IP HOLDING COMPANY SUCHITRA BAI PATENT DEPARTMENT ALTACIT GLOBAL CHENNAI
MEANING OF INTELLECTUAL PROPERTY
IP refers to all materials, concepts, Know-How, Formulae, Invention, Improvements, Industrial Design, Processes, Patterns, Machines, Manufactures, Composition of Matter, Complication of Information, Patents, Copyrights, Trade Secret, Technology, Technical Information, Software, Prototypes and Specification including Right to Apply for protections under statutory proceedings available for these purposes and capable of protection under Law.
MEANING OF IP HOLDING COMPANY
An intellectual property holding company is established to hold all or most of the intellectual property of a company group.
Existing intellectual property of the company group is assigned to the company by other group members with ongoing arrangements in place to ensure that future intellectual property is also held by the IP holding company.
INTELLECTUAL PROPERTY HOLDING COMPANIES
Over the last decade or so, businesses generating significant revenue from IP, have organized Intellectual Property Holding Companies (hereinafter referred to as ‘IPHC’) to reduce state taxes while separating IP assets from other corporate liabilities.
In case of an IPHC, the Parent Company creates a corporate subsidiary in the parent state itself or in a foreign country where there is either no tax that is levied or where the rate of tax is relatively low.
IP assets are then created by or transferred to the subsidiary. The subsidiary would then enter into license agreements under which the parent corporation and non-related corporations agree to pay the IPHC royalties in exchange for an exclusive or non-exclusive right to use the IP assets. Since most IPHCs are organized in low tax jurisdictions, royalties received by the IPHC are generally tax-free. The parent company that paid the royalty could also deduct the payment as a deductible expense, thereby reducing the income of the parent company.
WHY INTELLECTUAL PROPERTY RIGHTS IS CONSIDERED AS AN ASSET
Intellectual Property Right’s are considered to be intangible assets because it forms substantial part of assets of a Company and thus increases the valuation.
Intellectual Property Right’s helps in expanding the market share and venturing into new markets and businesses.
MODELS OF THE IPHC
An IP Holding Company is established to hold the portfolio of a single inventor. Eg., Lemelson Medical, Education and Research Foundation.
An IP Holding is formed to provide tax savings and centralized management of Intellectual Property associated with Business.
OTHER TYPES OF IPHC
WHY SET UP AN IPHC
Companies with significant IP portfolio set up IP holding companies for a variety of reasons. Essentially the creation of dedicated IP owing company may enable businesses to take advantage of favorable tax regimes. However there are other compelling business reasons for consolidating IP assets. Typical reasons for establishing intellectual property (IP) holding companies include (i) tax planning, (ii) protection in the event of insolvency, and (iii) administrative synergies, such as consolidation of legal costs.
An important practical benefits is often the centralizing of control of IP assets enabling the business to effectively manage its IP. It provides the companies with the knowledge to evaluate the strength and weaknesses of its IP portfolio so that it can make well-informed decisions about whether for e.g., it should be increasing holdings in certain areas or expanding its market through licensing. In addition centralized management allows the company to effectively monitor, protect and enforce its IP rights.
BENEFITS OF IP HOLDING COMPANY
In addition to the Tax benefits, the creation of IP Holding Company can increase corporate efficiency in the operating of the business, By consolidating ownership, the separate entity can provide centralized management of IP assets worldwide with a more global view on the exploitation of the assets.
Moreover by placing the intangible assets into an IP Holding Company and appointing Officers and Directors different from the operating Co’s Officers and Directors, the Parent Co. can insulate itself from involvement in the prosecution of lawsuits involving the IP.
PROCESS FOR ESTABLISHING AN IPHC
Establish the holding company early in the development of the intellectual property — before the IP has significant value (presumably prior to commercialization). The IP will be taxed on the transfer to the offshore.
Once IP rights are transferred, royalties will have to be paid to the holding company in exchange for use of the IP. When these royalties are deducted from the company’s taxable income, the royalty rates become subject to scrutiny by the taxing authorities.
Depending on which foreign jurisdiction you choose, your subsidiary may be required to withhold a percentage of the royalty payments for tax purposes. This is why you want to choose a tax-haven country with a favorable tax treaty — or no treaty at all.
A co develops and register a patent not under its own name but under the name of a 100% owned offshore company (eg., a BVI Company). The offshore company then enters in a license agreement with a Maltese company for the offshore co’s European Patent rights.
The Maltese co now has the exclusive right to exploit the offshore co’s IP in Europe. The Maltese co then enters into contracts with the European customers through which it exploits the rights which it now owns.
In Re Poly-America, L.P. v. GSE Lining Technology, Inc.,
In the Federal Circuit held that the plaintiff corporation was not entitled to claim damages for the profits lost by its sister corporation. Poly-America, L.P. v. GSE Lining Technology, Inc., 383 F.3d 1303, 1310-12 (Fed. Cir. 2004). In that case, the plaintiff owned the patent, but licensed it on a non-exclusive basis to its sister corporation, which sold goods that competed with the infringing goods. The plaintiff argued that it operated with its sister as a single economic unit for purposes of producing, marketing and selling the patented products and shared a unity of interest that justified treating them as a single economic unit for a lost-profits analysis. See id. at 1310. The Federal Circuit rejected this argument, pointedly noting that the companies would have to live with the consequences of their separate corporate status.
[Plaintiff] and [sister] have a common parent corporation and are not simply divisions of a single corporation, but are separate entities. Their parent has arranged their corporate identities and functions to suit its own goals and purposes, but it must take the benefits with the burdens. While we do not speculate concerning the benefits that the two companies reap from dividing their operations and separating the owner of the patent from the seller of the patented product, [plaintiff] and [sister] may not enjoy the advantages of their separate corporate structure and, at the same time, avoid the consequential limitations of that structure - in this case, the inability of the patent holder to claim the lost profits of its non-exclusive licensee.
Conclusion: The lesson of Poly-America for corporate families with a separate IP holding company is clear: beware how you allocate the functions of IP ownership, manufacturing, and selling among affiliated companies, lest you structure yourself out of entitlement to lost profits damages.
Nonexclusive licensees have no standing to seek relief for harm that they suffer from infringement and “probably cannot join in suing to enforce the patent for infringing activity”
Carver v. Velodyne Acoustics Inc., 202 F. Supp. 2d 1147, 1149
In order to recover money damages, the operating company would need to be treated as one with the patent-holding company.
Of the various benefits arising from the establishment of an IPHC, the greatest is the reduction in the enterprise’s total obligation for taxes. Authorities exempt some or all of a corporation’s income from taxation. The tax savings in this regard may be considerable. In addition to the tax benefits, the creation of an IPHC can increase corporate efficiency in the operation of the business. By consolidating ownership of IP, the separate entity can provide centralized management of IP assets on a global scale.
India has not witnessed the mushrooming of such companies yet but in the developed countries these companies have been established and commercial exploitation of IPRs and tax mitigation is their primary objective.