Dennis Fernandez

8/14/2019 Dennis Fernandez

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Sept 6, 2003 1

Current Issues inInternational Cross-Border

I.P. Strategies

Dennis Fernandez, Esq.

Fernandez & Associates LLPwww.iploft.com


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Cross-Border Strategies?


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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


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Intellectual Property Rights

Patents

Trade Secrets

Copyrights

Maskworks

Trademarks


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Patents

Protects unobvious apparatus, method

Substantial application effort

Arises under federal, international law


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Trade Secrets

Protects confidential businessinformation

No registration process

Arises under state, federal, internationallaw


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Copyrights

Protects original literal works

Optional registration, marking

Arises under federal, international law


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Trademarks

Protects distinctive marks, symbols

Optional registration, marking

Arises under state, federal, international

law


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Protecting Software / Data

Trade secret as default position

Copyright for original media content

Patent for algorithms, business method

Maskwork for chip implementation


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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


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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


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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 tooffshore structure in favorable tax

jurisdiction


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Offshore Development

Impractical when technology rightsalready mature, commercialized

Export control restriction on sensitivetechnology

Favorable early fair market valuation


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Offshore Transfer

Complex structural choices for offshoreentity/ies

US tax regime substantial reach on cross-border transactions

Territorial practical considerations


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Key Planning Objectives

Align IP ownership with developmentspend

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 whereIP is used, income source 861-862

Development

Manufacture

Sales


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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


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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% 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


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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


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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


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Licensing Terms

IP grant Improvements

Currency

Inflation rates Withholding tax

Exchange controls

Royalties

Arbitration Language

Political risk

Travel expense Product liability

Indemnification

Applicable law


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Country Selection

Entity structure Funding type

Formation time, documentation

Shareholding meetings

Taxation

Foreign 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 ortransfer tax payable by funds or shareholders; no tax treaties

Authority Info: Mutual legal assistance treaty with US to

cooperate regarding narcotics, fraud


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Bermuda


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


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Ireland


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


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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


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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


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Cross-Border Model

US

Company

HoldingCompany

Foreign

Subsidiary


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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


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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


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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


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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


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[email protected]

Dennis Fernandez

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