Jamille Cummins, Transworld Group - IP Strategies

Cross-Border IP Strategies

Jamille CumminsTransworld Group

www.transworldgroup.im1

Cross-Border Strategies?

Jamille Cummins, Transworl

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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


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Intellectual Property Rights


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Intellectual Property Rights Patents

Trade Secrets

Copyrights

Maskworks

TrademarksJamille

Cummins, Transworl

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Patents

Protects “unobvious” apparatus, method

Substantial application effort

Arises under federal, international law


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Trade Secrets

Protects confidential business information

No registration process

Arises under state, federal, international law


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Copyrights

Protects original literal works

Optional registration, marking



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Maskworks

Protects semiconductor lay-out designs

Simple registration, marking



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Trademarks

Protects distinctive marks, symbols

Optional registration, marking

Arises under state, federal, international law


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Protecting Software / Data

Trade secret as default position

Copyright for original media content

Patent for algorithms, business method

Maskwork for chip implementation


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US Patent Practice

First-to-invent rule

1-year bar-date rule

1-year foreign-filing rule

Export controls


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Other Intangible Assets

Franchises

Covenants not to compete

Governmental permits

Informational base

Business goodwillJamille

Cummins, Transworl

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US Tax Practice

Business Development Expense §174

Capital Gains for R&D/Patent Sale §1235

Trademark development generally non-expensable, unless advertising §162may be amortizable §197

Copyright generally non-expensable, non-capital asset §1221


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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


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Strategic Options

Offshore technology/IPR development, co-inventorship, or improvement

Transfer domestic technology/IPR to offshore structure in favorable tax jurisdiction


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Offshore Development

Impractical when technology rights already mature, commercialized

Export control restriction on sensitive technology

Favorable early fair market valuation


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Offshore Transfer

Complex structural choices for offshore entity/ies

US tax regime substantial reach on cross-border transactions

Territorial practical considerations


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Key Planning Objectives

Align IP ownership with development spend

Locate IP with market, manufacture

Consider incentives, depreciation, exit


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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


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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


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Foreign Corporations

Controlled Foreign Corporation (CFC) §§ 951-964

Foreign Personal Holding Company (FPHC) §§ 541-547, 551-558

Passive Foreign Investment Company (PFIC) §§ 1291-1297


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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


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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

reorganizationJamille

Cummins, Transworl

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Valuation Methods

Excess operating or premium profits

Premium pricing

Cost or royalty savings

Market comparison

Replacement costJamille

Cummins, Transworl

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Inbound / Outbound Issues

Withholding tax on royalties?

Applicable tax treaty, rate?

Trade / business or permanent establishment in foreign jurisdiction?


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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


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Licensing Terms

IP grant Improvements Currency Inflation rates Withholding tax Exchange

controls Royalties

Arbitration Language Political risk Travel expense Product liability Indemnification Applicable law


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Country Selection

Entity structure Funding type Formation time, documentation Shareholding meetings Taxation Foreign authority information exchange


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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


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Bermuda


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


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Ireland


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


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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


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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


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Cross-Border Model


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USCompany

HoldingCompany

ForeignSubsidiary

Offshore Company Set-up

USCompany

HoldingCompany

ForeignSubsidiary

US Company sets-up Holding Company in low-tax/treaty(no-withholding) jurisdiction, limit US control/interest

File IP appropriately for offshore protection, enforceability

Jamille Cummins, Transworld Group 36

Offshore IP Transfer

USCompany

HoldingCompany

ForeignSubsidiary

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


Offshore Subsidiary Licensing

USCompany

HoldingCompany

ForeignSubsidiary

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


Offshore Tax Benefits

USCompany

HoldingCompany

ForeignSubsidiary

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


Jamille Cummins, Transworld Group

Transworldcapital.imJamille

Cummins, Transworl

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Jamille Cummins, Transworld Group - IP Strategies

Economy & Finance

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