TAX aspects: Royalty companies

General
Royalties are income derived from patents, licensing rights, trademarks, names and brands. All of these are increasingly valuable in the global market place. Inventors, music makers, tennis stars, world companies selling famous brands, they can all profit equally from the advantages of a Dutch royalty company.

A royalty company, which holds a sub-license, receives royalties from the licensee and pays royalties to the grantor of the license. The royalty company does not own the underlying rights such as patents, copyrights or know-how; its entitlement to royalties is based on an agreement with the owner of the rights. The agreement with the owner can be limited either to part of the total rights or to a specific territory. The owner of the rights can be located in a low tax jurisdiction (e.g. The Netherlands Antilles).

The royalties that are received by a Dutch company and the royalties paid by a Dutch company to the ultimate owner should result in a taxable spread in the Netherlands. Because of the Dutch tax treaty-network, in most cases, there is no other taxation of the royalties then the taxable-spread left in the Netherlands.

Key ADVANTAGES OF A DUTCH ROYALTY COMPANY

Reduction of the withholding tax
The Dutch Tax Authorities do not impose a withholding tax on royalties paid by Dutch companies. This benefit can be channelled to the more than 50 countries the Netherlands has treaties with to avoid double taxation.

Advance Pricing Agreement & Advance Tax Ruling
Furthermore, added clarity and legal standing can be achieved by obtaining an Advance Pricing Agreement and/or an Advance Tax Ruling (APA/ATR) from the Dutch Tax Authorities regarding the tax position of a royalty company. Such a ruling should secure the amount of corporate income tax to be levied for a certain period of time, usually four years.

A ruling can be obtained if certain requirements are met, mainly regarding the amount of substance in the Netherlands, the amount of risk that the company has with respect to her royalty activities (such as credit risks, market risks and operational risks), and some transfer pricing-requirements regarding the royalty-transactions. The Secretary of State has issued a decree, which provides for additional guidance on these elements of substance, risk and remuneration.