Tax considerations on property rights abroad;

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TAX
CONSIDERATIONS
ON PROPERTY RIGHTS
ABROAD
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by Walter H. Diamond
A MERICAN BUSINESSMEN are frequently startled by the
impressive number of large and small companies, amount­ing
to some 2,500, that have made direct investments
abroad since 1960. During the past five years more than
2,000 United States firms have established businesses in
Europe alone. Although little publicity is focused on the
vast quantity of license agreements arranged with foreign
companies, surveys show that they outnumber new
overseas investments by nearly three to one.
Take the case of France since de Gaulle came to power.
While approximately 350 American businesses were set­ting
up French distributing centers for the European
Common Market, another 1,000 U.S. firms were negoti­ating
license pacts for patents, trademarks, copyrights,
designs, technical services, certain types of rentals and
trade secrets and formulae. In Australia the 850 so-called
American investors actually consist of only 250 compa­nies
laying out funds for capital investments but with 600
firms operating through licensees.
Of course there are numerous reasons why license
arrangements often gain precedence over direct invest­ments.
Nevertheless, by far the majority of companies are
quick to admit that the much lower royalty tax on
patents, trademarks and other services over corporate
rates is the prime incentive for their decision.
Generally speaking, the easiest way for an American
company to find the country which will levy the lowest
royalty tax on its foreign property rights is to follow the
line of least resistance — the Income Tax Convention.
This is why the six nations of the European Economic
Community offer the most receptive conditions for licens­ing
of U.S. property rights of any other area in the
world. For instance, under the double taxation treaty
between the United States and the Netherlands, the
normal Dutch tax of 15 per cent on royalties does not
apply on United States residents, corporations or other
legal entities providing that the recipients do not carry
on business in the Netherlands through a permanent
establishment.
The same basic exemption on royalties from patents,
32 THE QUARTERLY