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Sept 6, 2003 1
Current Issues in International Cross-Border I.P. Strategies
Dennis Fernandez, Esq.Fernandez & Associates LLPwww.iploft.com
Sept 6, 2003 2
Cross-Border Strategies?
Sept 6, 2003 3
Global Business Context
Increasing Technology Competition:• Semiconductor Design, Fabrication• Pharmaco-Genomics, Medical Devices• Wireless Telecom, Broadband Content
Strategic Intellectual Capital:• Defensive & Offensive Portfolio-Building• International I.P. Licensing and Litigation
Sept 6, 2003 4
Intellectual Property Rights
Sept 6, 2003 5
Intellectual Property Rights
Patents
Trade Secrets
Copyrights
Maskworks
Trademarks
Sept 6, 2003 6
Patents
Protects “unobvious” apparatus, method
Substantial application effort
Arises under federal, international law
Sept 6, 2003 7
Trade Secrets
Protects confidential business information
No registration process
Arises under state, federal, international law
Sept 6, 2003 8
Copyrights
Protects original literal works
Optional registration, marking
Arises under federal, international law
Sept 6, 2003 9
Maskworks
Protects semiconductor lay-out designs
Simple registration, marking
Arises under federal, international law
Sept 6, 2003 10
Trademarks
Protects distinctive marks, symbols
Optional registration, marking
Arises under state, federal, international law
Sept 6, 2003 11
Protecting Software / Data
Trade secret as default position
Copyright for original media content
Patent for algorithms, business method
Maskwork for chip implementation
Sept 6, 2003 12
US Patent Practice
First-to-invent rule
1-year bar-date rule
1-year foreign-filing rule
Export controls
Sept 6, 2003 13
Other Intangible Assets
Franchises
Covenants not to compete
Governmental permits
Informational base
Business goodwill
Sept 6, 2003 14
US Tax Practice
Business Development Expense §174
Capital Gains for R&D/Patent Sale §1235
Trademark development generally non-expensable, unless advertising §162
may be amortizable §197
Copyright generally non-expensable, non-capital asset §1221
Sept 6, 2003 15
Offshore Motivation
Globally-competitive development, manufacture, sales, or partnerships
Overall tax savings or deferral
Improve company balance sheet
Cross-border shifting of income, risk, control, or privacy
Sept 6, 2003 16
Strategic Options
Offshore technology/IPR development, co-inventorship, or improvement
Transfer domestic technology/IPR to offshore structure in favorable tax jurisdiction
Sept 6, 2003 17
Offshore Development
Impractical when technology rights already mature, commercialized
Export control restriction on sensitive technology
Favorable early fair market valuation
Sept 6, 2003 18
Offshore Transfer
Complex structural choices for offshore entity/ies
US tax regime substantial reach on cross-border transactions
Territorial practical considerations
Sept 6, 2003 19
Key Planning Objectives
Align IP ownership with development spend
Locate IP with market, manufacture
Consider incentives, depreciation, exit
Sept 6, 2003 20
Applicable Tax Regime
US person subject to tax on all income, whether source is domestic / foreign §1
Tax law of jurisdiction applicable where IP is used, income source §§ 861-862
• Development• Manufacture• Sales
Sept 6, 2003 21
Transfer Pricing
IRS may reallocate income/deductions between taxpayers, when transactions conducted by controlled group §482
May require transfer pricing study/policy to validate arms-length economic relationships
Sept 6, 2003 22
Foreign Corporations
Controlled Foreign Corporation (CFC) §§ 951-964
Foreign Personal Holding Company (FPHC) §§ 541-547, 551-558
Passive Foreign Investment Company (PFIC) §§ 1291-1297
Sept 6, 2003 23
CFC Rules
Total US shareholders owning at least 10% of company exceed 50%
10% shareholders taxed as if dividends paid, even if no cash distribution
Taxed on share of foreign company Subpart-F income, even if no cash distribution
Sept 6, 2003 24
IP Contributions
US person transferring IP to foreign corporation recognizes gain based on fair market value of receivable §367
Exceptions:– Active trade / business by foreign corporation– Domestic stock transfer, gain recognition
agreement– Foreign stock transfer, corporate reorganization
Sept 6, 2003 25
Valuation Methods
Excess operating or premium profits
Premium pricing
Cost or royalty savings
Market comparison
Replacement cost
Sept 6, 2003 26
Inbound / Outbound Issues
Withholding tax on royalties?
