Transfer Pricing Associates

The Growing Concern of Substance for IP Companies

post Saturday September 10, 2011

Tags: ip management, tax/transfer pricing



In May 2011, Transfer Pricing Associates published an article entitled, “IP Companies and Substance: No-Fly Zones?” that explores issues surrounding substance requirements in IP host countries and gives guidance on how to achieve a balanced risk-return.  The article begins by noting the importance of placing intellectual property in low tax jurisdictions as intellectual property normally represents 40 – 80% of a MNE’s value-added.  The realization of this fact by some tax jurisdictions has created a ‘race to the bottom’ in terms of tax rates and substance thresholds in order to attract more foreign investment and tax revenue.  To counteract this opportunistic behavior, however, tax authorities have introduced stricter substance requirements and/or Controlled Foreign Corporation (CFC) legislation.    

Effective Place of Management

In deciding how and in what jurisdiction to tax IP, tax authorities must determine whether the incorporation in one country differs from central management and control in another country.  If the facts and circumstances are at odds with the legal set-up, anti-abuse legislation provides for a substance over form approach.

Substance Requirements        

Typically, in order to legitimately transfer IP to a particular jurisdiction, the MNE must satisfy certain threshold substance requirements to prove that the entity is acting as both a pro?t centre and an investment centre.  Such requirements generally include:

Control over Risk

In determining an IP holding location, the entity deemed to be the owner of the IP also needs to be in control of the management of the IP and have the ?nancial capacity to bear the risk of decisions associated with investing in IP. With-out these critical elements being established, tax authorities will raise questions over the commercial substance of the arrangement.

Tips on Physical Presence of an IP Company’s Management Team

The article presents the following ‘rules of thumb’ for MNEs seeking to centralize IP in key locations:


To access the full article, please visit

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