The key to IP

Ireland continues to be a jurisdiction of choice for companies wishing to establish a European base. Alistair Payne reports on managing IP in Ireland

One of the fundamental challenges for companies establishing themselves in Ireland is the transfer and creation of technology involving IP rights. Arrangements need to be structured carefully to ensure that existing and future IP rights are protected properly and that holding and licensing structures are cost and tax-effective and are sufficiently flexible for the purposes of future commercialisation.

Case study: Starfinservices
Take, for example, Starfinservices (Starfin), a US-based corporation which has successfully developed a number of software products for the US-based financial services industry and now seeks to expand into Europe. Starfin has made worldwide patent applications for key elements of its software, owns various copyrights in the software and associated materials and has made trademark applications in the US and Europe.

Starfin wants to manage its European operations and considerable research and development (R&D) from its European base, but outsource the manufacture of peripherals, packaging and associated materials to a low-cost jurisdiction in Asia. Starfin is looking at Ireland as one of the potential locations for its European operations and is seeking advice on an appropriate structure.

Assignment or licence of IP rights into an Irish corporate structure
There are particular advantages in Starfin maintaining the beneficial ownership of its existing IP in the parent US entity. If it is acquired in the future or wishes to enter into joint venture-type arrangements with other US corporates, then it will be much simpler to streamline existing IP ownership in its parent entity. Also, there might be significant tax consequences of assigning IP rights to a foreign entity.

Consequently, Starfin’s preferred method of technology transfer is to license its rights. Starfin could license rights directly to SFS Ireland (SFSI – an Irish incorporated and resident company) or to a holding company, SFS Holdco (SFSH), located in an offshore location such as Bermuda. SFSH would in turn sub-license rights to SFSI. A separate holding company structure helps isolate the US parent from possible product liability suits and from liabilities arising from possible patent infringement allegations. Royalties paid by SFSI to SFSH should be tax deductible for SFSI, provided that they are of a revenue nature and are incurred wholly and exclusively for the purposes of SFSI’s business. As there is a full stamp duty exemption on the transfer of IP (including goodwill attaching to unregistered trademark rights), whether by assignment or licence, no stamp duty issues arise.

Research and development
Starfin might also enter into an R&D arrangement on a cost-sharing or services basis with SFSI or SFSH for further development of the base Starfin software product and related technology. Ownership of IP rights arising from the R&D activity is another issue.

It may be important for Starfin to hold all IP rights in software and technology in the one US-based entity if, for example, it wishes to sell or spin-off part of its business operations in the future. This will result in licence income being taxable in the US.

Alternatively, SFSH (based in Bermuda) could own IP rights in the newly developed software and technology. Split ownership of the base software from new incremental developments might cause difficulties if Starfin decides to divest part of its business. However, there will be minimal disadvantage to this structure if the aim is to create independent add-on developments. Royalty payments in respect of the licence of new software and technology to SFSI will be tax deductible for SFSI. Ownership of IP rights in the software and technology by a foreign company based outside the US is likely
to be advantageous in the event of a future divestment.

Otherwise, IP rights in the new software and technology could be owned by SFSI. The extent to which income from the exploitation of IP (in this case from the sale of software products) would qualify for the 12.5 per cent tax rate is discussed below. If the R&D leading to the registration of any new patents is to be undertaken in Ireland, a complete corporate tax exemption is available on patent royalty income in qualifying circumstances. Ireland has also just introduced a new 20 per cent tax credit for incremental R&D expenditure.

Establishing an Irish trading operation and IP rights licences
To qualify for the benefits of Ireland’s 12.5 per cent tax regime, SFSI must carry on trading activities in Ireland. Starfin proposes to organise its European operations through SFSI. SFSI will contract with third-party manufacturers to produce associated peripherals and packaging. The company will also contract with group distributors and direct outlets to distribute the software products both in Ireland and elsewhere in Europe. Provided SFSI is able to demonstrate that it has sufficient substance in Ireland and that it has personnel in Ireland with the necessary qualifications and skills to carry on the activity, then it should meet the trading threshold. Outsourced or subcontracted activities will comprise part of SFSI’s business, provided that these operations are managed from Ireland.

Structuring rights in this way raises a number of IP rights management issues that will need to be addressed when establishing these arrangements.

Trademark rights
Starfin has made European and Irish trademark applications for the Starfin mark. Trademark rights will be licensed through its chosen structure to SFSI and sub-licensed to third-party manufacturers.
Trademark usage in each jurisdiction should be monitored to make sure that marks are not being used deceptively, correct trademark notices are in place and that the trademarks are being used at all.

Patent rights and confidential know-how
Starfin’s existing patent rights include applications under the European Patent Convention (EPC) and Irish patent applications for short-term patents in relation to novel and inventive functions of its financial software product, but not for the software “as such” (the general European prohibition on patenting a computer program “as such” applies). The Irish applications will provide short-term, 10-year protection when granted and will be easier to obtain (requiring a lower inventive threshold) than the EPC patents, but will lapse upon the eventual granting of the EPC applications. Confidential know-how includes the manner of application and calculation of the financial software, without which the system is effectively inoperable. All of these rights are to be licensed to SFSI. In the event that SFSI ever requires to enforce the licence against third parties in Ireland, the licence of patent rights will need to be registered at the Irish Patents Office.

Irish law imposes a withholding tax on royalties or other payments in respect of the use of patent rights. This charge may be reduced or eliminated entirely where the royalty is paid to a company resident in a jurisdiction with which Ireland has a double taxation agreement (DTA). However, if SFSI is paying a patent royalty to SFSH in Bermuda, withholding tax would apply. In these circumstances, it would be preferable to separate out any licence of patent rights to SFSI from the licence of any other IP rights. This will permit an independent value to be ascribed to royalties arising from any patent rights to that arising from all other IP rights for the purposes of the withholding tax calculation. Perhaps SFSH could also value elements of the confidential know-how relating to the financial software separately from the patent rights and license them together with other IP rights.

Issues that will need to be treated with care so as not to contravene European competition law principles (Article 81 of the EC Treaty and the recently revised Technology Transfer Block Exemption) include the term of the respective patent and know-how licences and the manner in which the agreements treat the ownership of any patent or technology improvements which may be developed by SFSI.

Copyright and moral rights – licensing issues
Starfin owns various copyrights in its software and printed materials which, although they are developed in the US and transferred to Starfin under US law, are recognised in Ireland by the Copyright and Related Rights Act 2000. Ownership rights need to be confirmed and moral rights waivers need to be sought from authors before these copyright works can be licensed.

General IP business establishment issues
An ongoing management programme for Starfin’s IP rights will ensure that appropriate ownership, assignment and confidentiality provisions are inserted into employment agreements and all relevant service contracts. It will also include a register of key works and inventions created, the authors/inventors of those works and of all registered IP rights. Should Starfin ever decide to sell its Irish/European operations, this register will provide a straightforward starting point for a potential purchaser’s due diligence exercise, and best of all it will considerably simplify life for Starfin’s in-house counsel.

Alistair Payne is head of the commercial IP group at Matheson Ormsby Prentice and was assisted in this article by Catherine Galvin