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Sept 6, 20031 Current Issues in International Cross-Border I.P. Strategies Dennis Fernandez, Esq. Fernandez & Associates LLP www.iploft.com.

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Presentation on theme: "Sept 6, 20031 Current Issues in International Cross-Border I.P. Strategies Dennis Fernandez, Esq. Fernandez & Associates LLP www.iploft.com."— Presentation transcript:

1 Sept 6, Current Issues in International Cross-Border I.P. Strategies Dennis Fernandez, Esq. Fernandez & Associates LLP

2 Sept 6, Cross-Border Strategies?

3 Sept 6, 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

4 Sept 6, Intellectual Property Rights

5 Sept 6, Intellectual Property Rights Patents Trade Secrets Copyrights Maskworks Trademarks

6 Sept 6, Patents Protects unobvious apparatus, method Substantial application effort Arises under federal, international law

7 Sept 6, Trade Secrets Protects confidential business information No registration process Arises under state, federal, international law

8 Sept 6, Copyrights Protects original literal works Optional registration, marking Arises under federal, international law

9 Sept 6, Maskworks Protects semiconductor lay-out designs Simple registration, marking Arises under federal, international law

10 Sept 6, Trademarks Protects distinctive marks, symbols Optional registration, marking Arises under state, federal, international law

11 Sept 6, Protecting Software / Data Trade secret as default position Copyright for original media content Patent for algorithms, business method Maskwork for chip implementation

12 Sept 6, US Patent Practice First-to-invent rule 1-year bar-date rule 1-year foreign-filing rule Export controls

13 Sept 6, Other Intangible Assets Franchises Covenants not to compete Governmental permits Informational base Business goodwill

14 Sept 6, 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

15 Sept 6, 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

16 Sept 6, Strategic Options Offshore technology/IPR development, co-inventorship, or improvement Transfer domestic technology/IPR to offshore structure in favorable tax jurisdiction

17 Sept 6, Offshore Development Impractical when technology rights already mature, commercialized Export control restriction on sensitive technology Favorable early fair market valuation

18 Sept 6, Offshore Transfer Complex structural choices for offshore entity/ies US tax regime substantial reach on cross- border transactions Territorial practical considerations

19 Sept 6, Key Planning Objectives Align IP ownership with development spend Locate IP with market, manufacture Consider incentives, depreciation, exit

20 Sept 6, 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 §§ Development Manufacture Sales

21 Sept 6, 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

22 Sept 6, Foreign Corporations Controlled Foreign Corporation (CFC) §§ Foreign Personal Holding Company (FPHC) §§ , Passive Foreign Investment Company (PFIC) §§

23 Sept 6, 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

24 Sept 6, 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

25 Sept 6, Valuation Methods Excess operating or premium profits Premium pricing Cost or royalty savings Market comparison Replacement cost

26 Sept 6, Inbound / Outbound Issues Withholding tax on royalties? Applicable tax treaty, rate? Trade / business or permanent establishment in foreign jurisdiction?

27 Sept 6, 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

28 Sept 6, Licensing Terms IP grant Improvements Currency Inflation rates Withholding tax Exchange controls Royalties Arbitration Language Political risk Travel expense Product liability Indemnification Applicable law

29 Sept 6, Country Selection Entity structure Funding type Formation time, documentation Shareholding meetings Taxation Foreign authority information exchange

30 Sept 6, 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 cooperate regarding narcotics, fraud

31 Sept 6, 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 regarding fraud

32 Sept 6, 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

33 Sept 6, 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

34 Sept 6, 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

35 Sept 6, Cross-Border Model

36 Sept 6, Offshore Company Set-up US Company sets-up Holding Company in low-tax/treaty(no- withholding) jurisdiction, limit US control/interest File IP appropriately for offshore protection, enforceability

37 Sept 6, Offshore IP Transfer Holding Company pays US Company for fair- market-value stake in IP intangibles Cost-sharing agreement for IP co-development, financing by US and Holding companies, jointly-owned per relative contributions

38 Sept 6, Offshore Subsidiary Licensing Holding Company licenses IP to Foreign Subsidiar(ies) to collect royalties from customers in other jurisdiction(s) US Company receives royalty portion in US and accumulate portion offshore, actively licenses IP from Foreign Subsidiary

39 Sept 6, Offshore Tax Benefits US Company receives tangible asset as payments on balance sheet for sale of intangible IP US Company deducts license to use intangible asset, may defer income repatriation to tax-efficient time

40 Sept 6,


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