8/14/2019 Dennis Fernandez
1/40
Sept 6, 2003 1
Current Issues inInternational Cross-Border
I.P. Strategies
Dennis Fernandez, Esq.
Fernandez & Associates LLPwww.iploft.com
8/14/2019 Dennis Fernandez
2/40
Sept 6, 2003 2
Cross-Border Strategies?
8/14/2019 Dennis Fernandez
3/40
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
8/14/2019 Dennis Fernandez
4/40
Sept 6, 2003 4
Intellectual Property Rights
8/14/2019 Dennis Fernandez
5/40
Sept 6, 2003 5
Intellectual Property Rights
Patents
Trade Secrets
Copyrights
Maskworks
Trademarks
8/14/2019 Dennis Fernandez
6/40
Sept 6, 2003 6
Patents
Protects unobvious apparatus, method
Substantial application effort
Arises under federal, international law
8/14/2019 Dennis Fernandez
7/40
Sept 6, 2003 7
Trade Secrets
Protects confidential businessinformation
No registration process
Arises under state, federal, internationallaw
8/14/2019 Dennis Fernandez
8/40
Sept 6, 2003 8
Copyrights
Protects original literal works
Optional registration, marking
Arises under federal, international law
8/14/2019 Dennis Fernandez
9/40
8/14/2019 Dennis Fernandez
10/40
Sept 6, 2003 10
Trademarks
Protects distinctive marks, symbols
Optional registration, marking
Arises under state, federal, international
law
8/14/2019 Dennis Fernandez
11/40
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
8/14/2019 Dennis Fernandez
12/40
Sept 6, 2003 12
US Patent Practice
First-to-invent rule
1-year bar-date rule
1-year foreign-filing rule
Export controls
8/14/2019 Dennis Fernandez
13/40
Sept 6, 2003 13
Other Intangible Assets
Franchises
Covenants not to compete
Governmental permits
Informational base
Business goodwill
8/14/2019 Dennis Fernandez
14/40
Sept 6, 2003 14
US Tax Practice
Business Development Expense 174
Capital Gains for R&D/Patent Sale 1235
Trademark development generallynon-expensable, unless advertising 162may be amortizable 197
Copyright generally non-expensable,non-capital asset 1221
8/14/2019 Dennis Fernandez
15/40
Sept 6, 2003 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
8/14/2019 Dennis Fernandez
16/40
Sept 6, 2003 16
Strategic Options
Offshore technology/IPR development,co-inventorship, or improvement
Transfer domestic technology/IPR tooffshore structure in favorable tax
jurisdiction
8/14/2019 Dennis Fernandez
17/40
Sept 6, 2003 17
Offshore Development
Impractical when technology rightsalready mature, commercialized
Export control restriction on sensitivetechnology
Favorable early fair market valuation
8/14/2019 Dennis Fernandez
18/40
Sept 6, 2003 18
Offshore Transfer
Complex structural choices for offshoreentity/ies
US tax regime substantial reach on cross-border transactions
Territorial practical considerations
8/14/2019 Dennis Fernandez
19/40
Sept 6, 2003 19
Key Planning Objectives
Align IP ownership with developmentspend
Locate IP with market, manufacture
Consider incentives, depreciation, exit
8/14/2019 Dennis Fernandez
20/40
Sept 6, 2003 20
Applicable Tax Regime
US person subject to tax on all income,whether source is domestic / foreign 1
Tax law of jurisdiction applicable whereIP is used, income source 861-862
Development
Manufacture
Sales
8/14/2019 Dennis Fernandez
21/40
Sept 6, 2003 21
Transfer Pricing
IRS may reallocate income/deductionsbetween taxpayers, when transactionsconducted by controlled group 482
May require transfer pricing study/policy
to validate arms-length economicrelationships
8/14/2019 Dennis Fernandez
22/40
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
8/14/2019 Dennis Fernandez
23/40
Sept 6, 2003 23
CFC Rules
Total US shareholders owning at least 10% ofcompany 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
8/14/2019 Dennis Fernandez
24/40
Sept 6, 2003 24
IP Contributions
US person transferring IP to foreigncorporation recognizes gain based on fairmarket value of receivable 367
Exceptions:
Active trade / business by foreign corporation
Domestic stock transfer, gain recognition
agreement
Foreign stock transfer, corporate reorganization
8/14/2019 Dennis Fernandez
25/40
Sept 6, 2003 25
Valuation Methods
Excess operating or premium profits
Premium pricing
Cost or royalty savings
Market comparison
Replacement cost
8/14/2019 Dennis Fernandez
26/40
Sept 6, 2003 26
Inbound / Outbound Issues
Withholding tax on royalties?
