Dennis Fernandez

Current Issues in International Cross-Border I.P. Strategies

Dennis Fernandez, Esq. Fernandez & Associates LLP www.iploft.com Sept 6, 2003

1

Cross-Border Strategies?

Sept 6, 2003

2

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

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Intellectual Property Rights

Sept 6, 2003

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Intellectual Property Rights

Sept 6, 2003

„

Patents

„

Trade Secrets

„

Copyrights

„

Maskworks

„

Trademarks 5

Patents „ Protects

“unobvious” apparatus, method

„ Substantial „ Arises

Sept 6, 2003

application effort

under federal, international law

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Trade Secrets „ Protects

confidential business information

„ No

registration process

„ Arises

under state, federal, international

law Sept 6, 2003

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Copyrights „ Protects

original literal works

„ Optional

registration, marking

„ Arises

Sept 6, 2003

under federal, international law

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Maskworks „ Protects „ Simple „ Arises

Sept 6, 2003

semiconductor lay-out designs

registration, marking

under federal, international law

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Trademarks „ Protects

distinctive marks, symbols

„ Optional

registration, marking

„ Arises

under state, federal, international

law

Sept 6, 2003

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Protecting Software / Data „ Trade

secret as default position

„ Copyright „ Patent

for algorithms, business method

„ Maskwork

Sept 6, 2003

for original media content

for chip implementation 11

US Patent Practice „ First-to-invent

Sept 6, 2003

rule

„ 1-year

bar-date rule

„ 1-year

foreign-filing rule

„ Export

controls 12

Other Intangible Assets

Sept 6, 2003

„

Franchises

„

Covenants not to compete

„

Governmental permits

„

Informational base

„

Business goodwill 13

US Tax Practice „

Business Development Expense

„

Capital Gains for R&D/Patent Sale

„

Trademark development generally non-expensable, unless advertising may be amortizable §197

„

§174 §1235

§162

Copyright generally non-expensable, non-capital asset §1221

Sept 6, 2003

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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

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Strategic Options „ Offshore

technology/IPR development, co-inventorship, or improvement

„ Transfer

domestic technology/IPR to offshore structure in favorable tax jurisdiction

Sept 6, 2003

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Offshore Development „ Impractical

when technology rights already mature, commercialized

„ Export

control restriction on sensitive technology

„ Favorable Sept 6, 2003

early fair market valuation 17

Offshore Transfer „

Complex structural choices for offshore entity/ies

„

US tax regime substantial reach on crossborder transactions

„

Territorial practical considerations

Sept 6, 2003

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Key Planning Objectives „ Align

IP ownership with development spend

„ Locate

IP with market, manufacture

„ Consider

Sept 6, 2003

incentives, depreciation, exit

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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

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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

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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

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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 SubpartF income, even if no cash distribution

Sept 6, 2003

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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

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Valuation Methods „

Excess operating or premium profits

„

Premium pricing

„

Cost or royalty savings

„

Market comparison

„

Replacement cost

Sept 6, 2003

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Inbound / Outbound Issues „ Withholding „ Applicable

tax on royalties?

tax treaty, rate?

„ Trade

/ business or permanent establishment in foreign jurisdiction?

Sept 6, 2003

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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

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Licensing Terms „ „ „ „ „ „ „

IP grant Improvements Currency Inflation rates Withholding tax Exchange controls Royalties

Sept 6, 2003

„ „ „ „ „ „ „

Arbitration Language Political risk Travel expense Product liability Indemnification Applicable law 28

Country Selection „ Entity

structure „ Funding type „ Formation time, documentation „ Shareholding meetings „ Taxation „ Foreign authority information exchange Sept 6, 2003

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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 Septcooperate 6, 2003 regarding narcotics, fraud

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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 Septregarding 6, 2003 fraud

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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

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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

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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

Sept 6, 2003

„ „ „ „ „ „ „ „ „ „ „ „ „ „ „ „ „

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 34

Cross-Border Model US Company

Holding Company

Foreign Subsidiary

Sept 6, 2003

35

Offshore Company Set-up US Company

„

US Company sets-up Holding Company in low-tax/treaty(nowithholding) jurisdiction, limit US control/interest

„

File IP appropriately for offshore protection, enforceability

Holding Company

Foreign Subsidiary

Sept 6, 2003

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Offshore IP Transfer US Company

Holding Company

Foreign Subsidiary

Sept 6, 2003

„

Holding Company pays US Company for fairmarket-value stake in IP intangibles

„

Cost-sharing agreement for IP co-development, financing by US and Holding companies, jointly-owned per relative contributions 37

Offshore Subsidiary Licensing US Company

„

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 38

Holding Company

Foreign Subsidiary

Sept 6, 2003

Offshore Tax Benefits US Company

Holding Company

Foreign Subsidiary

Sept 6, 2003

„

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 39

[email protected]

Sept 6, 2003

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