Key Takeaways
- Bermuda offers tax neutrality for owning and licensing IP, but its appeal depends on how royalties flow into and out of the company.
- Because Bermuda has no double-tax treaty network, inbound royalties can face withholding tax that a holding structure alone cannot reduce.
- Economic substance and the DEMPE standard require real people, decisions, and functions in Bermuda to support where the IP is held.
- Whether Bermuda fits this use-case turns on the IP profile, royalty routing, and tolerance for transparency and BEPS scrutiny on offshore structures.
Using a Bermuda Company to Own and License Intellectual Property
A Bermuda IP holding company can own patents, trademarks, copyright, trade secrets, and know-how, then license those rights to operating subsidiaries or third-party licensees anywhere in the world. The vehicle for this is the standard exempted company formed under the Companies Act 1981, which may hold assets and earn income from non-residents but cannot carry on business inside the territory itself. For a foreign owner weighing this structure, the appeal is tax neutrality; the constraint, as this article sets out, is a demanding substance regime and a complete absence of double-tax treaties.
Holding IP in this way does not require any license from the Bermuda Monetary Authority so long as the company is not conducting regulated financial, insurance, or digital-asset activity. The IP rights themselves are never registered locally. Protection is secured wherever it is commercially needed, through the USPTO, EUIPO, UKIPO, or the international filing systems, while the company simply appears as the registered legal owner on those foreign filings.
This structure is most relevant to groups that already have a footprint on the island, to multinationals below the global minimum-tax threshold, and to owners whose royalties flow from low-withholding source countries. Where royalties originate in high-tax jurisdictions, the fit weakens considerably, and the sections below explain why.
Why Bermuda Appeals for IP Ownership: Tax Neutrality and Legal Foundations
The economic case rests on a single fact: there is no corporate income tax, no capital gains tax, no withholding tax on outbound dividends, royalties, interest, or management fees, and no stamp duty on share transfers of exempted companies. When royalties arrive from abroad, nothing is deducted at the Bermuda end, and nothing is withheld when profits move on to the shareholder.
Long-term certainty is reinforced by the tax-assurance certificate the Minister of Finance may issue, confirming that no future income, profit, or capital-gains tax will apply to an exempted company for a period of up to 30 years. That undertaking gives planners a fixed horizon rarely available elsewhere.
The legal foundations matter as much as the fiscal ones. Bermuda follows English common law, so contractual enforceability, assignment formalities, and licence structuring track closely to UK practice, and the courts are well regarded. No exchange controls apply to exempted companies, and the professional-services sector is mature.
One change narrows the picture for the largest groups. The Corporate Income Tax Act 2023, effective 1 January 2025, introduced a 15% tax on Bermuda constituent entities of multinational groups with annual revenue of EUR 750 million or more, aligning with the Pillar Two global minimum.
Groups below the EUR 750 million revenue threshold are not subject to the 15% corporate income tax; the full zero-tax position is preserved for smaller IP structures.
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The Treaty Gap: How the Absence of Double-Tax Agreements Affects Royalty Flows
Here is the structural weakness that defines this use-case. Bermuda has concluded no bilateral income-tax treaties that reduce or eliminate source-country withholding on royalties paid to a company on the island. The transparency agreements it has signed, including more than 100 Tax Information Exchange Agreements and multilateral instruments, allow tax authorities to request information; they do nothing to lower a withholding rate.
The practical effect lands directly on royalty yield. When a licensee in Germany, India, or the United States pays a Bermuda licensor, it withholds at its own domestic rate before the money ever leaves its borders.
| Payer country | Domestic withholding rate |
|---|---|
| United States | 30% |
| Germany | 15% |
| India | 10–20% |
| EU member states (varies) | up to 25–30% |
Compare this with an Irish, Dutch, or Singapore holding company, each of which can access treaty-reduced rates of often 0 to 10% on royalties from major trading nations. For the same gross payment, a Bermuda licensor receives materially less.
Membership of the OECD Inclusive Framework on BEPS, and adoption of certain minimum standards, does not change this. No treaty network exists to shop through, and post-BEPS rules would block conduit arrangements in any event. Where your royalties originate in high-withholding states such as India, China, Brazil, or much of the EU, this leakage is real and unrecoverable.
