Current Issues in International Cross-Border I.P. Strategies Dennis Fernandez, Esq. Fernandez & Associates LLP www.iploft.com Sept 6, 2003

Cross-Border Strategies? Sept 6, 2003

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

Intellectual Property Rights Sept 6, 2003

Intellectual Property Rights Patents Trade Secrets Copyrights Maskworks Trademarks Sept 6, 2003

Patents Protects “unobvious” apparatus, method Substantial application effort Arises under federal, international law Sept 6, 2003

Trade Secrets Protects confidential business information No registration process Arises under state, federal, international law Sept 6, 2003

Copyrights Protects original literal works Optional registration, marking Arises under federal, international law Sept 6, 2003

Maskworks Protects semiconductor lay-out designs Simple registration, marking Arises under federal, international law Sept 6, 2003

Trademarks Protects distinctive marks, symbols Optional registration, marking Arises under state, federal, international law Sept 6, 2003

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

US Patent Practice First-to-invent rule 1-year bar-date rule 1-year foreign-filing rule Export controls Sept 6, 2003

Other Intangible Assets Franchises Covenants not to compete Governmental permits Informational base Business goodwill Sept 6, 2003

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

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

Strategic Options Offshore technology/IPR development, co-inventorship, or improvement Transfer domestic technology/IPR to offshore structure in favorable tax jurisdiction Sept 6, 2003

Offshore Development Impractical when technology rights already mature, commercialized Export control restriction on sensitive technology Favorable early fair market valuation Sept 6, 2003

Offshore Transfer Complex structural choices for offshore entity/ies US tax regime substantial reach on cross-border transactions Territorial practical considerations Sept 6, 2003

Key Planning Objectives Align IP ownership with development spend Locate IP with market, manufacture Consider incentives, depreciation, exit Sept 6, 2003

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

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

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

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

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

Valuation Methods Excess operating or premium profits Premium pricing Cost or royalty savings Market comparison Replacement cost Sept 6, 2003

Inbound / Outbound Issues Withholding tax on royalties? Applicable tax treaty, rate? Trade / business or permanent establishment in foreign jurisdiction? Sept 6, 2003

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

Licensing Terms IP grant Improvements Currency Inflation rates Withholding tax Exchange controls Royalties Arbitration Language Political risk Travel expense Product liability Indemnification Applicable law Sept 6, 2003

Country Selection Entity structure Funding type Formation time, documentation Shareholding meetings Taxation Foreign authority information exchange Sept 6, 2003

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 Sept 6, 2003

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 Sept 6, 2003

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

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

OECD List Andorra Maldives Anguilla Marshall Islands 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 Sept 6, 2003

Cross-Border Model Sept 6, 2003

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 Sept 6, 2003

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 Sept 6, 2003

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 Sept 6, 2003

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 Sept 6, 2003

dennis@iploft.com Sept 6, 2003