Intellectual property such as patents, image rights and designs are becoming increasingly important wealth structuring and tax issues in the information age, lawyers say.

Intellectual property such as patents, image rights and copyrights are becoming increasingly important for wealth management clients as well as being hot-button business issues in the UK and other jurisdictions, lawyers at Withers say.

A complex and controversial area of  law, IP is often the most important asset of firms particularly when the value of a business is in “intangible” assets such as a trademark, business method or design, lawyers said at a London seminar held this week to explore the issue.

With many wealth management clients still operating businesses where IP is a vital part of their net worth, the IP is an important wealth and business structuring issue. A number of jurisdictions, such as the Netherlands, Luxembourg and the British Virgin Islands, for example, compete as low-tax jurisdictions in which IP rights can be registered. Singapore, already one of the world's fastest growing wealth management centres, is reportedly looking to become one of its most significant hubs for IP as well. 

“When you look at a business deal you often want to know what the IP is worth. Tax, in this regard, has also become a lot more important,” said Andrew Terry, partner at the firm and based in Withers’ London offices.

This week, UK finance minister George Osborne announced cuts to corporation taxes to 22 per cent in 2014. Part of the income companies make that is taxable comes in the form of IP royalties, Terry pointed out. There is a complex web of different withholding taxes applying to royalties in different jurisdictions, he continued. The UK is looking to develop a new way of taxing patents through a “patent box” that will apply a 10 per cent effective rate on patents-orientated trading profits. However, this tax will not cover copyright, domain names or trademarks.

“I think the benefit [of a new UK system] is very limited and not enough is being done to keep [IP-related] business in the UK,” Terry said.

Structures

Firms in the US, for example, might park their IP registration in a jurisdiction such as the British Virgin Islands. The Withers conference was told of the case of a hedge fund business where the trading system – the IP of the business – was held in the BVI while the day-to-day management of the fund stayed onshore. The stakes for US businesses are considerable as there is typically a 30 per cent withholding tax on royalties, encouraging firms to seek lower-tax jurisdictions.

In Luxembourg, income and gains derived from IP are taxed at 5.76 per cent, for example.

Karen Millen

In the UK, a dispute has highlighted why IP can be a problem for entrepreneurs of the kind that are often private clients of law firms and wealth managers. The women’s fashion retailer Karen Millen has reportedly said it will “take very seriously” any attempts to trade using its name following reports that its founder wants to start trading again, despite her having sold all interests in the business in 2004.

The importance of IP is underscored, Withers said in a presentation document, by how the sources of wealth have shifted drastically in the UK. Some 20 years ago, 80 per cent of wealth as measured by the Sunday Times Rich List was inherited, the rest self-made. Now, those percentages are exactly reversed.

In Guernsey, the jurisdiction is currently working on a draft image rights law, protecting a person’s rights over the use of their image, as in the case of actors or sportspersons. The idea has been regarded as a potential new industry for the jurisdiction.

The issue of some IP rights such as patents and copyrights is controversial. Economists Michele Boldrin and David Levine, for example, have in a book, Against Intellectual Monopoly, attacked IP, arguing that it violates commercial freedom and does not increase overall innovation and creativity that would otherwise be the case. The issue of IP has also been at the centre of battles in the US and other countries about the ability to copy and download music and film via the internet, or gain access to life-saving drugs protected by patents. On the other side of the argument, IP has recently been defended by US academic Robert Merges in Justifying Intellectual Property. He argues that creators and inventors are morally as well as legally entitled to charge for their products.