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Business Management Review | Friday, February 05, 2021
Intellectual property assets, such as patents, trademarks, designs, copyright, and trade secrets, are among the most valuable assets that a firm can hold.
Fremont, CA: Numerous software and product firms are established primarily on their intellectual property, whether through licensing or commercialization of intellectual property products and services. Moreover, intellectual property plays a crucial role in the investment decisions of businesses. Intellectual property can be used as collateral to obtain funding, for equity offering valuation purposes, and as the motivation for a merger or acquisition.
Intellectual property holding companies are corporate entities whose main mission is to own and manage intellectual property assets, such as patents, trademarks, copyrights, and trade secrets. A holding company for intellectual property is founded when an affiliate firm assigns its intellectual property assets in exchange for monetary consideration, shares, or membership interest in a newly formed intellectual property holding company. Depending on the specific circumstances, this trade between the intellectual property holding company and the affiliated firm may be considered a tax-free transaction. Along with the exchange of value for IP assets, the newly created intellectual property holding company will normally grant a license to such IP to the affiliate firm providing the IP assets. This License-Back Agreement contemplates fees or royalties owed to the IP holding firm, as well as essential termination and assignment clauses that terminate the licensing arrangement as required to safeguard the IP from the operating company's creditors. Depending on the nature of the intellectual property, the intellectual property holding firm may also license specific IP assets (or components thereof) to third parties for concurrent use or to exercise in specific industries or use cases.
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Historically, intellectual property holding firms have been established in states or countries with favorable tax regulations. The choice of a tax-friendly jurisdiction for the intellectual property holding company will result in a decrease in the total amount of taxes paid by the business. When fees or royalties are paid to an intellectual property holding company in accordance with a license agreement, the payments are deemed a cost to the parent company and are therefore not included in the parent company's net taxable income.
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