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

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Presentation on theme: "International Taxation of Intellectual Property IP Legal Considerations to IP Tax Planning 12-13 May 2014 Amsterdam, The Netherlands Severin de Wit, IPEG."— Presentation transcript:

1 International Taxation of Intellectual Property IP Legal Considerations to IP Tax Planning 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 whos 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 USCo Legal Title Owner, maintains & enforces IPRs OffshoreCo Exclusive Licensee in low tax jurisdiction SalesCo Country A non-exclusive distributor SalesCo Country B non-exclusive distributor SalesCo Country C non-exclusive distributor Tax concern: transfer pricing, must reflect arms length terms, not to transfer too many rights, treating license as a sale

11 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 Tax Corporate Treasury Management Chief Financial Officer Afterthought LEGAL

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 IPEGs sister company IPTrust delivers IP Corporate and Fiduciary Services in several EU countries

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



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