1. International Taxation of Intellectual Property IP Legal Considerations to IP Tax Planning
12-13 May 2014
Amsterdam, The Netherlands
Severin de Wit, IPEG Consultancy B.V

2. IP & Tax - A Strained Partnership?
Tax and IP professionals have different objectives
Tax:
create optimal tax structure
diminish tax liability, e.g. IP holding company in low-tax environment, creating tax efficient royalty flows from IPRs
IP:
protect company IPRs and manage validity & enforceability,
align IPR with commercial reality
Optimize IP value (e.g. enforceability)
Understanding the “profession specifics” and improving communications between Tax and IP is crucial for a successful and effective IP tax (re)structuring

3. Identifying critical and overlapping IP considerations
Economic (beneficial) ownership prevails for tax purposes in cases where legal and economic ownership of IPRs lie within different entities
However value of IPRs will still be driven by their legal protection and enforceability
Failure to properly assess competing economic and legal considerations in complex international tax scenarios lead to failure to meet objectives and runaway costs

4. Opposing interests between Tax and IP?
Tax prefer to minimize value of IPRs to minimize taxes on an actual transfer to an IP Holding Company
IP lawyers on the other hand seek to make IP asset maintenance and enforcement as easy as possible and to maximize the value of the asset
A low valuation may be beneficial for tax reasons, but may be less than helpful when trying to establish a high reasonable royalty rate in an infringement litigation

5. Critical IP considerations when IPRs are migrated (1)
Title or interest in the IPRs (legal ownership vs. beneficial ownership, moral rights (copyrights)?
In Group Companies: where are the IPRs located? Is a Group company registered as owner or as having a license? Exclusive, non-exclusive or “sole”?
Does this reflect who’s actually using the IPRs?
Need for Legal IP Audit
What is being acquired or licensed?
Can the IPR be freely transferred or licensed?

6. Critical IP considerations when IPRs are migrated (2)
Which company in the Group has standing to enforce the IPRs?
Can those entities claim damages or lost profits in case of enforcement (IP infringement case)?
Can Lost Profits be recovered when IP ownership is separated from Sales?
Reporting Lines
Location of tax haven, compromise IPRs?
Transfer pricing and the choice if IP rights

7. Critical IP considerations when IPRs are migrated (3)
Bankruptcy considerations when IPRs are migrated to SPV or when subject of asset pledge or security structures

8. In Group Companies: Where are the IPRs located?
Legal input at Tax (re)structuring: are license agreements following the real economic flows?
Issue 1: IPR owner located in different jurisdiction than where manufacturing takes place
Issue 2: No formal license agreement(s) in place
Matching Revenue Stream with company having IPRs
Legal should not micromanage the process
Focus on whether registrations are right, rather than who in the group structure is actually using (the) rights
Protection and registration focus, ignore big picture

9. Recovering lost profits
When IP ownership is separated from sales e.g. by non exclusive licensees:
US: non-exclusive licensees may not recover lost profits or damages
UK: in case of non-exclusive license, no statutory entitlement to receive same remedies as IP rightsholder
DE: non-exclusive licensee may only seek damages if he has been granted derivative rights of action by rights holder

10. maintains & enforces IPRs
Tax concern: transfer pricing, must reflect arm’s length terms, not to transfer too many rights, treating license as a sale
USCo
Legal Title Owner,
maintains & enforces IPRs
OffshoreCo
Exclusive Licensee in low tax jurisdiction
Legal concern: can SalesCo profits be recovered in infringement action?
SalesCo
Country A
non-exclusive distributor
SalesCo
Country C
non-exclusive distributor
SalesCo
Country B
non-exclusive distributor

11. Court of Appeal for the Federal Circuit in Mars Inc. v
Court of Appeal for the Federal Circuit in Mars Inc. v. Coin Acceptors, Inc. (2008)
Mars unable to recover lost profits of its wholly owned subsidiary, MEI

12. Reporting Lines in IP Taxation Structuring
Afterthought
LEGAL
Corporate Treasury Management
Chief Financial Officer

13. Migrating to tax haven which could “compromise” IPRs
In countries with bankruptcy issues
Jurisdictions known for “punitive damages”
Countries were Corporate Law issues exist (easy to “pierce corporate veil”, directors liability)
Kangaroo Countries (tax haven with corruption, danger of “biased” claims in retaliation of infringement suit)
PR and “corporate image” considerations
How does it look to constituency when crucial IP rights are transferred to an off shore location?
In damage claims by corporate giant with <5% tax burden with large turnover, suing small infringer for nominal damages
In trademark cases a chain of IP companies in obscure tax havens can be held against the plaintiff

14. Tax, IP and Bankruptcy Law
Consider bankruptcy consequences in tax structure
Netherlands: Nebula case (Hoge Raad, 2006)– licensee or holder of beneficial ownership not protected in bankruptcy of legal owner of IPRs
US:
Qimonda - Bankruptcy court Eastern District Virginia
Position of (in this case: US) non-debtor licensees
SUI: art 211 Swiss Bankruptcy Code: all licenses ended by BR trustee when IP Holding located in SUI is insolvent

15. Substance requirement and specialized IP directors in SPV
The level of substance required is determined
on a case-by-case basis,
the foreign jurisdiction involved
the advance tax agreement obtained from the tax authorities
Fiscal substance requirements in IP Holding companies require specialized IP qualified directors
IPEG and IPTrust deliver IP qualified directors from various EU countries

16. IPEG’s sister company IPTrust delivers IP Corporate and Fiduciary Services in several EU countries

17. Example of IP Tax Structure, IPEG was IP management company
IP Investor Company Limited
IP Advice International Partners V-A, L.P.
Advice
Invest
Third party
patent licensee
License
License payment
IPEG Consultancy B.V
IP management partner
Advice
Fees and incentive
IP Portfolio Service I, Hungary Kft
Invest
IP Portfolio Service II, Cyprus Ltd
Invest
Third party
patent purchaser
Transfer of patents
Purchase payment
IP Holding Limited (Guernsey)
Original Owner/Seller of IPRs
Transfer of patents
Contracted payments
Earnout
Provision of services