Zoomcopter Ltd., a company established in Taiwan, has developed a new widget which is used as a spare part in the assembly of helicopters. By using this widget when producing the helicopters, the operational costs of the helicopters can be substantially reduced.
Zoomcopter holds the worldwide patents on this invention and it wonders how the exploitation of the patents can be arranged in a tax-effective manner.
The patent should be transferred to a company in a low tax country from which the patents are licensed to one or more licensing companies in countries with a dense tax treaty network and which does not levy a withholding tax on royalties paid abroad.
The set-up of a licensing company in Mauritius could meet these objectives. Mauritius has an expanding network of double taxation treaties, thus substantially reducing the withholding taxes on royalties paid to the Mauritius company.
Although the Mauritius company is subject to tax in Mauritius at a rate of 15%, the spread between royalties received and royalties paid to the offshore patent-holder can be minimised (Mauritius has not adopted any transfer pricing regulations which could have an impact on the amount of the spread).
Royalties paid by the Mauritius company are not subject to a withholding tax in Mauritius.
Note: If there is no double tax treaty between Mauritius and the country from which the royalties are paid, the set-up of a sub-licensing company in a third country might be considered, e.g. Luxembourg. Luxembourg has a good tax treaty with Mauritius.