Current Issues in

International Cross-Border
I.P. Strategies

Dennis Fernandez, Esq.

Fernandez & Associates LLP
www.iploft.com
Sept 6, 2003 1
 Cross-Border Strategies?

Sept 6, 2003 2
 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
 Intellectual Property Rights

Sept 6, 2003 4
 Intellectual Property Rights
„ Patents

„ Trade Secrets

„ Copyrights

„ Maskworks

„ Trademarks

Sept 6, 2003 5
 Patents

„ Protects “unobvious” apparatus, method

„ Substantial application effort

„ Arises under federal, international law

Sept 6, 2003 6
 Trade Secrets

„ Protects confidential business

information

„ No registration process

„ Arises under state, federal, international

law
Sept 6, 2003 7
 Copyrights

„ Protects original literal works

„ Optional registration, marking

„ Arises under federal, international law

Sept 6, 2003 8
 Maskworks

„ Protects semiconductor lay-out designs

„ Simple registration, marking

„ Arises under federal, international law

Sept 6, 2003 9
 Trademarks

„ Protects distinctive marks, symbols

„ Optional registration, marking

„ Arises under state, federal, international

law

Sept 6, 2003 10
 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
 US Patent Practice

„ First-to-invent rule

„ 1-year bar-date rule

„ 1-year foreign-filing rule

„ Export controls

Sept 6, 2003 12
 Other Intangible Assets
„ Franchises

„ Covenants not to compete

„ Governmental permits

„ Informational base

„ Business goodwill

Sept 6, 2003 13
 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
 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
 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
 Offshore Development

„ Impractical when technology rights

already mature, commercialized

„ Export control restriction on sensitive

technology

„ Favorable early fair market valuation

Sept 6, 2003 17
 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
 Key Planning Objectives

„ Align IP ownership with development

spend

„ Locate IP with market, manufacture

„ Consider incentives, depreciation, exit

Sept 6, 2003 19
 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
 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
 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
 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
 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
 Valuation Methods
„ Excess operating or premium profits

„ Premium pricing

„ Cost or royalty savings

„ Market comparison

„ Replacement cost
Sept 6, 2003 25
 Inbound / Outbound Issues

„ Withholding tax on royalties?

„ Applicable tax treaty, rate?

„ Trade / business or permanent

establishment in foreign jurisdiction?

Sept 6, 2003 26
 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
 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
 Country Selection

„ Entitystructure
„ Funding type
„ Formation time, documentation
„ Shareholding meetings
„ Taxation
„ Foreign authority information exchange

Sept 6, 2003 29
 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
6, 2003 regarding narcotics, fraud 30
 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
6, 2003 fraud 31
 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
 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
 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
 Cross-Border Model
US
Company

Holding
Company

Foreign
Subsidiary

Sept 6, 2003 35
 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
 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
 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
 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
 dennis@iploft.com

Sept 6, 2003 40