By Dennis Fernandez

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

2. Cross-Border Strategies?
Sept 6, 2003 2

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 3

4. Intellectual Property Rights
Sept 6, 2003 4

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

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

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

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

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

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

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 11

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

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

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 14

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 15

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 16

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

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 18

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

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 §§ 861-862
• Development
• Manufacture
• Sales
Sept 6, 2003 20

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 21

22. 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 22

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 23

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 24

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

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

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 27

28. Licensing Terms
IP grant Arbitration
Improvements Language
Currency Political risk
Inflation rates Travel expense
Withholding tax Product liability
Exchange controls Indemnification
Royalties Applicable law
Sept 6, 2003 28

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

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
Septcooperate regarding narcotics, fraud
6, 2003 30

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
Septregarding fraud
6, 2003 31

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 32

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 33

34. OECD List
Andorra Maldives
Anguilla Marshall Islands
Antigua & Barbuda Monaco
Aruba Montserrat
Bahamas Nauru
Bahrain Netherlands Antilles
Barbados Niue
Belize Panama
British Virgin Islands Samoa
Cook Islands Seychelles
Dominica St. Lucia
Gibraltar St. Kitts & Nevis
Grenada St Vincent & Grenadines
Guernsey Tonga
Isle of Man Turks & Caicos Islands
Jersey US Virgin Islands
Liberia Vanuatu
Lichtenstein
Sept 6, 2003 34

35. Cross-Border Model
US
Company
Holding
Company
Foreign
Subsidiary
Sept 6, 2003 35

36. Offshore Company Set-up
US
US Company sets-up
Company Holding Company in
low-tax/treaty(no-
withholding) jurisdiction,
limit US control/interest
Holding
Company
File IP appropriately for
offshore protection,
Foreign
enforceability
Subsidiary
Sept 6, 2003 36

37. Offshore IP Transfer
Holding Company pays
US
Company US Company for fair-
market-value stake in IP
intangibles
Holding
Company
Cost-sharing agreement
for IP co-development,
financing by US and
Holding companies,
Foreign jointly-owned per
Subsidiary relative contributions
Sept 6, 2003 37

38. Offshore Subsidiary Licensing
Holding Company
US
Company licenses IP to Foreign
Subsidiar(ies) to collect
royalties from
customers in other
Holding jurisdiction(s)
Company
US Company receives
royalty portion in US
Foreign and accumulate portion
Subsidiary offshore, actively
licenses IP from
Sept 6, 2003
Foreign Subsidiary 38

39. Offshore Tax Benefits
US Company receives
US
Company tangible asset as
payments on balance
sheet for sale of
intangible IP
Holding
Company
US Company deducts
license to use intangible
asset, may defer
Foreign income repatriation to
Subsidiary tax-efficient time
Sept 6, 2003 39

40. dennis@iploft.com
Sept 6, 2003 40