With a holding company and a foundation, you can sell the IP secured in an operating company tax-optimized. For this purpose, shortly after the company is founded, ownership of the IP is transferred to the shareholder level and usufruct rights to the foundation. The Foundation may collect royalties for the use of the IP in the following years. This in turn leads to a lower taxation of the operating company because the licence fees represent operating expenses. It is true that the sale of the usufruct right on the IP is subject to 25 % corporation tax at foundation level. However, the shareholders can sell the ownership of the IP tax-free after a sale period of one year.

1.Sell IP tax-optimized – Introduction

When one speaks of intellectual property in business transactions, one often encounters the abbreviation IP. IP stands for the Anglo-Saxon term intellectual property, which describes precisely such intangible assets – protected as well as unprotected. Apart from all material assets, however, IP can also have a certain value. Many of you may be thinking about the intellectual property to make medicines, while others think about the classic design of a Porsche 911. Whether such intellectual property actually exists and is therefore potentially valuable and worthy of protection may be another matter. In any case, a few years ago Porsche lost a legal dispute over the design protection for the model 991 before the European Court of Justice.

But suppose an entrepreneur had created a trademark, patent or other type of IP in his company. Then it would obviously have a certain value. And if something is valuable, then it may also be worth selling it profitably. This is also possible with IP. But where profits occur within the framework of a company, the Treasury immediately extends its tax-claiming fingers afterwards.

Sometimes just a clearly regulated, fixed thing, something that is generally considered irrefutable, is enough to question it – even without a concrete reason or cause. The appeal is the challenge of finding a legal way to circumvent a rule, such as taxation, to show that it can be done differently. As a tax consultancy firm, we feel this appeal every day, because it is an essential driving force in our design consultancy and therefore of considerable value, even if it may not be an IP itself. In this sense, we now want to address the question of how IP can be sold tax-optimized.

2. selling IP tax-optimized: the starting position

To explain our design model, we use an example. To do this, we first want to adjust the parameters required for this example. So let’s say Ms. Idea has a brilliant idea for a startup. This idea is of great importance to your company and its financial success. Ms. Idea also followed our recommendation and founded a holding company as a parent company for her startup. The holding structure should one day enable her to sell largely tax-free on an exit based on a share deal.

But since it is known that buyers prefer an asset deal for tax reasons, Ms. Idea would also like to find a tax-favorable answer for this eventuality. After all, over time, the value of the IP of their operating company will increase in value, even a large share of the former sales revenue. In the case of an asset deal, about 30% of taxes would then apply to it. So now we help Ms. Idea avoid this so she can sell her IP tax-optimized.

Selling IP Tax Optimized: Our Design Model

3.1. Distribution of ownership and usufruct of IP

In addition to a holding company, which is particularly interesting for Ms. Idea in a share deal, she primarily needs a foundation in our design model.

Before the value of the IP, which is owned by the startup from the beginning, increases significantly, the startup sells the IP. On the one hand, the ownership of the IP goes to Ms. Idea privately, on the other hand, the rights to use the IP go to her foundation, so that the foundation has a usufruct rights to the IP. In both cases, the transfer shall take place for remuneration. Therefore, you need a report beforehand that determines the initially still relatively low value of the IP, so that we have no objections to expect from the financial administration.

3.2. Taxation of the transfer of rights to the IP

Yes, the tax office is also involved. Of course, we said we want to sell the IP tax-optimized, but that means the sale at a later date. At the moment, when the value of the IP is still relatively low, we are nevertheless making it a matter of taxation. At least the purchase price for the ownership of the IP for Ms. Idea is quite low, because the more valuable right of use in relation to it goes to her foundation.

3.3. The usufruct of the IP and its tax consequences

The Foundation can now write off the purchase price and collect licenses for the use of the IP by the operating company. As a corporation, the Foundation pays 15 % corporate tax on these royalties. However, since a foundation is not a business enterprise but only a property manager, no business tax is applicable. It is important that Ms. Idea ensures that her foundation does not actually carry out any commercial activity.

On the start-up side, you can now set the license fees agreed with the foundation as operating expenses. This reduces the tax bases for both corporate and business tax. In effect, Mrs Idea is already saving about 30% in taxes at this level. But this is just a side effect. The big kick follows only at the exit, because we want to sell the IP tax-optimized.

3.4. IP tax-optimized sell after the sale period

Assuming after a few successful years, the startup has achieved the predicted enormous increase in value. For Mrs Idea, the exit is within reach. Among the many interested parties, one offers a particularly lucrative offer, but which should run via an asset deal. Since the largest share of the value of the company is in the IP, the main issue is the sale of the ownership and usufruct rights in the IP. Since more than a year has certainly passed since the transfer of the IP from the startup to Ms. Idea or the usufruct rights to her foundation, the IP can be sold tax-optimized, in some cases even completely tax-free.

