The Inland Revenue Authority of Singapore (IRAS) published Advance Ruling Summary No. 16/2022 on 3 October, concerning the tax treatment of consideration received in relation to the transfer of certain intellectual property (IP).
The Advance Ruling covered whether the consideration received by Company A from Company B in relation to the transfer of the improvements of licensed IP related to the business in Territory X should be treated as a capital receipt and hence not subject to tax.
Company A was incorporated in Singapore. It operated a manufacturing plant in Singapore and managed the supply chain and distribution of the Group’s Product Alpha in specified territories, including Territory X.
Companies A and B were companies of the same Group. Company B owned the Group’s Core IP. Under a license agreement, Company B granted Company A the following rights:
- A non-exclusive right to use, including the right to sublicense, the Core IP for specified territories, including Territory X.
- The right to develop and retain economic ownership of all improvements of licensed IP.
Through Company A’s own research and development and marketing activities, Company A developed improvements of the licensed IP for use in the specified territories, including Territory X. These improvements leveraged the Core IP to tailor products, processes and marketing efforts to suit the market needs of the specified territories. They were used by Company A for marketing Product Alpha in the specified territories, including Territory X.
The Improved IP was owned by Company A to the extent that Company A bore the associated development costs. Any such improvements that fell outside the agreed scope as set out in the licence agreement was part of the IP licensed under the terms of the licence agreement.
Under the licence agreement, royalties were payable by Company A to Company B. Company A derived sales and royalty income from the use of the Core IP including the Improved IP.
Prior to the Group’s disposal of the Product Alpha business in Territory X to a third-party purchaser, Company A’s rights to exploit the Core IP related to Territory X were terminated. All other rights under the licence agreement continued to have effect. Company A also transferred the economic ownership of the Improved IP related to Territory X to Company B, since the use of the Improved IP in Territory X would be restricted.
The step of transferring the Improved IP from Company A to Company B was intended to enable Company B to consolidate all Product Alpha’s IP rights related to Territory X and then grant an exclusive, non-transferable, and perpetual licence of the IPs related to Territory X to a purchaser as part of the disposal.
The Improved IP was transferred for cash consideration. There was no compensation payable to Company A for the partial termination of the rights granted to Company A for Territory X under the licence agreement.
The IRAS ruled that, under Section 10(1)(a) of the Income Tax Act 1947 (2020 Revised), the consideration received by Company A from Company B was a capital receipt and hence not taxable.
The reasons given for its decision were that:
- The consideration received was due to the loss of the Territory X rights granted under the licence agreement. The giving up of the rights to use the Core IP granted under the licence agreement and the assignment of the economic rights that Company A owned in the Improved IP in respect of Territory X were necessary to enable Company B to consolidate all the relevant IP rights to grant the perpetual licence to the purchaser in respect of Territory X.
- The receipt did not arise from a turnover of the Improved IP as part of Company A’s trade or business profits and Company A had also represented that the consideration was not a compensation for any loss of trade income.