IP holding and royalty structures after BEPS
Owning your intellectual property (patents, software) in a lower-tax 'IP box' country only works if that company really did the development. Cyprus, Ireland and the Netherlands compared, plus the test that decides whether the tax office accepts the royalty at all.
It only works if the IP company really develops and controls the asset — the 'nexus' share and the DEMPE test decide the outcome.
- Royalties up
- The trading companies pay fair-market royalties and deduct them; the IP company receives them under the lower-tax IP box.
- Nexus fraction
- The low rate only applies to the share matching the qualifying R&D the company paid for, with up to a 30% top-up — not to all royalty income.
- R&D spend down
- The IP company pays for and controls development. Work bought from your own group companies counts against you and shrinks the benefit.
- Pillar Two
- For groups over the threshold, an effective rate below 15% triggers top-up tax, partly reduced by an allowance for real staff and assets (the 'substance-based income exclusion').
The 'nexus' rule in plain English
Since the OECD's BEPS project (Action 5), you only get the IP box's low rate in proportion to the research the company actually did. Take the qualifying spending — R&D the company did itself, plus R&D bought from unrelated firms — and divide it by all spending, including the cost of buying IP and work bought from your own group. You can add up to 30% to the top figure, but never more than the total. Apply that fraction to the IP income; only that share gets the low rate.
So a company that buys finished IP and licenses it out gets almost nothing from an IP box. A company that built the asset with its own team gets close to the headline rate. Anyone quoting a flat 2.5% is quoting the best case.
DEMPE decides whether the royalty stands
The IP box is the second question. The first is whether the tax office accepts the royalty at all. Under the transfer pricing rules from BEPS Actions 8 to 10, profit follows the work done, the assets used and the risks taken in developing, enhancing, maintaining, protecting and exploiting the IP (DEMPE for short).
A company that legally owns the IP but has no people making development decisions, and couldn't afford the risk if it failed, will be treated as a pass-through. The profit gets moved to wherever the DEMPE work really happens. Legal ownership on its own gets you nothing.
Choosing between Cyprus, Ireland and the Netherlands
Cyprus has the lowest effective rate and is the cheapest to run. It suits software and patent-type IP built by a modest in-house team. Ireland suits groups already there with a large R&D team and grant support. The Netherlands offers 9% with an exceptional network of tax treaties and a well-established system of advance rulings, which matters most when the tax kept back on incoming royalties is your biggest problem.
- The rate matters least when other countries keep back a lot of tax on the royalties you receive — good treaty cover is worth more than a lower box rate.
- For groups over €750m of revenue, Pillar Two takes back much of the difference, partly offset by the allowance for real staff and assets.
- Moving IP you already own out of a country usually triggers an exit tax there. That cost is often the number that decides it.
- Applying the headline box rate to all royalty income instead of the qualifying 'nexus' share.
- Counting bought-in IP, or R&D bought from your own group, in the top half of the fraction.
- Not tracking R&D spending asset by asset, so you can't prove the fraction in an audit.
- Owning the IP legally without doing the DEMPE work, so the profit gets moved elsewhere under transfer pricing rules.
- Ignoring Pillar Two top-up tax, so a large group never sees the benefit it modelled.
- Finding out about the exit tax on moving existing IP after deciding to move it, not before.
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