3.4.1. Selling IP tax-optimized from the private assets of a natural person

You are now wondering how this can be. Finally, we explained earlier that the sale by the startup is taxable. And that is where the difference lies. Because the sale took place at that time from the operating assets of the startup. This time, Ms. Idea sells the IP from her private assets. And in the case of a sale from private assets, the rules of § 23 EStG apply, which stipulate that one year after the acquisition of an asset, its sale from private assets can take place tax-free. However, this only applies if no use has been made in the meantime to obtain income through this asset (§ 23 (1) sentence 1 no. 2 sentence 4 EStG in conjunction with § 22 no. 2 EStG). Otherwise, the disposal period for tax-free sale is extended to ten years.

How good that Ms. Idea could not make use of the IP rights. Because the usufruct right was in the hands of their foundation.

3.4.2. Selling from the private assets of a foundation IP tax-optimized

However, their foundation has done just that in the past. In addition, the sale of the rights of use by the foundation should at least trigger corporate tax, right? Nevertheless, it makes it possible to sell the IP tax-optimised, because only 15% of the value of the IP is subject to corporate tax, but the trade tax is even completely avoidable. Finally, unlike other corporations, a foundation has private assets instead of business assets (unless it operates commercially). So the taxation is analogous to the taxation of Mrs Idea, except that it is corporate tax instead of income tax.

If, on the other hand, the foundation has received income from its usufruct rights on the IP more than ten years ago, it can even sell the IP completely tax-free. Then the regulation of the Income Tax Act also applies to the foundation with regard to the ten-year sale period. If the foundation waives license fees, then the sale of the IP is tax-free at any time after one year.

4th IP sold tax-optimized: two examples of calculation

Let us support our remarks here with some figures. Assuming the selling price of the property rights by Ms. Idea is EUR 1.000.000 and that for the usufruct rights of the Foundation EUR 4.000.000. In addition, the annual revenue from the licence fees should be EUR 100,000. The sale will continue to take place 15 years after the transfer of rights to the IP. At this point it should be noted that we focus our considerations solely on how we can sell the IP tax-optimized. The other assets included in the startup are thus not taken into account. But since we attach the highest value to IP, this simplification should be without weight. However, we still want to take into account the tax effects of licence payments. As you will see in a moment, this is most interesting.

4.1. Sell IP tax-optimized: Model with license fees

During the 15 years, the Foundation receives EUR 1,500,000 in royalties. This amounts to a corporate tax of EUR 225,000. At the same time, the startup was able to save about EUR 450,000 in corporate and business tax due to this operating expense. To simplify this, we also quite rightly set the percentage of business tax at a realistic 15%. As a result, the difference of EUR 225,000 waves as tax savings over the course of these 15 years.

When selling the IP, the following taxes are now incurred: For Ms. Idea, the sale is tax-free and for her foundation the tax office sets EUR 600,000 (15% of EUR 4,000,000). Taking into account the startup’s tax savings over the previous 15 years, only EUR 375,000 in taxes are incurred.

4.2.Sell IP tax-optimized: Model without license fees

In this variant, we examine which tax effects result from a waiver of the usufruct right. Again, the sale of the IP by Ms. Idea is tax-free. At the foundation, this is also tax-free this time. But the startup has waived the avoidance of taxes in the amount of EUR 450,000 in the 15 years. Therefore, this amount is relevant in our considerations as a tax.

4.3. Sell IP tax-optimized: Comparative taxation without optimization

In order to provide an understanding of the scope of tax optimization, we also offer a tax calculation, as it would be incurred in an asset deal of the IP from the operating assets of the startup. For this purpose, we quoted EUR 5,000,000 as the selling price, which corresponds to the combined value of Ms. Idea’s property right and her foundation’s usufruct rights. This sales price, which also represents profit for the IP in the absence of relevant acquisition or production costs, is subject to 15 % corporate and business tax each. Overall, we are talking about a tax of EUR 1,500,000.

Selling IP tax-optimized – our quintessence

Even if it may seem unusual at first glance that we charge different types of tax at the startup and the foundation, this serves to clarify how high the savings can be if you want to sell IP tax-optimized via our design model. The fact that very arbitrary figures are used for the value of the IP and the license fees is also reasonable. After all, all these factors must always be considered in individual cases. Therefore, it may also be that in some situations it could also be cheaper if the foundation waives license income. In our examples, however, it was the cheapest to use the license fees to reduce corporate taxation at the startup level.

In any case, it should be clear that both variants cause significantly lower taxes than if you sell the IP without tax design. In our most favorable example, the tax savings are phenomenal 75% of the otherwise incurred tax amount (EUR 1,500,000 – EUR 375,000 = EUR 1,125,000 tax savings, which corresponds to 75% of EUR 1,500,000)! In doing so, we have already disregarded the capital gains tax of 25 %, which will once be attributable to the profit distribution of the holding company.

Although we always assume the less favorable case of an asset deal, where the share deal would only be taxable with 1.5% of taxes at the holding company, but since the asset deal is tax-wise much cheaper for the buyer than the share deal, we should also be prepared for this eventuality. In any case, the willingness of a buyer to pay a higher price in an asset deal should also feed into our considerations and thus influence how we want to sell our IP tax-optimized.