Where to House the Brains of Your Business: Structuring IP Before a Sale

Why This Matters in 2026

When founders think about selling an IT business, most focus on the revenue multiple. The buyer is asking three questions: where does the code live, who owns it, and can that ownership be proven cleanly.

In an IT business, the asset is not equipment or office space. It is IP – intellectual property: rights to code, algorithms, trademarks, databases. IP is the intellectual core of the business – the asset that determines its value at exit. And it is the asset most commonly structured incorrectly – dispersed across entities, partially unregistered, or sitting in the operating company where it is maximally exposed.

The regulatory environment has shifted considerably over the past two to three years. The OECD introduced Pillar Two – a global minimum tax of 15% for groups with revenue above €750 million – which changes the economics of IP Box regimes for some structures. The UAE introduced corporate tax and tightened substance requirements for non-residents. Buyers in M&A transactions are increasingly requiring IP escrow, driven in part by a rising volume of disputes around open source licensing. A structure built two or three years ago may not meet today's requirements.

I. Executive Summary

A well-structured IP holding rests on three principles: IP is held in a separate holding entity, isolated from operational risk; the chain of title is documented without gaps; and IP generates a royalty stream that both demonstrates its value and provides the basis for valuation in a transaction. Section II examines the three elements in detail: jurisdiction selection, title documentation, and the royalty model.

Leaving IP in the operating company and selling on that basis is an option. But the buyer will either discount the price for the risk or require restructuring before closing. In either case, you will do the same work you would have done in advance – under transaction time pressure, and at considerably greater cost.

Key takeaway: IP in the operating company is an asset the buyer will either discount or require to be restructured before closing. Both outcomes cost more than addressing this in advance.

II. In Depth: The IP Holding Architecture

IP restructuring requires time. Trademark registration takes six to eighteen months depending on the jurisdiction. The royalty model must be operational for a minimum of two years before the transaction – otherwise the buyer will treat the royalty income not as confirmed revenue, but as a scheme. IP audit and the transfer of IP into a holding entity should both be planned with a horizon of at least two to three years before the anticipated transaction.

1. Jurisdiction: Where to Hold the IP

The jurisdiction for an IP holding is not selected on the basis of "no taxes there" but on the basis of "everything necessary is there": a low effective rate on royalty income (an IP Box regime), strong legal protection for assets, genuine economic substance, and recognition of the jurisdiction by the likely buyer.

Cyprus and Ireland are the established IP jurisdictions within the EU. IP Box regimes reduce the effective rate to 2.5% in Cyprus and 6.25% in Ireland. An important qualification: both regimes operate exclusively on the nexus principle (OECD BEPS Action 5 standard), under which the reduced rate applies only to IP developed with real R&D expenditure incurred within the jurisdiction itself. Transferring finished code without genuine in-jurisdiction R&D activity is not sufficient to access the 2.5% rate.

UAE (ADGM, DIFC) – zero tax on royalties, English common law, strong asset protection. Particularly well-suited for owners from CIS jurisdictions who face restrictions in European structures, and for businesses with Asian or Middle Eastern buyers.

Netherlands and Luxembourg are holding jurisdictions with extensive tax treaty networks. The participation exemption – the regime under which a parent company's gain on the sale of a subsidiary is exempt from tax – makes them attractive for transactions involving PE funds.

Withholding tax at source: royalty payments between jurisdictions are subject to withholding tax – this is a critical parameter in selecting the IP holding jurisdiction. Where the operating company is in Germany and pays royalties to a Cyprus entity, the rate under the Germany–Cyprus tax treaty is 0%. Where the operating company is in a different jurisdiction, the existence of a tax treaty and its specific terms must be verified before the holding jurisdiction is selected.

A quick check – Section 1:
– Is your IP held in a separate entity or in the operating company?
– If you are using an IP Box regime – are there genuine R&D expenditures in the jurisdiction of registration?
– Has the withholding tax rate between your operating company and IP holding jurisdictions been verified?
If IP is in the operating company, it is the first thing the buyer restructures after closing.

2. Title Documentation: The Chain Must Be Clean

The most common problem in IT company sales is the inability to prove that IP belongs to the company rather than to individuals. A developer wrote the code – but the employment contract contains no IP assignment clause (a provision assigning rights to works created in the course of employment, also referred to as work-for-hire in US practice). A contractor built the algorithm – but the agreement contains no IP assignment provision. A co-founder designed the product architecture – but never signed an agreement assigning that contribution to the company. Each such gap represents potential litigation from a former employee or contractor after the transaction has closed.

The buyer's standard response: either a price reduction to account for the risk, or escrow – retention of a portion of the proceeds in a conditional deposit held by a third party until the statute of limitations on potential claims expires. Increasingly, buyers are structuring an earnout: a portion of the consideration is paid only after the IP title chain has been verified – part of the price depends on what the IP audit finds.

An IP audit – a comprehensive inventory of all intangible assets with legal verification of the title chain – must include a review of open source licensing. If the codebase contains components under "copyleft" licences such as GPL, the buyer may be required to open-source the entire product. This is one of the three primary risk factors in IT company M&A transactions.

A quick check – Section 2:
– Do all contracts with developers and contractors contain an IP assignment clause?
– Has an IP audit been conducted, including a review of open source licences in the codebase?
– Are your trademarks registered to the IP holding entity – not to a founder personally?
If no audit has been conducted, the buyer will conduct one – and the results may affect the price.

3. The Royalty Model: IP Must Generate Income Before the Sale

An IP holding that merely holds rights is an incomplete structure. A complete structure has the IP holding licence its intellectual property to the operating companies at a market royalty rate. This produces three effects simultaneously: tax, valuation, and protective.

Tax effect: royalty payments reduce the taxable profit of the operating company and accumulate in the IP holding at a minimal or zero effective tax rate.

Valuation effect: a royalty stream provides an independent basis for valuing IP using the discounted cash flow (DCF) method. IP with a confirmed royalty income is worth more than IP without one.

Protective effect: creditor claims against the operating company cannot reach the IP holding. Litigation against the operating company does not freeze the IP.

A critical qualification: the royalty rate must satisfy the arm's length principle – it must be consistent with what independent parties would negotiate at arm's length. The rate is substantiated through a comparable transactions analysis (royalty rate benchmarking) or an independent valuation. Inflated royalties are a standard target of tax authority challenge in the context of a transfer pricing audit.

A quick check – Section 3:
– Is there an active licence agreement between the IP holding and the operating company?
– Does the royalty rate reflect market levels, and is it documented?
– Has the royalty model been operational for at least two years?
If there has been no independent valuation, the buyer has no basis to accept your figure.

Next Step

IP structure must be built in advance. Trademark registration alone takes six to eighteen months. The royalty model must be operational for at least two years before a transaction – otherwise the buyer will treat it as a structure created for the deal, not a reflection of reality. A transfer of IP from the operating company into a holding entity in anticipation of a sale is treated by buyers as an attempt to alter the terms at the last moment – and is always reflected in the price.

The buyer always sees where the brains of the business are. If it is unprotected by structure, that will be reflected in the price. If the horizon for a sale or investment is three to five years, now is the right moment for an IP audit and the design of the appropriate holding structure. On an initial call, we will review where your IP sits today and identify what needs to change for it to work in your favour at the transaction.