A strategic and tactical presentation on software licensing in a global context with examples of strategic intelligence as a business and legal planning essential, critical points on harmonizing terms to operate efficiently and effectively to manage legal risk across multiple jurisdictions, and to maximize net income to the home jurisdiction with insightful planning under some 300+ bilateral tax treaties. For more, contact Emile Loza at ELoza@TechnologyLawGroup.com. Send LinkedIn invitations to connect emile.loza@gmail.com.
1. American Conference Institute
Licensing Software in a Global Market
Emile Loza, JD, MBA, CLP
Founding Attorney
Technology Law Group
Boise, Idaho
eloza@TechnologyLawGroup.com
www.TechnologyLawGroup.com
Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 1
2. Key Points
• Strategic intelligence is key to:
– Tactical advantage in negotiations
– Control of IP rights flow
– Drafting precision & self-enforcing agreements
• Globally harmonized terms, as possible, are key to:
• Operational & drafting efficiency
• Legal risk management
• Tax treaty-optimized terms are key to:
– Net income to licensor
– Minimized double taxation
– Tax compliance
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 2
3. Strategic Intelligence
Scenario:
• Licensor – U.S.-based computer company with
assertion-driven WW technology licensing program
for hardware, software & materials.
• Licensees – manufacturing & design suppliers and
distributors HQ’d in Far East (Taiwan, Korea &
Japan).
Strategic Intelligence Needs:
• Company Dossier
• Affiliates List
• Command & Control Matrix Report
• Litigation History Report
• Spot Intelligence Reports
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4. Strategic Intelligence – Dossier Components
• Executive summary
• Existing connections with licensor
• Company snapshot
• Key executives (Command & Control Matrix)
• Shareholders
• Products
• Major customers (channels)
• Major suppliers
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5. Command & Control List
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6. Command & Control Matrix
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7. Geolocation – Trace Routing of IP Addresses
*Resources:
www.samspade.org
www.visualroute.com.
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8. Strategic Intelligence – Dossier Components (cont’d)
• Performance Analysis
– Selected financial data (projected &
historical).
– Shipments; units sold (projected &
historical).
– Market share, awards & industry ratings.
• Strategy Analysis
– Marketing & R&D strategies.
– Licensing & other IP activities.
– Mergers & JVs, acquisitions
& divestitures.
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9. Strategic Intelligence – Dossier Components (cont’d)
• Subsidiary Analysis
– Alpha by name (include name variants,
transliterations, foreign character sets).
– Ownership hierarchy.
– Potential infringement targets.
– Geographical markets & jurisdictional
contacts.
• Extensive, dated citations to
source materials
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10. Strategic Intelligence – Substantiating Sources
• Source qualifiers
• Confirming sources
• Dates & URLs
• Archival
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12. Subsidiary Analysis & IP Rights Flow
Know Thy Partner!
Specialty
mfg
entity
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13. Subsidiary Analysis & IP Rights Flow
Newly Far East-
Parent acquired based
CONTROL wholesaler
entity
ENTITY
R&D
BVI
holding entities
Chinese company
mfg entity Specialty
WW
mfg
distribution
chain-Germany entity
HQ’d
Real World Example
Control entity has ~150
subsidiaries & >1K
Retail entities
locations.
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14. Subsidiary Analysis & IP Rights Flow
Newly Far East-
Parent acquired based
CONTROL entity
wholesaler
ENTITY LICENSOR CONTRACTS
HERE. R&D
BVI
entities
holding
company
Chinese Specialty
WW
mfg entity mfg
distribution
chain-Germany entity
HQ’d
Control entity has Retail entities
~150 subsidiaries.
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 14
15. Subsidiary Analysis & IP Rights Flow
Newly Far East-
Parent acquired based
CONTROL wholesaler
entity
ENTITY
R&D
BVI
holding entities
company
Chinese
mfg entity Specialty
WW
mfg
distribution
chain-Germany entity
HQ’d
RIGHTS FLOW
HERE
Retail entities
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 15
16. Subsidiary Analysis & IP Rights Flow
Newly Far East-
Parent acquired based
CONTROL wholesaler
entity
ENTITY
R&D
BVI
holding entities
company
Chinese mfg
entity
WW
Specialty
distribution
chain-Germany mfg
HQ’d entity
PRODUCTS
SHOW UP HERE Retail entities
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17. Affiliates List
• Determine Affiliates List from Dossier.
