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

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

  1. 1. Current Issues in International Cross-Border I.P. Strategies Dennis Fernandez, Esq. Fernandez & Associates LLP www.iploft.com Sept 6, 2003 1
  2. 2. Cross-Border Strategies? Sept 6, 2003 2
  3. 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 3
  4. 4. Intellectual Property Rights Sept 6, 2003 4
  5. 5. Intellectual Property Rights Patents Trade Secrets Copyrights Maskworks Trademarks Sept 6, 2003 5
  6. 6. Patents Protects “unobvious” apparatus, method Substantial application effort Arises under federal, international law Sept 6, 2003 6
  7. 7. Trade Secrets Protects confidential business information No registration process Arises under state, federal, international law Sept 6, 2003 7
  8. 8. Copyrights Protects original literal works Optional registration, marking Arises under federal, international law Sept 6, 2003 8
  9. 9. Maskworks Protects semiconductor lay-out designs Simple registration, marking Arises under federal, international law Sept 6, 2003 9
  10. 10. Trademarks Protects distinctive marks, symbols Optional registration, marking Arises under state, federal, international law Sept 6, 2003 10
  11. 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 11
  12. 12. US Patent Practice First-to-invent rule 1-year bar-date rule 1-year foreign-filing rule Export controls Sept 6, 2003 12
  13. 13. Other Intangible Assets Franchises Covenants not to compete Governmental permits Informational base Business goodwill Sept 6, 2003 13
  14. 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 14
  15. 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 15
  16. 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 16
  17. 17. Offshore Development Impractical when technology rights already mature, commercialized Export control restriction on sensitive technology Favorable early fair market valuation Sept 6, 2003 17
  18. 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 18
  19. 19. Key Planning Objectives Align IP ownership with development spend Locate IP with market, manufacture Consider incentives, depreciation, exit Sept 6, 2003 19
  20. 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 20
  21. 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 21
  22. 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 22
  23. 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 23
  24. 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 24
  25. 25. Valuation Methods Excess operating or premium profits Premium pricing Cost or royalty savings Market comparison Replacement cost Sept 6, 2003 25
  26. 26. Inbound / Outbound Issues Withholding tax on royalties? Applicable tax treaty, rate? Trade / business or permanent establishment in foreign jurisdiction? Sept 6, 2003 26
  27. 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 27
  28. 28. Licensing Terms IP grant Arbitration Improvements Language Currency Political risk Inflation rates Travel expense Withholding tax Product liability Exchange controls Indemnification Royalties Applicable law Sept 6, 2003 28
  29. 29. Country Selection Entity structure Funding type Formation time, documentation Shareholding meetings Taxation Foreign authority information exchange Sept 6, 2003 29
  30. 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 Septcooperate regarding narcotics, fraud 6, 2003 30
  31. 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 Septregarding fraud 6, 2003 31
  32. 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 32
  33. 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 33
  34. 34. OECD List Andorra Maldives Anguilla Marshall Islands Antigua & Barbuda Monaco Aruba Montserrat Bahamas Nauru Bahrain Netherlands Antilles Barbados Niue Belize Panama British Virgin Islands Samoa Cook Islands Seychelles Dominica St. Lucia Gibraltar St. Kitts & Nevis Grenada St Vincent & Grenadines Guernsey Tonga Isle of Man Turks & Caicos Islands Jersey US Virgin Islands Liberia Vanuatu Lichtenstein Sept 6, 2003 34
  35. 35. Cross-Border Model US Company Holding Company Foreign Subsidiary Sept 6, 2003 35
  36. 36. Offshore Company Set-up US US Company sets-up Company Holding Company in low-tax/treaty(no- withholding) jurisdiction, limit US control/interest Holding Company File IP appropriately for offshore protection, Foreign enforceability Subsidiary Sept 6, 2003 36
  37. 37. Offshore IP Transfer Holding Company pays US Company US Company for fair- market-value stake in IP intangibles Holding Company Cost-sharing agreement for IP co-development, financing by US and Holding companies, Foreign jointly-owned per Subsidiary relative contributions Sept 6, 2003 37
  38. 38. Offshore Subsidiary Licensing Holding Company US Company licenses IP to Foreign Subsidiar(ies) to collect royalties from customers in other Holding jurisdiction(s) Company US Company receives royalty portion in US Foreign and accumulate portion Subsidiary offshore, actively licenses IP from Sept 6, 2003 Foreign Subsidiary 38
  39. 39. Offshore Tax Benefits US Company receives US Company tangible asset as payments on balance sheet for sale of intangible IP Holding Company US Company deducts license to use intangible asset, may defer Foreign income repatriation to Subsidiary tax-efficient time Sept 6, 2003 39
  40. 40. dennis@iploft.com Sept 6, 2003 40

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