Post on 28-Mar-2015
International Taxation of Intellectual PropertyIP Legal Considerations to IP Tax Planning
12-13 May 2014Amsterdam, The Netherlands
Severin de Wit, IPEG Consultancy B.V
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
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
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
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?
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
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
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
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
USCoLegal Title Owner,
maintains & enforces IPRs
OffshoreCoExclusive Licensee in low tax jurisdiction
SalesCo Country A
non-exclusive distributor
SalesCo Country B
non-exclusive distributor
SalesCo Country C
non-exclusive distributor
Legal concern: can SalesCo profits be
recovered in infringement action?
Tax concern: transfer pricing, must reflect arm’s
length terms, not to transfer too many rights, treating license as a sale
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
Reporting Lines in IP Taxation Structuring
Tax
Corporate Treasury Management
Chief Financial Officer
AfterthoughtLEGAL
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
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
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
IPEG’s sister company IPTrust delivers IP Corporate and Fiduciary Services in several EU countries
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 partypatent purchaser
Transfer of patents
Purchase payment
Third partypatent licensee
License
License payment
License
License payment
IPEG Consultancy B.VIP management
partnerAdvice
Fees and incentive
IP Advice International
Partners V-A, L.P.
IP Investor Company Limited
Advice
Invest
Invest
Invest
Example of IP Tax Structure, IPEG was IP management company