Applicable tax treaty, rate?
Trade / business or permanent establishment in foreign jurisdiction?
Sept 6, 2003 27
Sale vs. License
Transfer “all substantial rights” ?
Sale gives rise to capital gains / loss, usually no withholding tax
License is ordinary income, royalties subject to withholding tax
Sept 6, 2003 28
Licensing Terms
IP grant Improvements Currency Inflation rates Withholding tax Exchange controls Royalties
Arbitration Language Political risk Travel expense Product liability Indemnification Applicable law
Sept 6, 2003 29
Country Selection
Entity structure Funding type Formation time, documentation Shareholding meetings Taxation Foreign authority information exchange
Sept 6, 2003 30
Cayman Islands
Entity structure: Company unit trust ltd, partnership
Funding type: Open/closed-end class, hybrid scheme
Formation time/docs: 1-week memorandum, articles of association or deed of trust, minimum $33k equity or fund listed on approved stock exchange
Shareholding mtgs: None
Taxation: No individual income, corporate, capital gains or transfer tax payable by funds or shareholders; no tax treaties
Authority Info: Mutual legal assistance treaty with US to cooperate regarding narcotics, fraud
Sept 6, 2003 31
Bermuda
Entity structure: Company unit trust ltd, partnership
Funding type: Open/closed-end class
Formation time/docs: 3-5 weeks prospectus, memorandum of association or deed of trust
Shareholding mtgs: Annual meeting need not be in Bermuda
Taxation: No individual income, corporate, profit, withholding capital gains, estate, duty, or inheritance tax payable by funds or shareholders; no tax treaties
Authority Info: Mutual assistance act with US to cooperate regarding fraud
Sept 6, 2003 32
Ireland
Entity structure: Company unit trust ltd, partnership
Funding type: Closed-end, VC professional investor funds
Formation time/docs: 2-3 months, memorandum, articles of association or deed of trust
Shareholding mtgs: Annual meeting in Ireland
Taxation: Special tax zone exempts funds and shareholders from income and capital gains tax; tax treaty
Authority Info: Official secrets act maintain confidentiality except in limited circumstances
Sept 6, 2003 33
Luxembourg
Entity structure: Fixed capital company, variable capital unit trust, partnership
Funding type: Closed-end, VC funds
Formation time/docs: 3-5 months, prospectus, articles of incorporation or deed of trust
Shareholding mtgs: Annual meeting in Luxembourg
Taxation: No income, capital gains, withholding, or dividends tax on funds of non-resident shareholder; tax treaty
Authority Info: Banking secrecy statute
Sept 6, 2003 34
OECD List Andorra Anguilla Antigua & Barbuda Aruba Bahamas Bahrain Barbados Belize British Virgin Islands Cook Islands Dominica Gibraltar Grenada Guernsey Isle of Man Jersey Liberia Lichtenstein
Maldives Marshall Islands Monaco Montserrat Nauru Netherlands Antilles Niue Panama Samoa Seychelles St. Lucia St. Kitts & Nevis St Vincent & Grenadines Tonga Turks & Caicos Islands US Virgin Islands Vanuatu
Sept 6, 2003 35
Cross-Border Model
USCompany
HoldingCompany
ForeignSubsidiary
Sept 6, 2003 36
Offshore Company Set-up
US Company sets-up Holding Company in low-tax/treaty(no-withholding) jurisdiction, limit US control/interest
File IP appropriately for offshore protection, enforceability
USCompany
HoldingCompany
ForeignSubsidiary
Sept 6, 2003 37
Offshore IP Transfer
Holding Company pays US Company for fair-market-value stake in IP intangibles
Cost-sharing agreement for IP co-development, financing by US and Holding companies, jointly-owned per relative contributions
USCompany
HoldingCompany
ForeignSubsidiary
Sept 6, 2003 38
Offshore Subsidiary Licensing
Holding Company licenses IP to Foreign Subsidiar(ies) to collect royalties from customers in other jurisdiction(s)
US Company receives royalty portion in US and accumulate portion offshore, actively licenses IP from Foreign Subsidiary
USCompany
HoldingCompany
ForeignSubsidiary
Sept 6, 2003 39
Offshore Tax Benefits
US Company receives tangible asset as payments on balance sheet for sale of intangible IP
US Company deducts license to use intangible asset, may defer income repatriation to tax-efficient time
USCompany
HoldingCompany
ForeignSubsidiary