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

2. Cross-Border Strategies?
Sept 6, 2003

3. 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

4. Intellectual Property Rights
Sept 6, 2003

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

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

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

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

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

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

11. 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

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

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

14. 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

15. 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

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

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

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

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

20. 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
Sept 6, 2003

21. 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

22. Foreign Corporations Controlled Foreign Corporation (CFC) §§ 951-964
Foreign Personal Holding Company (FPHC) §§ ,
Passive Foreign Investment Company (PFIC) §§
Sept 6, 2003

23. 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

24. 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

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

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

27. 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

28. 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

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

30. 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

31. 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

32. 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

33. 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

34. 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

35. Cross-Border Model
Sept 6, 2003

36. 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

37. 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

38. 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

39. 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

40.
Sept 6, 2003