Applicable tax treaty, rate?
Trade / business or permanent
establishment in foreign jurisdiction?
8/14/2019 Dennis Fernandez
27/40
Sept 6, 2003 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
8/14/2019 Dennis Fernandez
28/40
Sept 6, 2003 28
Licensing Terms
IP grant Improvements
Currency
Inflation rates Withholding tax
Exchange controls
Royalties
Arbitration Language
Political risk
Travel expense Product liability
Indemnification
Applicable law
8/14/2019 Dennis Fernandez
29/40
Sept 6, 2003 29
Country Selection
Entity structure Funding type
Formation time, documentation
Shareholding meetings
Taxation
Foreign authority information exchange
8/14/2019 Dennis Fernandez
30/40
Sept 6, 2003 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 listedon approved stock exchange
Shareholding mtgs: None
Taxation: No individual income, corporate, capital gains ortransfer tax payable by funds or shareholders; no tax treaties
Authority Info: Mutual legal assistance treaty with US to
cooperate regarding narcotics, fraud
8/14/2019 Dennis Fernandez
31/40
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, withholdingcapital gains, estate, duty, or inheritance tax payable by funds orshareholders; no tax treaties
Authority Info: Mutual assistance act with US to cooperate
regarding fraud
8/14/2019 Dennis Fernandez
32/40
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 shareholdersfrom income and capital gains tax; tax treaty
Authority Info: Official secrets act maintain confidentialityexcept in limited circumstances
8/14/2019 Dennis Fernandez
33/40
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 ofincorporation or deed of trust
Shareholding mtgs: Annual meeting in Luxembourg
Taxation: No income, capital gains, withholding, or dividendstax on funds of non-resident shareholder; tax treaty
Authority Info: Banking secrecy statute
8/14/2019 Dennis Fernandez
34/40
Sept 6, 2003 34
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
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
8/14/2019 Dennis Fernandez
35/40
Sept 6, 2003 35
Cross-Border Model
US
Company
HoldingCompany
Foreign
Subsidiary
8/14/2019 Dennis Fernandez
36/40
Sept 6, 2003 36
Offshore Company Set-up
US Company sets-upHolding Company inlow-tax/treaty(no-withholding) jurisdiction,
limit US control/interest
File IP appropriately foroffshore protection,enforceability
USCompany
HoldingCompany
Foreign
Subsidiary
8/14/2019 Dennis Fernandez
37/40
Sept 6, 2003 37
Offshore IP Transfer
Holding Company paysUS Company for fair-market-value stake in IPintangibles
Cost-sharing agreementfor IP co-development,financing by US and
Holding companies,jointly-owned perrelative contributions
USCompany
HoldingCompany
Foreign
Subsidiary
8/14/2019 Dennis Fernandez
38/40
Sept 6, 2003 38
Offshore Subsidiary Licensing
Holding Companylicenses IP to ForeignSubsidiar(ies) to collectroyalties fromcustomers in other
jurisdiction(s)
US Company receives
royalty portion in USand accumulate portionoffshore, activelylicenses IP fromForeign Subsidiary
USCompany
HoldingCompany
Foreign
Subsidiary
8/14/2019 Dennis Fernandez
39/40
Sept 6, 2003 39
Offshore Tax Benefits
US Company receivestangible asset aspayments on balancesheet for sale ofintangible IP
US Company deductslicense to use intangible
asset, may deferincome repatriation totax-efficient time
USCompany
HoldingCompany
Foreign
Subsidiary
8/14/2019 Dennis Fernandez
40/40
Sept 6, 2003 40