Tax benefits should not be the main purpose for the creation of an intellectual property holding company, as the South African Revenue Service (SARS) will simply strike such a structure off the table.

"The tax tail should not wag the commercial dog," said Okkie Kellerman, tax director at Edward Nathan Sonnenbergs (ENS), the law firm, at a seminar on Tuesday on tax, exchange controls and transfer pricing considerations relating to intellectual property (IP).

Tax considerations relating to cross-border IP transactions have expanded, ENS warned. So has the general approach to IP, evolving from the mere registration and protection of trademarks to include critical questions about who the different parties are in a sale or transfer of rights, the value of the assets and what exactly is being transferred.

Companies should therefore consider all the benefits of creating a separate IP holding company, not just the tax benefits.

Chris Bull, a director at ENS specialising in intellectual property, said a group's tax exposure could be reduced within an IP holding company, where the group would get tax relief if intellectual property was sold or transferred within a group of companies. Only once the rights of use or the IP assets are sold out of the group will capital gains tax be triggered.

Mr Bull said other benefits of creating a separate IP holding company included the bundling of the intellectual property in an appropriate vehicle for a financing deal such as securitisation, or ring-fencing intellectual property from operational risk.

Mr Kellerman said the acid test for the pricing of IP transactions within a group of companies was the "arms'-length principle", where the price paid by subsidiaries of the group was similar to the price a buyer unrelated to the group would have paid.

He referred to the GlaxoSmithKline (GSK) matter where tax authorities fined the pharmaceutical group about $4bn after settling a dispute of many years about the transfer prices its US subsidiary paid its parent for drugs.

Mr Bull said SARS was quite sophisticated in its dealings with intellectual property. It employed skilled people who had worked at IP firms in South Africa for many years. Companies should no longer consider tax and transfer pricing issues regarding intellectual property "glibly", he said.

SARS conducts registration searches around the world for South African residents filing trademarks and patents in foreign jurisdictions. A company opening subsidiaries elsewhere in Africa should ensure that legal agreements in terms of the rights of use of its brand names and IP are in place, Mr Bull said.

In many instances, he said, the alarm bells only rang once a letter from SARS arrived asking for the legal agreements and explanations of the transactions.

Originally published in BusinessDay, June 2012.

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