One usage of an offshore company is in dealing with royalties and intellectual properties. During the webinar Evanna Phoon and I hosted featuring Lee Chiwi (CEO of Rockwills Singapore) gave us examples of how we can use offshore companies to take advantage of reducing the withholding tax impact on royalties. watch the video below for his sharing:
FROM Lee Chiwi:
Intellectual property is certainly becoming very important to organizations for its branding and for its ability to grow very quickly in many countries. Let’s take a franchise like Secret Recipe, which I understand is a Malaysian grown company.
Secret Recipe, I think, operates not only in Malaysia but operates in several other countries in South East Asia. Potentially, it’s going to become a global brand, for example, like Starbucks. With such IP rights, they are able to license other people to use their methodologies to operate their business who will then pay a royalty from the profits earned.
What happens is that, invariably, in every country in the world, the governments will tax the royalties that are earned by a licensing party. Let’s say the owners of this licensing party want to go to a certain country X. So, it transfers certain technologies. It licenses that party in the country to operate the Secret Recipe business.
That licensee makes money. It pays royalties to the licensor. So, there is going to be tax, withholding tax that is required to be paid back by the licensing party.
Now, the rates of the withholding tax can be quite high depending on the country. What we have in place in the world would be countries that have negotiated tax treaties, which would include the ability to lower the withholding tax on royalties.
Malaysia is fortunate because Malaysia, as I understand, has a wonderful network of tax treaties with many countries in the world. If country X has the Double Tax Treaty with Malaysia, then the withholding tax rate will tend to be lower.
Now, if there is no Double Tax Treaty in place between Malaysia and country X, then what tax advisors normally do is to try to identify another offshore jurisdiction which might have an existing Double Tax Treaty agreement with country X because Malaysia doesn’t have that.
You find a common intermediary country, incorporate a company, an offshore company in that country, which can then therefore take advantage of the lower withholding tax treaty rates with country X. What you do then is you license from Malaysia to the intermediary country, and then the intermediary country’s offshore company then licenses or sub-licenses to country X.
That mechanism allows overall the minimization of the impact of royalty rates back to the owners of the Secret Recipe business.
I’ve taken a long way to describe this. I hope it did make sense to the participants. Generally, that’s how it works.
In some cases, you can choose to leave the royalties offshore in that intermediary holding company, or licensing company. That’s fine as well because at some stage, these profits can always be remitted back to Malaysia. As I understand, foreign sourced income would not be taxable in Malaysia generally.
For Premium Webinar Members, you can watch the full replay of the session here:
