Patent Income Exemption and corporate structures

censuspro

Does anyone have any info or know the typical structures when setting up companies with patent royalty income?

Hanley

Census_Pro wrote: »

Does anyone have any info or know the typical structures when setting up companies with patent royalty income?

Very loosely, from a few tech companies I've worked on;

Holding co. --> Patent co. --> Trading co.

Trading company is the one who uses the patent and incurs the normal day to day business transactions (sales, expenses etc). CT's paid on profits as you'd expect, well assuming there's a profit.

Trading co. pays Patent Co. for the royalty use. Royalty income is tax exempt. Soooo in theory you could pay a large fee to the patent co. to minimise your tax liability in the trading co.

Holding co. is the parent of the two above mentioned companies, the directors of which hold the controlling shares and ultimate voting rights over the group. From time to time you see non-voting shares issued in the trading co. to employees as part of a profit sharing scheme (my tax knowledge is VERY dusty, but I'd imagine this is so they can "pay" the employees by way of dividends when times are good and avoid the PAYE/PRSI costs associated, while the employees on pay DWT at a lower rate than income tax). that could be soooo wildly wrong tho.

Hopefully some more experienced guys will chime in.

censuspro

I see, but is there a need for a holding company i.e. how would the holding company pay the exempt dividends to the shareholders unless they hold the patents rights? Would it not have to be the patent company paying the dividends to the shareholders?

For example

Patent co grants patent licence to Trading co
Trading co pays patent royalties to patent co
Patent co pays tax free dividends to shareholders

Hanley

Who said anything about tax free dividends?

Patent Royalty income is not assessable for CT purposes (ie it's tax free).

BUT dividends are subject to Dividend Withholding Tax (DWT). I think it's 20%.

I assume the benefit is that regardless of how much you receive in dividends, it will still be taxed 20%, ulike income tax which is double that after a certain ceiling is reached. And then there's the obvious PAYE/PRSI savings on the companies behalf.

censuspro

I'm looking at it more from the owners/shareholders view. Income received from patent royalties is exempt from income tax in the hands of the individual. DWT is just a witholding tax, you can claim a refund or credit. Ultimately you want the corporate structure set up in such a way that the owners can extract the profits as tax efficiently as possible i.e the payment of tax free patent royalty dividends.