– Identify all known relevant companies
related to potential licensee.
– Uses:
• Counter-assertion risk analysis.
• “Licensed Subsidiaries” addendum.
• Enforcement strategy.
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18. Intelligence-Powered Drafting
• Party Identification
– Complete name (Commas & abbreviations count!)
– D&B, EIN, registration & other numbers
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19. Intelligence-Powered Drafting
• Considerations:
– Industry consolidation.
– Control of rights flow.
– Competitive defense
• Better Drafting Practices:
– Definitions for Subsidiary, Licensed Subsidiary,
Former Subsidiary, After-Acquired Subsidiary.
– Licensed Subsidiary Addendum.
– Duty extensions as to reporting, payment
& audit.
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20. Intelligence-Powered Drafting
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21. Licensed Subsidiary Addendum
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22. Intelligence-Powered Royalty Reporting
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23. Globally-Harmonized Terms (A Brief Note)
Scenario:
• Licensor – US-HQ’d digital advertising
company with Canada-based subsidiary &
servers for global online distribution of
software and access to software.
• Licensees – large grocery chains, big box
stores, medical offices, malls; distributors
with networks of end-users.
Legal & Operational Needs:
• Minimize legal expense.
• Implementation efficiency.
• Minimize legal risk.
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 23
24. Globally-Harmonized Terms (A Brief Note)
Arbitration to Unify & Reduce Risk
• Arbitration agreement addendum
• Choice of law
• Choice of forum (AAA, ICC, etc.)
• Importation of Federal Rules of Civil
Procedures & Evidence
• Arbitral v. Non-arbitral Issues
– Contract formation
– Patent validity
• Cost, secrecy & binding and
precedential effect
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25. Royalty Taxation
Painting by Alex Gross. www.alexgross.com. Used with permission.
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26. Typical, But Inadequate, Drafting
“All taxes imposed due to the performance
of the parties under this Agreement shall
be paid by the party required to do so by
the applicable law.”
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 26
27. Business & Legal Concerns
• Tax & financial planning
– In-country taxation reduces net deal value.
– Predicted v. actual cash flow?
• What is the “applicable law”?
– Conflicts between choice of law provision &
requirements imposed by in-country law.
– Tax treaties – no opt-out.
• Licensor liability in foreign jurisdiction.
• Contract management issues
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 27
28. Tax Treaty-Optimized Terms
Scenario 1: Digital advertising company
licensing distributors & end-users in the EU.
Needs – Maximize net income into Canada or
US; minimize double taxation; avoid
“permanent establishment” elsewhere.
Scenario 2: Global computer company with
footprints & licensees in Korea & Taiwan.
Needs – Maximize net income; minimize
double taxation; ensure tax
compliance.
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 28
29. Scenario 1: Sample Royalty Taxation
Jurisdiction US Bilateral Canada Bilateral
Tax Treaty Tax Treaty
Austria Yes Yes
Brazil No (30%) Yes (15%)
China Yes Yes
Czech Republic Yes Yes
France Yes Yes
India Yes Yes
Mexico Yes Yes
Switzerland Yes Yes
Taiwan No No
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30. Scenario 2: Royalty Taxation in Korea
• International law governs.
– United States-Republic of Korea Income Tax
Convention, Article 14 (Signed at Seoul June 4,
1976) (Entry into force Oct. 23, 1979).∗
∗Resources:
• PricewaterhouseCoopers, Doing Business and Investing –
Global Intelligence from PricewaterhouseCoopers – Korea 429-
36 (2002).
• U.S. Internal Revenue Service:
– Treaty text, http://www.irs.gov/pub/irs-trty/korea.pdf.
– Technical Explanation, http://www.irs.gov/pub/irs-
utl/koreatrweb.pdf.
• Korea’s National Tax Service: Generally
http://www.nta.go.kr/eng/default.html.
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 30
31. Varying Royalty Rates Under the Treaty
• Generally, where a resident of one of the
two Contracting States derives royalties
from sources within the other Contracting
State, that other Contracting State may
impose a maximum tax burden of 15% of
gross royalties. See Art. 14(1).
