How to Reduce Your Taxes Using Intellectual Property Rights

Intellectual property rights account for a growing share of a firm’s assets. It is more mobile than other forms of capital and could be used by firms to shift income offshore and to reduce their corporate income tax liability. We consider how influential corporate income taxes are in determining where firms choose to legally own intellectual property. We estimate a mixed (or random coefficients) logit model that incorporates important observed and unobserved heterogeneity in firms’ location choices. We obtain estimates of the full set of location specific tax elasticities and conduct an ex-ante analysis of how the location of ownership of intellectual property rights will respond to changes in tax policy. We find that recent reforms that give preferential tax treatment to income arising from IP patents are likely to have significant effects on the location of ownership of new intellectual property, and could lead to substantial reductions in tax revenue.

Amounts received by individuals who create intellectual property may be royalties or compensation, depending on whether they own and license the property or create it for an employer. Royalties may be either business or nonbusiness income.

Individuals in the trade or business of creating intellectual property may deduct ordinary and necessary business costs, and some are exempt from the uniform capitalization rules for the property.

Whether a transfer of intellectual property is a sale or a license of the property depends on whether all rights to the property have been transferred. A transfer treated as a sale generally gives rise to a capital gain or loss, and as a license to ordinary income.

The terms of a bequest or gift of intellectual property rights likewise control whether all substantial property rights have been transferred. This determines how the bequest or gift is treated for tax purposes.

Advantages and Disadvantages of Intellectual Property Rights 

The concept of intellectual property is not an entirely new one, but it has become increasingly more important as the economy worldwide has begun to shift into what is known as an information economy. This shift has started to change what is considered valuable in private exchange. Instead of physical objects, or land, the most important form of property in this new world is intellectual, the creative products of the human mind.

Intellectual Property



Trade Marks

A sign that can distinguish the goods and services from one trader from those of another. Might include words, logos, pictures or a combination of these.


Legally prevents others taking advantage of customer good will generated by your business by trading under your name (or something very similar)


Having a registered trade mark does not entitle you to the related internet domain names. The degree to which similar (not identical) trademarks infringe upon your business is a matter for debate in a civil action with related cost.


Comes into effect immediately something that can be protected is created and ‘fixed’ in some way e.g. on paper, on film, via sound recording, as an electronic record on the internet, etc.


No official registration required.

Comes into effect immediately.

No cost to marking something as copyright


Does not protect ideas, only the way in which the idea is expressed.

To be effective it must be enforced.

You have responsibility for legally asserting copyright if you feel it is infringed. Involves legal costs and proving infringement

Registered Design

Monopoly right for the appearance of the whole or a part of a product resulting from the features lines, colours, shape, texture or materials used.

Cannot be the same as any design already available and must have ‘individual character’


Can be combined with legal protection from copy right and design rights.


Protect genuine design innovation for up to 25 years.


Cannot be applied to designs that concern how a product works or which are not visible in normal use; ascetics only.

Easily subverted by slight amendments to the basic design.


Granted by a government, a patent is a right for a limited period to stop others making, using or selling an invention without permission. Patents are concerned with products or process which are:

New, cannot have been made public in any way before the date the patent is filed.Involve an inventive step.

Involve an inventive step.

Be capable of industrial application, as distinct from a purely intellectual or aesthetic activity. Process alleged to operate in a manner contrary to well-established physical laws, therefore, do not have industrial application.

Patents can be taken on a country specific basis or worldwide. More countries means more cost and effort to achieve this.


A patent gives the legal right to stop others using your invention. Its existence may be enough to deter competitors.

Buys time (20 years) in which an inventor can develop a market to the product or process.

Attractive to investors as it limits competition.


Takes time and money to establish a patent. All patents have to be ‘researched’ to ensure there are no existing patents of a similar nature – involves legal fees.

Not possible to guarantee that a patent (once granted) is valid, it can be legally challenged and revoked with no refunds.

It is still up to the inventor to protect a patent if they can identify an infringement – the patent office doesn’t take sides.

Granting a patent is no indication that the invention has any merit or commercial value.

Some products and process can be varied slightly to get around the exact wording of patents.


Advantages of Using Intellectual Property for Tax Optimization Purposes

Copyrights, patents, trademarks and other intellectual property rights in terms of tax planning can become an effective instrument against other goods and services. The main advantage is that IP price cannot be established on the basis of any uniform rules and there are no restrictions on the parties to freely set the price of such property. The intellectual property rights do not consist of physical assets and can be easily moved between different tax systems and jurisdictions. This is why the use of intellectual property rights is a very convenient way to legally reduce the tax burden and withdrawal of capital to a safer jurisdiction.

In order to create an effective business model and significantly optimize taxation, it is crucial to choose the appropriate scenario that fits your particular case.  Please seek the advice of professionals to evaluate your specific needs and appropriate royalty routing structure.

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