Library ~ The Benefits of a Delaware Intellectual Holding Company

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Introduction ~ The Benefits of a Delaware Intellectual Holding Company

Seasoned DMS professionals are keenly aware that that timely information is critical to account success and customer satisfaction.

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An Example of employing a Delaware Investment Holding Company to Protect Trademarks, Tradenames, and Other Intellectual Property Parent corporation (Parent) owns a valuable trademark. The mark is readily recognized in the marketplace and allows Parent to generate a large amount of sales. Parent wishes to protect the mark and develops the following strategy.

Parent (in state with a 10% corporate income tax rate) creates a Delaware subsidiary (sub). Parent transfers intangibles to the subsidiary (with no tax costs) via a Section 351 transfer in exchange for subsidiaries common stock. The intangible is valued by a CPA firm resulting in a fair market royalty rate of 4%. Sub grants use of license to Parent for 4% of sales under an arm's length licensing agreement.

Tax Analysis Before DHC Sub Created

Parent Gross Sales Income			$150,000,000
Deductions			100,000,000

Taxable Income			$50,000,000
State Tax Rate			10%

State Tax Due			$5,000,000

TAX ANALYSIS AFTER DHC SUB CREATED

In Parent State

In Delaware

Parent Income	$150,000,000	Sub Royalty Income	$6,000,000
Deductions		State Tax Rate	0%
(including royalty expense)*	$106,000,000	State Tax Due	$ 0

Taxable Income	$44,000,000
State Tax Rate	10%

State Tax Due	$4,400,000

* $150,000,000 X 4% Royalty Rate = $6,000,000

One can see the Parent saves $600,000 (5,000,000 - 4,400,000) by employing Sub DHC.

Subs income is non-taxable and created the $6,000,000 deduction for Parent. (Please note that the royalty income could also be loaned back to Parent to further create an additional interest expense deduction for Parent and yield additional tax savings).

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