Royalty Receipt Schemes

In international practice it is common to use offshore companies for the ownership of intellectual property (author rights, patents, trade marks and so on). This is due to the fact that intellectual property is the most flexible type of the property, which makes it easy to hand over to a foreign owner. This is why there is a natural tendency to place this property in those jurisdictions where its exploitation (royalty fee for the rights of commercial use of intellectual property) suffers the lowest tax losses.

As most offshore zones have no tax agreements with developed countries, by paying royalties to the offshore company in the country where the income is paid, tax will be charged at the source. In some cases the tax payment can be avoided or the tax rate can be reduced if the company from a taxable country (where there is a tax agreement) can be used in a scheme as a transit element. In this case the offshore company, the owner of the intellectual property, gives an operating license to a transit company and then the transit company issues a sublicense to the final user. In particular Dutch companies are widely used as transit elements, because the Netherlands does not charge withholding taxes for outgoing royalty. As a result royalties are transferred to the offshore company without any additional losses.

Structure example:

A foreign company owns a patent (trademark). For this purpose it is possible to use a company from any tax-free offshore jurisdiction. According to the license agreement this company assigns the right to issue sublicenses to use this patent (trademark), in Russia for instance. The Dutch company receives royalty from Russia and pays it to the offshore company.

There are no withholding taxes in Russia under authority of the Double taxation avoidance agreement. In the Netherlands only the difference between received and paid royalty is tax charged. There is no withholding tax for outgoing royalties in the Netherlands. There is also no income tax and outgoing dividends for the offshore company to pay.