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32. Exemption from Royalty Taxation
• Exempt when licensor is resident of one
Contracting State, but has “permanent
establishment” in the other Contracting State
and when IP from which royalties arise is
“effectively connected” with that permanent
establishment.
– Arts. 14(3) & 6(b). If exempt, royalties are
treated as business profits, and taxation
basis is reduced by expenses reasonably
connected with those profits. Arts. 14(3) &
8(b).
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 32
33. Article 6(b) Connection Factors
• Factors to determine whether IP from which
royalties arise is “effectively connected” with
“permanent establishment.”
– Whether IP used in or held for use in
carrying permanent establishment’s
industrial or commercial activities.
– Whether activities carried on through
permanent establishment are material
factor in income realization from IP.
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34. Proof of Tax Payment in Korea
Certificate for Non-resident’s Tax Payment
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35. Proof of Tax Payment in Korea
• Certificate should be timely completed and
filed with the royalty withholding by the
licensee with Korean tax authorities.
• Upon filing, tax authorities acknowledge
payment with signatures and stamps or
chops.
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 35
36. Better Drafting Practice
• Licensee Obligations:
– Timely file Certificate & pay withholding,
preferably by dates certain.
– Timely provide licensor copy of filed
Certificate.
– Warrant and represent Certificate &
withholding as complete, timely & correct.
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 36
37. Royalty Taxation in Republic of China (Taiwan)
• Domestic law governs as to royalties
to US licensors.
– Income Tax Act, 2006/9/11.∗
• International law as to some other
countries having bilateral tax
treaties with Taiwan.∗
∗Resources:
• English translations of domestic laws: ROC Ministry of Finance, Related
Laws and Regulations, <http://www.mof.gov.tw/engWeb/mp.asp?mp=2>;
ROC Ministry of Justice, Laws and Regulations Database of the Republic of
China, <http://law.moj.gov.tw/eng/>.
• Treaties: Ministry of Finance,
http://www.dot.gov.tw/en/display/list.asp.
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 37
38. Sample Tax Treaties & Withholding Rates of Taiwan
Jurisdiction Royalty
Withholding Rate
Non-treaty Countries 20%
Australia 12.5%
Gambia 10%
Indonesia 10%
Netherlands 10%
Singapore 15%
South Africa 10%
United Kingdom 10%
Vietnam 15%
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39. Royalty Tax Withholding Documentation
• Licensee to file a Republic of China
Withholding & Non-withholding Tax
Statement upon royalty payment to foreign
licensor.
– Payor & payee.
– Payment particulars, including total
amount paid & period for payment.
– Withholding rate applied
– Net tax withheld
– Net payment wired or otherwise
transmitted to licensor.
– Reported in NT$.
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 39
40. Alternate Approaches Under Taiwan’s Tax Law
1. Instead of withholding tax, licensee may
apply for income tax refund for royalties
paid to a foreign licensor under Article
4.21 of Taiwan’s Income Tax Act
– To facilitate application, licensor must appoint
licensee as its representative for matters related
to pursuing that application with the Taiwanese
authorities.
– Better practice – Revocable appointment.
2. Others?
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41. Better Drafting Practice
• Agree as to applicable tax law.∗
• Caution as to treaty shopping.
• Licensee’s indemnification of licensor for any
foreign tax liability arising from licensee’s failure
to timely & accurately file tax documents & pay
withholdings to relevant tax authorities.
∗Resources:
• Organisation for Economic Co-operation and Development
• ABA’s International Law Section, www.abanet.org/intlaw.
• ASIL’s Guide to Electronic Resources for International Law,
www.asil.org/resource/pil1.htm.
• International Legal Materials
• Treaties in Force
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Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 41
42. Key Take-Aways
• Strategic intelligence is key to:
– Tactical advantage in negotiations
– Control of IP rights flow
– Drafting precision & self-enforcing agreements
• Globally harmonized terms, as possible, are key to:
• Operational & drafting efficiency
• Legal risk management
• Tax treaty-optimized terms are key to:
– Maximized net income to licensor
– Minimized double taxation
– In-country compliance
www.TechnologyLawGroup.com
Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 42
43. Thank You!
Emile Loza, JD, MBA, CLP
Founding Attorney
Technology Law Group
Boise, Idaho
eloza@TechnologyLawGroup.com
www.TechnologyLawGroup.com
Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice. Page 43