They Paid 0.005% Tax. It Was Legal. Until It Wasn't

What Royalties Are and Why Companies Pay Them to Themselves

A trademark is not just a picture on the package. It's an asset. You can license it out and receive money in return. Regular payments for the right to use someone's brand are called royalties.

The scheme looks like this. A company sets up a subsidiary in a low-tax country and assigns the trademark rights to it. From that point on, the rest of the group's divisions pay royalties to that subsidiary — as if renting the brand. For the payers, this is an expense that reduces taxable profit. For the receiving entity, it's income taxed at a minimal rate or none at all.

This structure is called an IP holding company (IPHC). It's a standard corporate planning tool. But in some cases it was used so aggressively that governments started treating it as illegal state aid.

Nike: $6.6 Billion Hidden Behind a Tick

Nike's European headquarters sit in Hilversum, Netherlands. An office like any other — a campus, thousands of employees. But from 2005 to 2014, every dollar of profit Nike earned in Europe flowed out through a fairly elegant construction.

The Dutch subsidiary paid royalties for the right to use the famous Swoosh — not to some European entity, but to a company in Bermuda, where there is no corporate tax at all. The royalties were treated as an expense, reducing taxable profit in the Netherlands. The money settled in Bermuda. According to the ICIJ investigation (the "Paradise Papers" project, 2017), Nike had accumulated $6.6 billion in offshore profit by June 2014. The average effective tax rate on it was about 3%.

In 2014 the original agreement with the Dutch tax authorities expired. Nike restructured: the trademark rights moved to a new entity, Nike Innovate CV — a Dutch limited partnership that, according to ICIJ, was not a tax resident in any country in the world. Royalties were $982 million in 2015 and $1.13 billion in 2016. To every journalist's question, Nike replied: "We are in full compliance with tax law."

Apple: 0.005% — and Eight Years in Court

The Apple story is a bit more complex, but the logic is the same. Apple had two Irish subsidiaries — Apple Sales International (ASI) and Apple Operations Europe (AOE) — that held rights to its intellectual property. Apple subsidiaries around the world paid these Irish entities for licenses, channeling profit into Ireland with its 12.5% corporate tax rate.

But the twist was finer. ASI and AOE were formally registered in Ireland yet managed from the state of Nevada in the US. Under Irish law at the time, this meant they were not Irish tax residents. The US, in turn, considered them Irish companies and didn't tax them either. The result: in 2014 ASI's effective tax rate was 0.005% — roughly one cent for every twenty dollars of profit. That figure was cited by the European Commission in its 2016 decision.

What followed was a long legal saga. The Commission classified the scheme as illegal state aid and ordered Apple to repay €13 billion. Apple and Ireland appealed. In 2020 the lower court sided with Apple. But in September 2024, the European Court of Justice closed the matter: Apple pays. For the quarter, Apple recognized a one-time tax expense of roughly $10 billion.

Starbucks: Royalties for a Roasting Recipe — to the UK

In 2015, the European Commission turned to Starbucks. The European unit was paying an inflated price for green coffee to a Swiss trading entity of the company and at the same time channeling royalties to a UK entity, Alki, for "coffee-roasting know-how." According to the Commission's calculation, this artificially understated profit in the Netherlands and gave the company an unfair tax advantage.

Starbucks disagreed and went to court. In 2019 the EU General Court ruled that the Commission had failed to fully prove parts of its argument and partially sided with the company. The scheme stayed in the grey zone.

A trademark is an asset that can be put to work. Multinationals did this for decades at gigantic scale. Regulators are closing the loopholes one by one, and the rules are getting tighter. But the underlying principle — register the mark and properly structure the rights to it — works just as well for small businesses. The stakes are just different: not tax optimization, but simply protection of what you've built. — Anton Chekhov, founder and CEO of Edeal

Why It Worked — and Why It's Being Closed

The mechanism is the same in all three cases: intellectual property is parked in a low-tax jurisdiction, and operating companies around the world pay for using it. The payments reduce profit where taxes are high. The income accumulates where the tax is close to zero. Money falls through the gaps between national tax codes.

Since 2015 the OECD has been implementing BEPS (Base Erosion and Profit Shifting), which has been closing these gaps systematically. In 2024 a global minimum corporate tax of 15% (Pillar Two) entered into force for large groups with turnover above €750 million. These specific rules don't apply to small and medium businesses — but the broader context is tightening: anything that used to be called "tax optimization through IP" is now being flagged by regulators and frequently recharacterized retroactively.

What This Means for Your Business

IP-holding structures across dozens of jurisdictions are for big businesses with expensive lawyers and multi-year negotiations with tax authorities. Trying to replicate these constructions at small or mid-sized scale is a path to problems. Regulators have grown stricter, and a small company has fewer ways to demonstrate a "business purpose" beyond tax savings.

But the underlying question stays relevant at any scale: where does your trademark legally live, and are the rights to it correctly structured?

This is no longer about "doing it like Apple." It's about protection. If you operate in the US, registering your trademark there isn't optional — it's baseline brand protection. Without it, your brand is not protected by US law. Someone else may file an application for the same name before you do — and you lose the right to use it in this market. In our experience, this happens far more often than founders think before it actually happens to them.

Related issues — the corporate structure holding the mark; the agreements between related companies if the business operates in several countries; alignment of cross-border payments with IRS rules and local regulators. Each of these decisions, taken in isolation, can look fine and simultaneously create risk in the overall picture.

How to Do It Right

Doing it right means a combination of three components: registering the trademark in the right jurisdiction, the corporate structure holding the mark, and tax support that doesn't build schemes but covers IRS requirements and local regulators.

This combination requires two specialists: a CPA (Certified Public Accountant — a licensed US accountant with the right to represent the client before the IRS) and a business attorney (a licensed US lawyer for corporate law and intellectual property). One without the other doesn't close the picture: the lawyer registers the trademark but doesn't know the tax implications; the CPA handles taxes but doesn't structure the IP rights.

At Edeal these two roles work together. The CPA practice handles the tax side: jurisdiction selection based on the actual operations, IRS reporting, correct payments between related companies. The business attorney handles the legal side: trademark registration with USPTO (see our separate article "US Trademark Registration"), Madrid Protocol for international protection, license agreements, opposition or defense in third-party disputes.

Without the link between these two specialists, any decision is going to be half-built.

What to Do Right Now

If you're selling under a name in the US and haven't filed with USPTO — that's the first thing worth checking. The USPTO search is free. If your name isn't there, every week of delay increases the risk that someone else files first.

If your business already operates across multiple countries — look at who formally owns the mark and how licenses between group companies are structured. This is the area where "works fine" is not the same as "correctly structured."

If you've had a failed registration or a refusal — that isn't the end either. In most cases there are options: refine the class description, prove priority of use, file a new application under a narrower scope.