Withholding Tax on Inbound Royalties and the Limits of a Bermuda Holding Structure
The withheld tax at source is a final cost, not a timing item. Because the company pays no Bermuda income tax, it has no domestic liability against which to credit foreign withholding, so the amount deducted abroad is simply lost.
Consider a US licensee paying royalties to a Bermuda entity that is not a US tax resident. The domestic withholding rate is 30% on the gross royalty, with no treaty reduction, unless the structure is made transparent for US tax purposes or another mitigation applies. Inside the European Union, individual member states set their own rates on royalties to non-treaty countries, commonly between 10% and 25%, and the Interest and Royalties Directive does not extend to a non-EU company.
The structure therefore performs best when royalties come from jurisdictions that apply zero or low domestic withholding regardless of any treaty. The United Kingdom currently imposes 0% on most royalties under domestic law, and Switzerland applies 0% on royalties domestically; payments from such sources reach Bermuda intact.
What you cannot do is use the entity as a conduit. There is no DTT network to redirect royalties through to a lower-tax parent while claiming treaty relief, and Bermuda carries no thin-capitalisation or earnings-stripping rule that would recharacterise inbound royalties at its own end. The limitation, in every case, sits with the payer's country.
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Economic Substance Rules and the DEMPE Standard for IP Companies
IP business is a relevant activity under the Economic Substance Act 2018, and it sits in the most demanding tier the law contains. The regime took effect for new companies on 31 December 2018 and for pre-existing companies from 1 July 2019, supplemented by the Economic Substance Regulations 2018 and guidance from the Registrar of Companies and Ministry of Finance.
IP income is treated as presumptively high-risk where the IP was acquired from an affiliate, where it is licensed to or exploited through affiliates, or where the company did not create the IP through its own research and development. In those cases the law presumes non-compliance, and the burden falls on the company to rebut it.
The benchmark is the OECD's DEMPE framework, covering the Development, Enhancement, Maintenance, Protection, and Exploitation of intellectual property. To pass, the entity must show that its own people and management, present on the island, actually perform the core income-generating activities: strategic decisions on IP development and exploitation, control of research budgets, oversight of licensing strategy, and management of IP risk.
Pure equity holding companies enjoy a reduced substance test. IP companies do not. They face the full test, which requires:
- Adequate qualified employees in the territory
- Adequate physical presence, meaning genuine office space
- Adequate local expenditure proportionate to the activity
- The core activities actually performed in the territory
Outsourcing core activities to a local service provider is allowed, but the company must monitor and control those functions, and the strategic decisions must remain with directors or officers present on the island. Continued failure to meet the test brings escalating penalties and, eventually, exchange of information with the tax authority of the beneficial owner's home country.
Building Real Substance in Bermuda: People, Decisions, and Functions Behind the IP
Substance for an IP company is built around people and decisions, not addresses. At least one qualified resident director, and preferably a board majority, must take part in IP governance from the island, and meetings at which material IP decisions are made should be held there with a proper quorum present.
A single nominee director handling administration will not carry the test. The entity needs staff with genuine IP expertise, whether employed directly or through a locally licensed provider: licensing managers, legal counsel, people who actually run the portfolio. High-level choices on research budgets, major licence terms, and enforcement strategy must demonstrably happen on the island, evidenced through minuted decisions, management presence, and correspondence.
A registered office address, which every corporate service provider supplies, does not by itself amount to adequate physical presence. Real or genuinely shared office space is expected, alongside operating expenditure proportionate to the scale of the royalty stream.
The island has a working professional ecosystem. Offshore firms with local offices, including Appleby, Conyers, Harneys, and Carey Olsen, can help implement substance, and management companies can supply locally based IP managers. The regulatory bar for IP, however, sits higher than for a passive holding company.
A credible IP substance operation (resident directors, qualified staff, office, and compliance) can run to six figures in USD annually, which is difficult to justify for a modest royalty stream.
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Structuring Licence Agreements and Routing Royalties Through a Bermuda Entity
The exempted company, as licensor, enters written licence agreements with each operating subsidiary or third-party licensee. Local common law governs enforceability, and choice-of-law clauses pointing to the island are recognised internationally.
Transfer pricing is where most of the risk concentrates, though it does not arise locally. There is no domestic transfer-pricing statute and no locally filed documentation requirement, but every paying jurisdiction applies its own arm's-length rules to royalties sent to a Bermuda entity. The OECD Transfer Pricing Guidelines and BEPS Actions 8 to 10 on hard-to-value intangibles set the standard, so the royalty rate must withstand benchmark analysis.
