Moving IP Back To The US Involves More Than Saving Tax Dollars

For years, US multinational companies routinely placed their global intellectual property in affiliates in low-tax jurisdictions outside the US. This may no longer become routine.

Recent changes in the US tax law have made the US a more attractive IP venue, particularly when weighed against the increasingly complex international tax environment. These changes include an expanded deduction on income from US exports, an exemption from the 15% global minimum tax on US profits, and the retention of the 21% US corporate tax rate.

Several US companies are considering migrating corporate IP to US affiliates using two possible strategies: transferring existing IP from offshore affiliates to US entities or placing all newly created IP in US affiliates. Each option poses certain IP challenges that tax and IP advisers can effectively manage only through close collaboration.

Transferring Existing IP

To transfer intangibles from an offshore affiliate to a US entity, a company must take three critical steps.

First, it must identify what specific intangibles will be transferred to the US entity and then execute assignments to be recorded with the proper authorities in the appropriate jurisdictions.

Second, it must terminate all existing inter-company licenses involving the IP and execute new licenses naming the US affiliate as the lawful owner. This step is necessary to provide affiliates with the necessary legal rights to sell, use or sub-license the underlying products, services or technologies.

The new licenses also should contain adequate provisions protecting the enforceability of the IP. In the case of patented products sold by affiliates, for example, the licenses should give the affiliates certain exclusive rights so that they can enforce the patents against third-party infringers.

Similarly, in the case of trade secrets, the licenses should impose on the affiliates specific confidentiality obligations, while, in the case of trademarks, the licenses should include quality control measures to protect the validity and value of the licensed marks.

Finally, the company should terminate any existing third-party licenses involving the IP and execute new licenses identifying the US affiliate as the new IP owner. Without new licenses naming the correct owner, the current licensors will have no right to license the IP to third parties, and this may lead to breach-of-contract claims or other liabilities.

New IP Placement

Even if a US company doesn't transfer its current IP to a US affiliate, it may still elect to place some or all of its newly created IP in a US entity. To this end, the company can adopt several measures designating the US entity as the owner of future IP.

For example, it can use employment agreements requiring employees conducting research and development to "hereby assign" to the US entity all future inventions, discoveries and creations. In the US and other jurisdictions, such a provision will trigger the assignment as a matter of law at the moment the employee conceives the invention or other innovation.

It also can adopt policies requiring all patent and other IP applications to name the US entity as the owner of any new invention or other innovation. Finally, the company can put in place contractual provisions requiring the US entity to be named as the owner of any IP resulting from affiliates' R&D activities or collaborative ventures with third parties.

Looking Ahead

Any US company considering a tax-driven move of current or future IP to a US affiliate should carefully assess the steps necessary to protect and enforce the company's IP rights. At a minimum, such an assessment will require the corporate tax and IP departments to work closely together to:

• Determine the specific IP to be owned by the US affiliates
• Identify the inter-company and third-party licenses that need to be revised
• Identify the employment agreements and research contracts that should be re-drafted
• Ensure that the new licenses enable the company to protect and enforce its IP rights.

Only through such a collaboration can the tax and IP departments ensure that the company will adequately manage the challenges of IP migration.

Originally published by Bloomberg Tax

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