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

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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

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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 §162may be amortizable §197

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

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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

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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

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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

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Key Planning Objectives

Align IP ownership with development spend

Locate IP with market, manufacture

Consider 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

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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 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

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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 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

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Valuation Methods

Excess operating or premium profits

Premium pricing

Cost or royalty savings

Market comparison

Replacement cost

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Inbound / Outbound Issues

Withholding tax on royalties?

Applicable tax treaty, rate?

Trade / business or permanent establishment in foreign jurisdiction?

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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 28

Licensing Terms

IP grantImprovementsCurrency Inflation ratesWithholding taxExchange controlsRoyalties

ArbitrationLanguagePolitical riskTravel expenseProduct liabilityIndemnificationApplicable law

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Country Selection

Entity structureFunding typeFormation time, documentationShareholding meetingsTaxationForeign authority information exchange

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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 listedon 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 ListAndorraAnguillaAntigua & BarbudaArubaBahamasBahrainBarbadosBelizeBritish Virgin IslandsCook IslandsDominicaGibraltarGrenadaGuernseyIsle of ManJerseyLiberiaLichtenstein

MaldivesMarshall IslandsMonacoMontserratNauruNetherlands AntillesNiuePanamaSamoaSeychellesSt. LuciaSt. Kitts & NevisSt Vincent & GrenadinesTongaTurks & Caicos IslandsUS Virgin IslandsVanuatu

Sept 6, 2003 35

Cross-Border ModelUS

Company

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

Sept 6, 2003 40

dennis@iploft.com