Assigning IP into the entity from a related party raises a parallel concern. The assignment must occur at fair market value; a below-market transfer can be recharacterised by the payer's tax authority under BEPS Action 8 exit-tax principles or US section 367(d). A formal assignment deed, executed under common-law formalities, is the standard instrument.
Sub-licensing chains are workable and common in (re)insurance and global services groups based on the island, where the master right is held centrally and regional companies take sub-licences. The chain must reflect genuine economic ownership rather than a paper arrangement. Royalties are received into local bank accounts, no local tax is deducted on receipt, and no exchange controls restrict the currency in which income is taken or distributed.
Protecting and Registering Trademarks, Patents, and Copyrights Held by the Company
There is no domestic IP registry of international standing. Trademarks and patents must be filed where protection is commercially needed, through the USPTO, EUIPO, UKIPO, the Madrid Protocol for trademarks, or the PCT for patents. Local statutes such as the Trade Marks Act 1974 and the Patents Act 1970 protect rights within the territory only, which is of limited value to a multinational portfolio.
Copyright in most countries arises automatically on creation, so no local registration is needed; the company instead maintains the assignment and ownership documentation that establishes its title. Whatever the right, the entity's name should appear as registered owner or assignee on every target-jurisdiction filing, because any gap between the registered owner and the holding company weakens enforcement and undermines the substance narrative.
As a British Overseas Territory, the island benefits from certain treaty extensions the United Kingdom applies to its territories. Whether Madrid Protocol and PCT access runs through a local entity directly or via UK extension should be confirmed with IP counsel, since extension status can shift.
Enforcement of cross-border infringement is generally pursued in the country of infringement, not locally, though the common-law courts can issue injunctions and hear contract disputes. When acquiring IP from an affiliate, counterparties may ask for a legal opinion from local counsel confirming the validity of the assignment.
When Bermuda Works for IP Holding and When Another Jurisdiction Fits Better
The structure earns its place in a defined set of circumstances rather than as a default choice.
It is a reasonable fit when:
- The group is already domiciled on the island, often a (re)insurance or holding group, and the IP is ancillary to existing substance
- Royalties flow mainly from zero or low-withholding payers, such as UK-sourced royalties under domestic rules or payments between local entities
- The beneficial owner is a US person holding through an entity treated as a pass-through for US tax, which neutralises source withholding via the US return
- Consolidated group revenue sits below the EUR 750 million Pillar Two threshold
- Credible substance already exists, so adding IP functions is incremental
It is a weak or poor fit when:
- Royalties flow from high-withholding states (India, Brazil, China, most EU members without domestic exemptions), where the withheld tax is unrecoverable
- The group needs a treaty network to cut source withholding, in which case Ireland, the Netherlands, Luxembourg, Singapore, or Cyprus are structurally superior
- The owner's home country applies controlled-foreign-company rules, such as UK CFC provisions, German Hinzurechnungsbesteuerung, or US GILTI and Subpart F, which can pull the income upward and erase the local benefit
- The arrangement is largely paper-based, given the high-risk presumption that makes thin IP structures legally dangerous
On banking, the picture is workable but not frictionless. Local accounts can generally be opened at HSBC Bermuda, Clarien Bank, Butterfield Bank, and Bermuda Commercial Bank. USD clearing routes through US correspondent banks, so post-FATCA and CRS scrutiny means any company receiving sizeable royalty inflows must hold complete KYC and beneficial-ownership records. Accounts at major international banks are possible but subject to enhanced due diligence, and mainstream payment processors such as Stripe, PayPal, and Adyen rarely accept a pure holding company without an operational footprint.
Reputation, Transparency Pressures, and BEPS Scrutiny on Offshore IP
Standing matters for an IP structure, because counterparties and tax authorities judge it. The EU Council removed Bermuda from its list of non-cooperative jurisdictions in May 2019, after the substance law was enacted, and it has remained off the list since.
The brief 2019 listing was attributed to what the Premier described as a "minor technical omission" in the regulations, corrected quickly. The episode showed how politically exposed offshore IP locations remain. The OECD and FATF have concluded that the territory's conduct and laws are not harmful.
