Intellectual property — patents, trademarks, copyrights, trade secrets, software, and know-how — is the most valuable asset class of the digital economy. For technology companies, consultancies, and creative businesses, IP often represents the majority of the enterprise's value. How that IP is owned, managed, and licensed within a corporate structure has profound implications for tax efficiency, asset protection, and long-term value creation.

But the landscape for IP holding structures has shifted dramatically in recent years, and strategies that were common even five years ago now carry significant risks.

The traditional IP holding model

The classic IP holding structure involves centralising ownership of intellectual property in an entity located in a low-tax jurisdiction. The IP holding company licenses the use of the IP to operating entities in higher-tax jurisdictions, receiving royalty payments that reduce the taxable income of the operating entities while accumulating profits in the low-tax holding company. Ireland was the most famous example.

Through the "Double Irish" structure — combined with a "Dutch Sandwich" for efficiency — multinational technology companies routed royalty income through Irish-registered entities that were tax- resident in jurisdictions with no corporate income tax. The effective tax rates achieved were, in some cases, in the low single digits — on billions of dollars of global revenue. The Double Irish was closed to new entrants in 2015 and fully eliminated by 2020.

But the principle it embodied — centralising IP ownership in a favourable jurisdiction and using royalty flows to shift profits — remains the foundation of many international tax planning strategies.

What has changed

Three developments have fundamentally altered the viability of aggressive IP holding structures. First, the OECD's BEPS project — particularly Actions 8-10 on transfer pricing and intangibles — has established new standards for how IP transactions between related parties must be priced. The key principle is that the entity claiming ownership of the IP must have the personnel and capabilities to control the development, enhancement, maintenance, protection, and exploitation (DEMPE) of the IP.

An entity that merely holds legal title to IP, without the people and functions to manage it, will not be entitled to the residual profits from that IP. This is a fundamental shift. Under the old regime, legal ownership was sufficient to claim IP-related income. Under the new regime, functional substance is required. A shell company in a low-tax jurisdiction that "owns" IP but has no employees with the technical expertise to manage it will have its IP income reallocated to the entities that actually perform the DEMPE functions — typically the operating entities in higher-tax jurisdictions.

Second, the global minimum tax under Pillar Two will ensure that, for large multinationals, the effective tax rate on IP income cannot fall below 15%, regardless of where the IP holding company is located. The Substance-Based Income Exclusion (SBIE) under the GloBE rules provides some relief — it allows a carve-out for income attributable to tangible assets and payroll costs in the jurisdiction — but the days of achieving effective rates in the low single digits on IP income are over for in-scope groups.

Third, individual countries have strengthened their domestic anti-avoidance rules targeting IP migration. France's Article 238 A of the Code Général des Impôts allows the tax administration to challenge royalty payments to entities in preferential tax regimes. Germany's CFC rules (Hinzurechnungsbesteuerung) target passive income — including royalties — earned by controlled foreign companies in low-tax jurisdictions.

The UK's anti-diversion rules achieve a similar result.

What still works

Despite the tightening landscape, legitimate IP holding structures remain viable when they are built on genuine substance. The key is aligning legal ownership with functional reality. An IP holding company that employs the personnel responsible for managing and developing the IP — engineers, designers, product managers — has a legitimate claim to the income that the IP generates. If those personnel are located in a jurisdiction with a favourable tax regime — whether through a patent box, an R&D incentive, or a generally lower corporate tax rate — the resulting tax efficiency is defensible because it reflects the genuine location of the value-creating activities.

Patent box regimes, which tax qualifying IP income at reduced rates, remain available in several jurisdictions. The UK's patent box offers an effective rate of approximately 10% on qualifying profits. The Netherlands' innovation box provides a rate of 9%. France's IP regime offers a 10% rate on certain qualifying income. These regimes have been redesigned to comply with BEPS standards — meaning they require genuine R&D activity in the jurisdiction, not merely legal ownership of the IP.

For SMEs and individual entrepreneurs, the opportunities are more modest but still meaningful. An entrepreneur who develops software through a US LLC, for example, owns the IP within that LLC. If the LLC has no effectively connected income to a US trade or business, the royalty income it earns from licensing the software to foreign operating entities is not subject to US federal income tax. The key is ensuring that the LLC's ownership of the IP is genuine — that the development actually occurs through the LLC, and that the licensing arrangements are at arm's length.

Conclusion

At Fidelys Partners, IP structuring is integrated into our broader architectural work. We help clients determine where IP should be held, how it should be licensed, and what substance is required to support the chosen structure. The goal is always the same: a structure that is tax-efficient, legally robust, and defensible under the current — not the historical — regulatory environment.

— Fidelys Partners —