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