Current Issues in
International Cross-Border
I.P. Strategies
Dennis Fernandez, Esq.
Fernandez & Associates LLP
www.iploft.com
Sept 6, 2003
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Cross-Border Strategies?
Sept 6, 2003
2
Global Business Context
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Increasing Technology Competition:
• Semiconductor Design, Fabrication
• Pharmaco-Genomics, Medical Devices
• Wireless Telecom, Broadband Content
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Strategic Intellectual Capital:
• Defensive & Offensive Portfolio-Building
• International I.P. Licensing and Litigation
Sept 6, 2003
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Intellectual Property Rights
Sept 6, 2003
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Intellectual Property Rights
Sept 6, 2003
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Patents
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Trade Secrets
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Copyrights
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Maskworks
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Trademarks
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Patents
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Protects “unobvious” apparatus, method
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Substantial application effort
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Arises under federal, international law
Sept 6, 2003
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Trade Secrets
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Protects confidential business
information
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No registration process
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Arises under state, federal, international
law
Sept 6, 2003
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Copyrights
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Protects original literal works
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Optional registration, marking
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Arises under federal, international law
Sept 6, 2003
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Maskworks
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Protects semiconductor lay-out designs
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Simple registration, marking
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Arises under federal, international law
Sept 6, 2003
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Trademarks
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Protects distinctive marks, symbols
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Optional registration, marking
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Arises under state, federal, international
law
Sept 6, 2003
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Protecting Software / Data
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Trade secret as default position
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Copyright for original media content
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Patent for algorithms, business method
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Maskwork for chip implementation
Sept 6, 2003
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US Patent Practice
Sept 6, 2003
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First-to-invent rule
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1-year bar-date rule
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1-year foreign-filing rule
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Export controls
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Other Intangible Assets
Sept 6, 2003
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Franchises
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Covenants not to compete
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Governmental permits
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Informational base
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Business goodwill
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US Tax Practice
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Business Development Expense
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Capital Gains for R&D/Patent Sale
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Trademark development generally
non-expensable, unless advertising
may be amortizable §197
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§174
§1235
§162
Copyright generally non-expensable,
non-capital asset §1221
Sept 6, 2003
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Offshore Motivation
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Globally-competitive development,
manufacture, sales, or partnerships
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Overall tax savings or deferral
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Improve company balance sheet
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Cross-border shifting of income, risk,
control, or privacy
Sept 6, 2003
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Strategic Options
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Offshore technology/IPR development,
co-inventorship, or improvement
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Transfer domestic technology/IPR to
offshore structure in favorable tax
jurisdiction
Sept 6, 2003
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Offshore Development
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Impractical when technology rights
already mature, commercialized

Export control restriction on sensitive
technology
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Favorable early fair market valuation
Sept 6, 2003
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Offshore Transfer
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Complex structural choices for offshore
entity/ies
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US tax regime substantial reach on crossborder transactions
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Territorial practical considerations
Sept 6, 2003
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Key Planning Objectives
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Align IP ownership with development
spend
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Locate IP with market, manufacture
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Consider incentives, depreciation, exit
Sept 6, 2003
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Applicable Tax Regime
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US person subject to tax on all income,
whether source is domestic / foreign §1
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Tax law of jurisdiction applicable where
IP is used, income source §§ 861-862
• Development
• Manufacture
• Sales
Sept 6, 2003
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Transfer Pricing
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IRS may reallocate income/deductions
between taxpayers, when transactions
conducted by controlled group §482
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May require transfer pricing study/policy
to validate arms-length economic
relationships
Sept 6, 2003
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Foreign Corporations
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Controlled Foreign Corporation
(CFC) §§ 951-964
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Foreign Personal Holding Company
(FPHC) §§ 541-547, 551-558
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Passive Foreign Investment Company
(PFIC) §§ 1291-1297
Sept 6, 2003
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CFC Rules
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Total US shareholders owning at least 10% of
company exceed 50%
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10% shareholders taxed as if dividends paid,
even if no cash distribution
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Taxed on share of foreign company SubpartF income, even if no cash distribution
Sept 6, 2003
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IP Contributions
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US person transferring IP to foreign
corporation recognizes gain based on fair
market value of receivable §367
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Exceptions:
– Active trade / business by foreign corporation
– Domestic stock transfer, gain recognition
agreement
– Foreign stock transfer, corporate reorganization
Sept 6, 2003
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Valuation Methods
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Excess operating or premium profits
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Premium pricing
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Cost or royalty savings
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Market comparison
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Replacement cost
Sept 6, 2003
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Inbound / Outbound Issues
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Withholding tax on royalties?
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Applicable tax treaty, rate?
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Trade / business or permanent
establishment in foreign jurisdiction?
Sept 6, 2003
26
Sale vs. License
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Transfer “all substantial rights” ?
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Sale gives rise to capital gains / loss,
usually no withholding tax
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License is ordinary income,
royalties subject to withholding tax
Sept 6, 2003
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Licensing Terms
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IP grant
Improvements
Currency
Inflation rates
Withholding tax
Exchange controls
Royalties
Sept 6, 2003
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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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Sept 6, 2003
29
Cayman Islands
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Entity structure: Company unit trust ltd, partnership
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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
6, 2003
regarding narcotics, fraud
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Bermuda
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Entity structure: Company unit trust ltd, partnership
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Funding type: Open/closed-end class
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Formation time/docs: 3-5 weeks prospectus, memorandum of
association or deed of trust
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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
6, 2003
fraud
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Ireland
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Entity structure: Company unit trust ltd, partnership
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Funding type: Closed-end, VC professional investor funds
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Formation time/docs: 2-3 months, memorandum, articles of
association or deed of trust
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Shareholding mtgs: Annual meeting in Ireland
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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
Luxembourg
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Entity structure: Fixed capital company, variable capital unit
trust, partnership
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Funding type: Closed-end, VC funds

Formation time/docs: 3-5 months, prospectus, articles of
incorporation or deed of trust
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Shareholding mtgs: Annual meeting in Luxembourg
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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
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OECD List
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Andorra
Anguilla
Antigua & Barbuda
Aruba
Bahamas
Bahrain
Barbados
Belize
British Virgin Islands
Cook Islands
Dominica
Gibraltar
Grenada
Guernsey
Isle of Man
Jersey
Liberia
Lichtenstein
Sept 6, 2003
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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
34
Cross-Border Model
US
Company
Holding
Company
Foreign
Subsidiary
Sept 6, 2003
35
Offshore Company Set-up
US
Company

US Company sets-up
Holding Company in
low-tax/treaty(nowithholding) jurisdiction,
limit US control/interest

File IP appropriately for
offshore protection,
enforceability
Holding
Company
Foreign
Subsidiary
Sept 6, 2003
36
Offshore IP Transfer
US
Company
Holding
Company
Foreign
Subsidiary
Sept 6, 2003
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Holding Company pays
US Company for fairmarket-value stake in IP
intangibles
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Cost-sharing agreement
for IP co-development,
financing by US and
Holding companies,
jointly-owned per
relative contributions
37
Offshore Subsidiary Licensing
US
Company

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
38
Holding
Company
Foreign
Subsidiary
Sept 6, 2003
Offshore Tax Benefits
US
Company
Holding
Company
Foreign
Subsidiary
Sept 6, 2003

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
39
dennis@iploft.com
Sept 6, 2003
40