Intellectual property (IP) is a critical asset for many businesses as it represents the innovation and know-how a business possesses which makes it unique and successful. A business needs to maintain its IP to secure its competitive edge, generate revenue, and secure its long-term success in the marketplace.

The tax implications of IP are complex and often overlooked. Recently NBR published an article on how the Pushpay (church payment and software management company founded in New Zealand) IP restructure delivered a US$188 million tax benefit to its new owners. Such examples demonstrate a need to consider the tax implications of IP, both locally and internationally, as part of a business’s IP management so that your business is well positioned from a tax perspective.

Intellectual property structuring in New Zealand

Structuring IP effectively can have significant tax and legal implications. In New Zealand, the structuring of IP involves consideration under various legislative frameworks, including the Patents Act 1953, the Income Tax Act 2007 and international tax rules.

Patents and intellectual property rights

In New Zealand, patents are governed by the Patents Act 1953, administered by the Intellectual Property Office of New Zealand. A patent grants the patentee the exclusive right to exploit the patented invention for a defined term.

Tax implications of intellectual property

• The tax treatment of IP in New Zealand is influenced by several factors, including the creation, ownership and transfer of IP. Key considerations include:
  • Royalties derived from IP linked to New Zealand are subject to tax. The definition of "linked to New Zealand" is comprehensive, covering any connection such as ownership by a New Zealand resident or creation in New Zealand.
  • Expenditure on creating or acquiring IP can be deductible, but the specific rules depend on the nature of the IP and the business activities.
  • New Zealand's Controlled Foreign Company (CFC) rules aim to protect the tax base. IP created in New Zealand and moved offshore could have New Zealand tax implications.
  • Unlike many other jurisdictions, New Zealand does not have a general capital gains tax. However, the transfer of IP to a CFC could have tax implications, particularly if the IP was created or enhanced in New Zealand.

Strategic considerations for IP structuring

Effective IP structuring involves strategic planning to optimise tax outcomes and protect IP rights. Key strategies include:

• Establishing an IP holding company can centralise the management and exploitation of IP. This can provide tax benefits, such as the ability to claim deductions for IP-related expenses and manage royalty income efficiently.
• For businesses operating internationally, structuring IP through favourable and established jurisdictions can be beneficial. However, it is essential to ensure compliance with New Zealand's CFC rules and other anti-avoidance provisions.
• Transfer pricing rules require that transactions involving IP between related parties are conducted at arm's length. Proper documentation and compliance with these rules are crucial to avoid tax disputes and penalties.
• Licensing IP to third parties or using a franchising model can generate royalty income while retaining ownership of the IP. This can be an effective way to expand business operations and monetise IP.

Intellectual property structuring in New Zealand requires careful consideration of legal and tax implications. By understanding the relevant legislation and employing strategic planning, businesses can optimise their IP management and enhance their competitive advantage.

At Bellingham Wallace, we have worked with clients to commercialise their IP. Our tax team has a wealth of experience in local and international tax structuring. Please get in touch with us if you would like to discuss your IP needs.