Transparency runs deep. The jurisdiction exchanges financial account data under CRS and group-level reports under country-by-country reporting automatically with participating countries. There is no patent box or preferential IP regime to defend, only a zero general rate, yet BEPS Action 5 still asks whether genuine nexus exists between IP income and research activity performed locally.
The harder pressure comes from home-country rules. US shareholders face GILTI on the entity's net IP income, UK shareholders meet CFC provisions on UK-derived IP, and German shareholders meet Hinzurechnungsbesteuerung; any of these can wipe out the local tax saving at the owner level. Structures that cannot evidence real DEMPE functions will be recharacterised by major tax authorities whatever the local filings say.
On the reputational scale, the territory sits above BVI, Seychelles, or the Marshall Islands, helped by stable government, UK-territory status, and early BEPS adoption. It still attracts the offshore-label due diligence that a Luxembourg, Irish, or Singapore entity avoids.
Conclusion
For IP holding, this is a narrow tool that works well only in specific hands: groups already established on the island, owners drawing royalties from zero-withholding sources, and US persons holding through a pass-through. For most cross-border royalty flows out of high-tax markets, the missing treaty network and unrecoverable source withholding will outweigh the zero domestic rate.
Before going further, model the all-in result at the shareholder level, combining source-country withholding, your home-country CFC or GILTI exposure, and the six-figure cost of real substance, then compare it against a treaty-access jurisdiction.
How Expanship Can Help Your Business in Bermuda
Expanship sets up and runs Bermuda exempted companies for IP holding, with particular attention to the full economic-substance test and the DEMPE evidence that high-risk IP activity demands. The same team supports the wider needs of a foreign-owned entity on the island, from formation through to ongoing operation.
- Incorporation of a Bermuda exempted company structured for IP ownership
- Registered agent and registered office services
- Economic-substance assessment and tax registration support
- Ongoing compliance management and annual filings
- Accounting and bookkeeping for royalty-receiving entities
- Introductions to local banks for account opening
To discuss whether this structure fits your IP and royalty profile, contact Expanship Bermuda.
Frequently Asked Questions
A Bermuda exempted company pays no corporate income tax, no withholding tax, and no capital gains tax on royalty income, and groups below the EUR 750 million Pillar Two threshold keep that zero position in full. The 15% Corporate Income Tax Act 2023, effective 1 January 2025, reaches only constituent entities of multinational groups at or above that revenue level.
No. Because Bermuda has no double-tax treaties, the payer's country withholds at its full domestic rate, such as 30% in the United States or up to 25 to 30% in parts of the EU, and that tax cannot be reduced or credited at the Bermuda end. Royalties from zero-withholding sources, such as most UK royalties under domestic law, are the situations where the structure preserves yield.
IP business faces the full substance test under the Economic Substance Act 2018, meaning adequate qualified employees, genuine office space, proportionate local expenditure, and core income-generating activities performed on the island. The DEMPE functions, including control of research budgets and licensing strategy, must be carried out by management present in the territory, since IP income is presumed high-risk where it comes from affiliates.
They are registered wherever protection is needed, through bodies such as the USPTO, EUIPO, and UKIPO, or through the Madrid Protocol and PCT systems, because there is no local registry of international standing. The Bermuda company appears as the registered owner or assignee on those foreign filings.
It may. Controlled-foreign-company rules such as US GILTI and Subpart F, UK CFC provisions, and German Hinzurechnungsbesteuerung can attribute the entity's IP income to the owner and tax it at the shareholder level, which can cancel out the zero local rate entirely. This is one of the most important points to model before incorporating.
Local accounts are generally available at HSBC Bermuda, Clarien Bank, Butterfield Bank, and Bermuda Commercial Bank, but any company receiving large royalty inflows needs complete KYC and beneficial-ownership documentation because USD clearing passes through US correspondent banks. Accounts at major international banks are possible under enhanced due diligence, while mainstream payment processors rarely accept a pure holding company.
Legal Disclaimer
The information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. While we strive to ensure the accuracy and timeliness of the content, laws and regulations are subject to change, and the application of laws can vary widely based on specific facts and circumstances.
Readers should not act upon this information without seeking professional counsel tailored to their individual situation. Expanship and its authors disclaim any liability for actions taken or not taken based on the content of this article.
For specific advice regarding your business setup, compliance requirements, or any legal matters, please consult with qualified legal and tax professionals in the relevant jurisdiction.
