Sports and IP structures: Tax considerations
Sports and Event Management Focus
Shiraz KhanPartner, Head of Taxation
Mariam SabetSenior Counsel,Intellectual Property
Saif AbdulelahAssociate, Tax
As the sports and events industry in the Middle East is growing rapidly and given the evolving tax environment, it is critical to take into account the tax implications of operating and doing business in the region.
In line with the strategy to diversify government revenues and to align with international best standards, the tax landscape in the region has undergone major change since 2017. Four of the GCC countries have implemented VAT, with the other two expected to follow in due course. There has also been significant corporate tax reform in the region. The UAE has recently introduced a Federal corporate tax for the first time as a result of international tax developments. Saudi Arabia continues to modernise its tax system to bring it in line with international standards and to attract foreign investment. Qatar has recently amended its corporate income tax legislation in line with the BEPS Pillar 2 and global G20 proposals for a global minimum tax and to broaden the tax net. Kuwait is also in the process of considering tax reform.
It is common for many sports personalities and organisations to generate revenues from intellectual property (“IP”) including the licensing of brand name and image rights. This article addresses some of the key corporate tax considerations for such IP structures in some of the countries in the region.
It is becoming increasingly popular to structure the ownership and licensing of IP through a corporate structure for various legal and commercial reasons.
These IP holding structures are designed to own a company’s IP namely, patents, trade marks, copyright, designs, etc. for licensing/selling/managing the IP.
One of the main benefits of having an IP holding structure is ringfencing those valuable IP assets from lawsuits and other risks that could compromise such assets. For example, a company will have an operating or trading company (“Opco”) which enters into the day-to-day agreements with third parties (suppliers, customers etc.). If any disputes arise with said third parties, it will be against the entity that they contracted with, i.e., Opco. Any assets held by said company will be at risk if a lawsuit is initiated. Therefore, the fewer assets held by Opco, the lesser the exposure.
Given how valuable a company’s IP assets can be, insulating them from such exposure through a holding structure would be the optimal approach. There will then need to be an IP licence agreement between the IP holding company as licensor and Opco as licensee in relation to the IP assets. As a result of this setup, the Opco will not own the IP assets and will ensure that they are protected from any exposure arising out of the activities of the Opco.
This licence arrangement also opens new revenue generating opportunities (licence fees and royalties) arising from the Opco sub-licensing to third parties the use of the IP assets.
In addition to ringfencing the IP assets, another benefit from an IP holding structure is that it centralises the IP assets into one structure. This allows for an effective and robust IP management which is attractive for investors.
However, when setting up an IP structure in the region, it is important to consider the tax regime in the jurisdiction in which the IP company will be established. Any income which arising from IP is also typically regarded as royalties and subjected to withholding tax in the country of the payer.
Therefore, in structuring the ownership and licensing of the IP in a tax efficient manner, thought should be given to application of withholding tax in the countries where the payer is based. We have outlined below some key features of some of the tax regimes in the region, which may be relevant to the holding of IP.
It is also important to note that there is complexity around the classification IP income, in particular whether the income should be regarded as royalties or income from services and the place of source which often results in disputes with tax authorities. It is therefore critical to ensure professional advice is sought on these points.
In the UAE, corporate tax at the Federal level now applies to all UAE businesses (with notable exemptions) at the standard rate of 9% on taxable income exceeding a threshold of AED 375,000.
Notwithstanding the above, a 0% tax rate may potentially be available if the entity receiving the royalty income is established in a free zone and meets various stringent conditions provided that the income from intellectual property does not exceed a de minimis threshold.
The 9% corporate tax rate is one of the most competitive in the world and the lowest in the region, which makes the UAE a very attractive IP holding jurisdiction. In addition, the withholding tax rate is currently 0% which means that no tax is payable on the distribution of profits or royalty payments to non-residents. In the context of IP structures, where cross-border royalties and dividend payments are common, this represents a significant tax advantage.
The UAE also has an attractive regime for holding companies whereby dividends from UAE companies are exempt from corporate tax and a participation exemption applies to dividends from foreign holdings and capital gains arising from the sale of both local and foreign holdings subject to meeting certain conditions. Individuals are not subject to tax on dividend income.
The 9% corporate tax rate is one of the most competitive in the world and the lowest in the region, which makes the UAE a very attractive IP holding jurisdiction
Saudi Arabia and Qatar also have comprehensive corporate tax regimes which apply to local source income at the rate of 20% and 10% respectively.
Both Saudi Arabia and Qatar impose withholding tax on royalty payments while only Saudi Arabia levies withholding tax on dividend payments. Saudi Arabia also has a participation exemption for dividends subject to a minimum ownership requirement and holding period.
Similar to the UAE, both Saudi Arabia and Qatar do not have personal income tax, meaning that any dividends income received by individuals residing in these countries will not be taxed.
It is also important to consider the double tax treaties entered into by GCC states with other countries to see whether there is any tax relief available for royalty and dividend payments received by entities resident in a GCC country from foreign jurisdictions, or for royalties and dividend payments made by entities established in a GCC country to non-residents. In this regard, GCC countries have an extensive double tax treaty network, with the UAE for example having over 130 double tax agreements with various jurisdictions around the world.
A common feature of IP structures is that there are transactions between companies in the same group with back-to-back licensing of IP or the sale of IP.
Most of the tax laws in GCC countries contain transfer pricing rules that require transactions between related parties to be conducted on an arm’s length basis for tax purposes (i.e. generally speaking, in line with prices which would be charged between two parties had they been independent). The tax legislation usually sets out specific methods which are required to be used to price related party transactions. The tax authority usually has wide powers to revalue or reclassify related party transactions or make tax adjustments where they consider that the pricing is not arm’s length. Fixed and percentage-based penalties may be applied to the tax difference.
It is important to take into consideration transfer pricing rules and have documentation in place to support the arm’s length nature of the transactions. In the context of IP, valuations can be particularly complex due to its intangible nature. Accordingly, professional advice should be sought to ensure that the pricing of related party transactions is compliant with transfer pricing requirements.
IP businesses in the UAE will also need to take into account substance requirements in the UAE as they have to ensure that they have adequate qualified employees and have incurred adequate expenditure in the UAE, and that the entity is managed and directed in the UAE. IP businesses are required to submit annual notifications and reports demonstrating that they have complied with these requirements. There is a more stringent ‘high-risk IP licensee’ classification with stricter requirements for specific IP activities that are deemed high-risk.
Qatar has also recently introduced economic substance requirements that should be noted and considered by IP businesses looking to operate or set up in Qatar.
To conclude, tax considerations of setting up or transacting in the Middle East should be taken into account. In the IP industry, tax considerations require particular thought due to the complexity. Aside from ensuring compliance with tax, transfer pricing, and economic substance requirements, IP businesses and sportspeople should ensure that they structure their operations in a tax-efficient manner. The key issues involve developing a tax efficient IP holding jurisdiction as well as determining the form of the local presence (e.g. legal entity, branch etc) which can result in different tax consequences.
For further information,please contact Shiraz Khan, Mariam Sabet and Saif Abdulelah.
Published in October 2023
