international software licensing

Oct. 21, 2008 All rights reserved. This presentation does not provide or constitute legal or tax advice.

American Conference InstituteLicensing Software in a Global Market

Emile Loza, JD, MBA, CLPFounding Attorney

Technology Law GroupBoise, Idaho

[email protected]


www.TechnologyLawGroup.com

Key Points

• Strategic intelligence is key to:– Tactical advantage in negotiations– Control of IP rights flow– Drafting precision & self-enforcing agreements

• Globally harmonized terms, as possible, are key to:• Operational & drafting efficiency

• Legal risk management

• Tax treaty-optimized terms are key to:– Net income to licensor– Minimized double taxation– Tax compliance



Strategic Intelligence

Scenario: • Licensor – U.S.-based computer company with

assertion-driven WW technology licensing program for hardware, software & materials.

• Licensees – manufacturing & design suppliers and distributors HQ’d in Far East (Taiwan, Korea & Japan).

Strategic Intelligence Needs:• Company Dossier• Affiliates List• Command & Control Matrix Report• Litigation History Report• Spot Intelligence Reports



Strategic Intelligence – Dossier Components

• Executive summary• Existing connections with licensor• Company snapshot• Key executives (Command & Control Matrix)• Shareholders• Products• Major customers (channels)• Major suppliers



Command & Control List



Command & Control Matrix



Geolocation – Trace Routing of IP Addresses

*Resources:www.samspade.orgwww.visualroute.com.



Strategic Intelligence – Dossier Components (cont’d)

• Performance Analysis– Selected financial data (projected &

historical).– Shipments; units sold (projected &

historical).– Market share, awards & industry ratings.

• Strategy Analysis– Marketing & R&D strategies. – Licensing & other IP activities.– Mergers & JVs, acquisitions

& divestitures.



Strategic Intelligence – Dossier Components (cont’d)

• Subsidiary Analysis– Alpha by name (include name variants,

transliterations, foreign character sets).– Ownership hierarchy.– Potential infringement targets.– Geographical markets & jurisdictional

contacts.• Extensive, dated citations to source materials



Strategic Intelligence – Substantiating Sources

• Source qualifiers• Confirming sources• Dates & URLs• Archival



What Bacon Knew About Licensing

Knowledge is Power!Sir Francis Bacon, ReligiousMeditations – Of Heresies (1597)

Image © Elizabethan Era



Subsidiary Analysis & IP Rights Flow

Specialty mfg

entity

Know Thy Partner!




WW distribution

chain-Germany HQ’d

Far East-based

wholesaler

R&D entities

Parent

Chinese mfg entity

BVIholding company

Retail entities

CONTROL ENTITY

Newly acquired

entity

Real World ExampleControl entity has ~150

subsidiaries & >1K locations.

Specialty mfg

entity




Specialty mfg

entity

WW distribution


Far East-based

wholesaler

R&D entities

Parent

Chinese mfg entity

BVIholding company

Retail entities

CONTROL ENTITY

Newlyacquired

entity

Control entity has ~150 subsidiaries.

LICENSOR CONTRACTS HERE.




Specialty mfg

entity

WW distribution


Far East-based

wholesaler

R&D entities

Parent

Chinese mfg entity

BVIholding company

Retail entities

CONTROL ENTITY

Newly acquired

entity

RIGHTS FLOW HERE




Specialty mfg

entity

WW distribution


Far East-based

wholesaler

R&D entities

Parent

Chinese mfg entity

BVIholding company

Retail entities

CONTROL ENTITY

Newly acquired

entity

PRODUCTS SHOW UP HERE



Affiliates List

• Determine Affiliates List from Dossier.– Identify all known relevant companies

related to potential licensee. – Uses:

• Counter-assertion risk analysis.

• “Licensed Subsidiaries” addendum.

• Enforcement strategy.



Intelligence-Powered Drafting

• Party Identification

–Complete name (Commas & abbreviations count!)

–D&B, EIN, registration & other numbers




• Considerations:– Industry consolidation. – Control of rights flow.– Competitive defense

• Better Drafting Practices:– Definitions for Subsidiary, Licensed Subsidiary,

Former Subsidiary, After-Acquired Subsidiary.– Licensed Subsidiary Addendum.

– Duty extensions as to reporting, payment & audit.



Licensed Subsidiary Addendum



Intelligence-Powered Royalty Reporting



Globally-Harmonized Terms (A Brief Note)

Scenario: • Licensor – US-HQ’d digital advertising company with Canada-based subsidiary & servers for global online distribution of software and access to software.

• Licensees – large grocery chains, big box stores, medical offices, malls; distributors with networks of end-users.

Legal & Operational Needs:• Minimize legal expense.• Implementation efficiency.• Minimize legal risk.



Globally-Harmonized Terms (A Brief Note)

Arbitration to Unify & Reduce Risk• Arbitration agreement addendum• Choice of law• Choice of forum (AAA, ICC, etc.)• Importation of Federal Rules of Civil Procedures & Evidence

• Arbitral v. Non-arbitral Issues– Contract formation– Patent validity

• Cost, secrecy & binding and precedential effect



Royalty Taxation

Painting by Alex Gross. www.alexgross.com. Used with permission.



Typical, But Inadequate, Drafting

“All taxes imposed due to the performance of the parties under this Agreement shall be paid by the party required to do so by the applicable law.”



Business & Legal Concerns

• Tax & financial planning– In-country taxation reduces net deal value.– Predicted v. actual cash flow?

• What is the “applicable law”?– Conflicts between choice of law provision &

requirements imposed by in-country law.– Tax treaties – no opt-out.

