Intellectual property (“IP”) is a creation of the mind and includes things like inventions, literary and artistic works, designs and symbols, software code, names and images used in business.
IP is commonly protected in law by way of patents, copyright and trademarks which enable the person who came up with the idea to securely earn recognition or financial benefit from whatever it is he/she has invented or created.
An Offshore IP company is an ideal vehicle for the administration and management of licenses and intellectual properties including computer software, technical know-how, patents, copyrights and trademarks.
Every other day I’m asked to advise on how ownership and commercialization of IP can be managed from an Offshore Perspective.
Let’s look at a particular example.
Recently I was consulted by a cutting edge motor vehicle designer looking to begin manufacture.
Here are the steps you would need to undertake in order to establish such a business (ie once you’ve worked out where, ie in what country, you intend to manufacture):
- Register a tax free Company in a hand-picked jurisdiction (where to incorporate depends on a number of things including where you live, where you intend to manufacture, where you intend to sell etc etc, contact me for advice on this).
- Transfer ownership of the IP (eg the car design) to the nil tax Offshore Company (or have the Tax Haven Company apply for registration/recognition at law as the initial owner of the IP ie if you are not, at law, presently the registered/legal owner of the IP).
- Obtain the necessary government approvals for your business in, then incorporate a domestic Company in, the country where you intend to manufacture.
- Have the Tax Free Offshore Company License the use of the IP to the domestic/manufacturing Company
1. Register the Tax Free Offshore Company
This is the easiest part. All you need to do to register an Offshore Company is:
(a) Complete, sign and email your provider an order form.
(b) Email your provider certified copies of your passport driver’s license and proof of address as per the requirements.
Note: If, whilst setting up/conducting operations, you remain tax resident in a country which has CFC laws you will want to also include a Private Foundation as part of your Tax Free Offshore Company structure.
2. Transfer ownership of the IP
All forms of intellectual property – copyrights, trademarks, trade secrets and patents – can be transferred in two ways: the property can be temporarily transferred under a license; or the property can be permanently transferred by way of an assignment.
An Assignment is a permanent transfer of the rights. In other words, you’re selling the rights to someone else and you will not be getting them back. Assignments are typically made under employment or contractor agreements, when companies acquire the assets of other companies, or when intellectual property is used as security such as when a movie studio secures finance by assigning movie rights in return for a loan.
If you create or invent something with commercial potential, someone may eventually want to buy the rights from you. That’s usually done with an assignment (or, as its sometimes called, an assignment agreement). An assignment is a permanent transfer of your ownership rights to a copyright, patent, trademark, or trade secret. Why would you give up all rights? Usually it’s because someone makes you an offer that’s hard to refuse — typically a lump sum payment, or periodic royalty payments based on a percentage of sales or units. When you assign your creation, you are the assignor and whoever purchases the rights is the assignee.
There are three common types of assignments in intellectual property: trademark assignments, patent assignments, and copyright assignments.
Trademark Assignments
Trademarks are the names or logos that are used to identify goods and services. If you were buying the Coca-Cola Company, you would want to make sure that the sale included an assignment of the company’s trademarks and their associated goodwill (the intangible value that the trademark possesses because consumers know it). Trademark assignments typically occur when a company is sold. A trademark assignment may also occur as part of a bankruptcy or may be used as a security interest when a business seeks to obtain a loan.
Once the assignment is made, the business buying the mark, the assignee, becomes the owner, and the assignor (the seller) has no further ownership interest. On some occasions, an assignment may be transferred back to the original owner if certain conditions are met. Most countries’ national trademark laws require the assignment of a mark to be in writing. Assignments should be recorded with the local Government’s Patent and Trademark Office and the new owners can obtain new certificates of registration in their names.
Patent Assignments
Patents protect inventions, industrial designs, and plants. Assignments of patent rights must be in writing. Many inventors assign their invention, either to the company they work for under an employment agreement or, in the case of independent inventors, to outside development or manufacturing companies. These assignments typically transfer ownership of any patent that issues on the invention and may (although usually not in the case of employed inventors) provide for compensation for the inventor, although employed inventors often receive little or no additional compensation, because they are getting paid to invent. Like trademark assignments, patent assignments usually must be recorded with the responsible local government department. Trade secrets – confidential information that provides a business advantage – and patent applications or unpatented inventions can also be assigned.
Copyright Assignments
Copyrights protect music, art, writing, software, and other forms of creative expression such as websites, blogs, and video. Copyright assignments must be in writing. Usually, a copyright assignment involves the transfer of the entire copyright, as when a freelance writer assigns all copyright interests in a particular article to a magazine. But an assignment may also transfer less than the whole copyright. For example, an author might assign the right to promote, display, and distribute a novel to a publisher while reserving the right to create derivative works (such as a screenplay) from that novel. Copyright assignments may be recorded at the Government Copyright Office. Copyright assignments, unlike patent and trademark assignments, can be terminated under certain conditions.
3. Forming a Domestic Company
Given you will probably need to engage a lawyer on the ground (in the country where you intend to manufacture) to help you obtain the necessary business/residency permits, it may be cheaper and more efficient to have that lawyer incorporate the domestic Company for you.
4. License the use of the IP to the Offshore Company
What this entails is having a Lawyer draw up an agreement between the Offshore Company and the manufacturing Company which affords the manufacturing Company the right to manufacture the item (eg cars) provided it makes regular license or royalty payments to the Offshore Company. The royalty payments are receipted by (and may potentially be reinvested) by the Offshore Company free of tax. The key to this working is that the amount of the Royalty payments should be seen to be commercially realistic for that type of industry/market/product.
Practically speaking, commonly the manufacturing Company will pay the Offshore Company a fee (eg a percentage of sale price) for every item (eg car) sold. Obviously you’ll need to do some research to find out what a fair percentage would be.
As ever local laws can have an impact. Hence you should seek local legal/tax/financial advice before committing to embark on such a program as is detailed above.
