The result is a royalty deduction in the high-tax operating jurisdictions and low-taxed royalty income in the hands of the IPCo. This is illustrated in the following example:
An IPCo in a jurisdiction with a 5 percent tax rate is then formed, and the IP is transferred to IPCo.
IPCo then licenses the IP to its foreign subsidiary in exchange for an arms-length royalty.
A detailed discussion of choice of jurisdiction for the IPCo is beyond the scope of this article, but there are three basic considerations.
The ability for the IPCo to distribute profits without dividend with-holding taxes should also be factored in the analysis.