Gal Ehrlich, Founder and Managing Director of the Ehrlich Group

Following Amdocs: Tax Shelters of Intellectual Property Assets and the Restrictions That Apply Thereto

 (photo credit: EHRLICH GROUP)
(photo credit: EHRLICH GROUP)

The intellectual property portfolio of a company includes intangible assets. These assets have no geographical location, only a symbolic one, based on the place of incorporation of the company registered as the owner. Therefore, an international company located in country A, can list a subsidiary company located in country B as the lawful owner of a patent developed in country C, and registered in the local patent office of country D. There are various legal implications to the symbolic location of where a company’s intellectual property assets are located. As mentioned, this location is not the country where the right to a patent is registered, but the place of incorporation of the company the assignee of  the right. For instance, an Israeli company can be the owner of patents registered in the United States Patent and Trademark Office, and of trademarks registered in the European Patent Office (EPO). 

As a rule, the revenues earned from the exploitation of intellectual property are taxed by the country in which the company registered as the owner of a right to a patent is incorporated. As a result, companies have an interest to “place” their intellectual property portfolio in countries where they will pay the lowest tax rate on the revenues that these assets generate. However, various international regulations can limit the ability of a company to fully maneuver where these revenues for tax purposes, from their intellectual property assets, are made. Additionally, in many cases, a country that invests in research and development of a certain technology, will provide financing to a company only if the company commits to placing these intangible assets, that are the product of research and development, in that same country.  The transfer of intellectual property assets to a different country, where the tax rate is lower, could cost a company more than the taxes it could save, for the company might lose its financing and ability to carry on its activity.

Indeed, the corporate income tax rate in each country is an important factor in determining the location in which a company chooses to place its intellectual property. However, it is not the only factor. If it were so, it would be expected that all of the world’s intellectual property will be placed in countries where the corporation tax is the lowest. But in reality, only in a small portion of cases is intellectual property placed in countries that are considered tax shelters. Less than 0.5% of patent applications submitted to the European Patent Office in recent years were registered to owner companies that were incorporated in tax shelters. There are additional legal and financial parameters to the placement of a company’s intellectual property assets, beyond its corporation tax. For instance, the size of the local market where the company was incorporated and the strength of the protections given to intellectual property rights in that country. Various companies are taxed differently because of differences in their corporate structure. The relative value of the assets in a company’s intellectual property portfolio, the tax attractiveness of the location of these assets, and its corporate structure, may change between different industries and between different companies, and so is their obligatory tax. 

Another important factor in a company’s selection of where to place its intellectual property assets are the specific tax incentives and among others those directly related to the registration of intellectual property, and encouragement of research and development. It was recently published (March 16, 2021), that technology giant Amdocs is in talks with the Israeli Tax Authority to receive tax breaks worth billions of shekels, in exchange for transferring all its intellectual property assets to Israel. The company, which conducts business in 85 countries, approached the Israeli Tax Authority for an early decision on determining the extent of tax breaks it would be eligible to receive, if it completes the transfer of all of its intellectual property assets to Israel. This move by Amdocs was made possible as a result of the dramatic revision made in 2016 to the 1959 Encouragement of Capital Investments Law, and the considerable benefits provided by the law to companies that have income based on technological intellectual property assets, conditional upon the stipulation that companies employ a minimal amount of Israeli employees, and that they perform research and development in Israel.

However, even these incentives given to companies by different countries, are limited in a certain way. One of the largest initiatives of the OCED organization is the BEPS (base erosion and profit shifting) Action Plan. The goal of this plan is to combat the phenomenon in which multi-national corporations exploit differences and gaps in the tax systems of different countries. According to the organization, tax planning of this sort costs countries some 100-240 billion dollars in lost income every year – equal to 4-10% of the world’s income from corporate taxes. This initiative came following recent decades where various countries such as Ireland and Singapore have become tax shelters, specifically for intellectual property assets. These shelters are called “Patent Box” or “IP Box.” The goal of the BEPS Action Plan is to set clear rules in providing tax incentives for international companies, to prevent a situation where companies will not pay tax (or pay very little tax) because of the competition between the countries on how they treat the placing of intellectual property in their jurisdiction. These rules include, among others, a requirement to increase the propensity towards business activity of the company in that country where the intellectual property assets are placed. 

The placement of a company’s intellectual property assets in a certain country leads to income not only for that country but also creates considerable business propensity for that country, and even expands a company’s business activity in that same country, in a way that significantly contributes to the local market and leads to creating additional jobs and the expansion of research and development and business development of mass data industries in that country. The selection to place a company’s intellectual property assets in a certain country also constitutes a vote of confidence in the local economy and the country’s ability to effectively protect these assets. The hope is that Amdocs’s move will attract additional international companies to place their intellectual property portfolio in Israel, to help the recovery of the Israeli market from the recent financial crisis brought by the Covid-19 pandemic.

For more information: Ehrlich Group