal can include all or part of your IP assets. The IPHC (also known as a special purpose vehicle – SPV) holds the IP assets, collects the royalty payments, and manages the payout to the investors or lenders. The IPHC also shields the IP from creditors in the event your company is sued or goes bankrupt. Sears used this strategy to recapitalize the company. They set up an SPV using their top brands – Kenmore, Craftsman and Diehard – and secured $1.8 billion through a bond offering. They licensed back the brands, and paid royalties to the SPV, which in turn, makes payments to the bondholders.
Setting up and operating an IPHC offers significant tax savings, increased efficiency in managing (and using) your IP assets, and a way to protect them from potential litigation threats and creditors. Whether an IPHC is right for your company will depend on a number of factors, the type of IP, how you are using it, and where your company sells its products or services. But don’t overlook this strategy. Consulting with a qualified legal or accounting professional is the best way to decide if an IPHC is right for your IP assets.