• Licensor liability in foreign jurisdiction.

• Contract management issues



Tax Treaty-Optimized Terms

Scenario 1: Digital advertising company licensing distributors & end-users in the EU. Needs – Maximize net income into Canada orUS; minimize double taxation; avoid “permanent establishment” elsewhere.

Scenario 2: Global computer company with footprints & licensees in Korea & Taiwan. Needs – Maximize net income; minimize double taxation; ensure tax compliance.



NoNoTaiwanYesYesSwitzerlandYesYesMexicoYesYesIndiaYesYesFranceYesYesCzech RepublicYesYesChina

Yes (15%)No (30%)BrazilYesYesAustria

Canada Bilateral Tax Treaty

US Bilateral Tax Treaty

Jurisdiction

Scenario 1: Sample Royalty Taxation



Scenario 2: Royalty Taxation in Korea

• International law governs.– United States-Republic of Korea Income Tax

Convention, Article 14 (Signed at Seoul June 4, 1976) (Entry into force Oct. 23, 1979).∗

∗Resources:• PricewaterhouseCoopers, Doing Business and Investing –

Global Intelligence from PricewaterhouseCoopers – Korea 429-36 (2002).

• U.S. Internal Revenue Service:– Treaty text, http://www.irs.gov/pub/irs-trty/korea.pdf.– Technical Explanation, http://www.irs.gov/pub/irs-

utl/koreatrweb.pdf.• Korea’s National Tax Service: Generally

http://www.nta.go.kr/eng/default.html.



Varying Royalty Rates Under the Treaty

• Generally, where a resident of one of the two Contracting States derives royalties from sources within the other Contracting State, that other Contracting State may impose a maximum tax burden of 15% of gross royalties. See Art. 14(1).



Exemption from Royalty Taxation

• Exempt when licensor is resident of one Contracting State, but has “permanent establishment” in the other Contracting State and when IP from which royalties arise is “effectively connected” with that permanent establishment.– Arts. 14(3) & 6(b). If exempt, royalties are

treated as business profits, and taxation basis is reduced by expenses reasonably connected with those profits. Arts. 14(3) & 8(b).



Article 6(b) Connection Factors

• Factors to determine whether IP from which royalties arise is “effectively connected” with “permanent establishment.”

– Whether IP used in or held for use incarrying permanent establishment’s industrial or commercial activities.

– Whether activities carried on through permanent establishment are material factor in income realization from IP.



Proof of Tax Payment in Korea

Certificate for Non-resident’s Tax Payment



• Certificate should be timely completed and filed with the royalty withholding by the licensee with Korean tax authorities.

• Upon filing, tax authorities acknowledge payment with signatures and stamps or chops.

Proof of Tax Payment in Korea



• Licensee Obligations:–Timely file Certificate & pay withholding,

preferably by dates certain.–Timely provide licensor copy of filed

Certificate.–Warrant and represent Certificate &

withholding as complete, timely & correct.

Better Drafting Practice



• Domestic law governs as to royalties to US licensors.– Income Tax Act, 2006/9/11.∗

• International law as to some other countries having bilateral tax treaties with Taiwan.∗

∗Resources:• English translations of domestic laws: ROC Ministry of Finance, Related

Laws and Regulations, <http://www.mof.gov.tw/engWeb/mp.asp?mp=2>; ROC Ministry of Justice, Laws and Regulations Database of the Republic of China, <http://law.moj.gov.tw/eng/>.

• Treaties: Ministry of Finance, http://www.dot.gov.tw/en/display/list.asp.

Royalty Taxation in Republic of China (Taiwan)



15%Vietnam10%United Kingdom10%South Africa15%Singapore10%Netherlands10%Indonesia10%Gambia

12.5%Australia20%Non-treaty Countries

Royalty Withholding Rate

Jurisdiction

Sample Tax Treaties & Withholding Rates of Taiwan



Royalty Tax Withholding Documentation

• Licensee to file a Republic of China Withholding & Non-withholding Tax Statement upon royalty payment to foreign licensor.– Payor & payee.– Payment particulars, including total

amount paid & period for payment. – Withholding rate applied– Net tax withheld– Net payment wired or otherwise

transmitted to licensor.– Reported in NT$.



Alternate Approaches Under Taiwan’s Tax Law

1. Instead of withholding tax, licensee may apply for income tax refund for royalties paid to a foreign licensor under Article 4.21 of Taiwan’s Income Tax Act

– To facilitate application, licensor must appoint licensee as its representative for matters related to pursuing that application with the Taiwanese authorities.

– Better practice – Revocable appointment.

2. Others?



Better Drafting Practice

• Agree as to applicable tax law.∗

• Caution as to treaty shopping.• Licensee’s indemnification of licensor for any

foreign tax liability arising from licensee’s failure to timely & accurately file tax documents & pay withholdings to relevant tax authorities.

∗Resources:• Organisation for Economic Co-operation and Development• ABA’s International Law Section, www.abanet.org/intlaw. • ASIL’s Guide to Electronic Resources for International Law,

www.asil.org/resource/pil1.htm. • International Legal Materials • Treaties in Force



Key Take-Aways

• Strategic intelligence is key to:– Tactical advantage in negotiations– Control of IP rights flow– Drafting precision & self-enforcing agreements

• Globally harmonized terms, as possible, are key to:• Operational & drafting efficiency

• Legal risk management

• Tax treaty-optimized terms are key to:– Maximized net income to licensor– Minimized double taxation– In-country compliance


Thank You!

Emile Loza, JD, MBA, CLPFounding Attorney

Technology Law GroupBoise, Idaho

[email protected]

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