The migration of intellectual property (IP) rights to tax advantageous jurisdictions is receiving ever-greater attention, as companies and tax authorities focus on the significant value of intangibles.

Like all assets of a business, it is important to ensure that intangibles are owned and exploited in a tax-efficient manner and it can be an attractive proposition to move IP rights to a location that offers greater tax advantages.

However, it is important to consider both IP aspects and tax benefits before moving IP rights. Without a proper understanding of the issues involved, a tax-driven migration can run into serious issues. Before migrating IP rights, ensure the following issues are addressed.

Identity

What are the intangible rights being dealt with? It is important to identify as precisely as possible what intangible rights are involved, to ensure that all relevant rights are transferred together and not just easily listed registered rights such as trademarks or patents.

In seeking to identify the rights to be transferred, remember that a single brand, item of technology, product, logo and so on might be protected by a bundle of separate and possibly overlapping intangible rights, some of which will be legally protected by IP laws (e.g. patents, trademarks, copyright) and some of which will be protectable by contractual rights (e.g. confidential information, non-compete restrictions).

Some intangibles may not be legally protectable at all but may nevertheless have a tax value, for example certain components of marketing intangibles.

Ownership

Who is (and will be) the legal owner from an IP perspective? The legal owner from an IP perspective will not always be the same as the economic owner or be the entity that has invested or will invest in the creation of the intangible.

In many jurisdictions if a copyright work is commissioned from a contractor, the first owner of the copyright will – absent an express, written assignment – be the contractor and not the entity who paid for the work to be done. A disconnection of legal ownership of IP rights and economic ownership commonly arises in multinational groups where one company invests money in the creation of IP rights, but the rights actually arise as a matter of local law to another company.

These hurdles are generally manageable once it is acknowledged that economic ownership (as determined by the tax adviser) and legal ownership (as determined by the IP adviser) are two distinct concepts. When migrating IP rights, it is essential to ensure that legal ownership is transferred appropriately.

Many businesses do not understand the subtleties of these rules, which vary according to local law, making it risky to take initial assertions about ownership at face value without further analysis, particularly for unregistered intangibles.

Migration

Is it legally possible to move the intangibles? Not all intangible rights are legally capable of being assigned from one entity to another, and an attempt to move such rights might simply be invalid. For example, the author of a copyright work has moral rights such as the right to be identified as an author and to object to derogatory treatment of a work.

While these rights can be waived in some jurisdictions (e.g. the UK but not in France), they cannot be transferred to anyone else. Similarly, some jurisdictions such as Australia have strict rules about transfers of domain names or prohibit the assignment of unregistered trademarks separately from the remaining business assets to which those trademarks relate.

Licensing

What licences will need to be in place on migration? Formal licensing documentation is not only important from a transfer pricing documentation perspective, it is also crucial in any migration of intangibles. Failure to document licensing arrangements can have important consequences. For example it can:

. create a risk of invalidating a trademark for non-use, result in a non-exclusive licensee losing the ability to enforce its rights and recover its damage; and

. prevent royalties from being able to leave the jurisdiction due to currency or banking controls.

Enforcement

Will the owner still be able to effectively enforce its intangible rights? IP rights are negative in nature – they are monopoly rights which allow the owner to prevent a third party from doing specified things (e.g. using the same brand, making the same product). As such, they only have value if they can be effectively enforced against third parties.

If the migration is not planned and executed carefully it can seriously jeopardise the ability of the business to enforce its IP rights, effectively making those rights worthless. No matter how great the tax savings will be from a migration, it cannot compensate for IP rights that cannot then be enforced.

A migration of intangibles which results in a separation between owner-ship and exploitation can have a negative impact on the ability of the group to enforce IP rights. Take the example of one company owning the IP rights (e.g. an IP holding company in a tax advantageous jurisdiction) and other companies in the group (e.g. manufacturing entities in other jurisdictions) using the IP rights. Depending on local law governing the IP right in question, this can result in a situation where the IP-owning company has a legal right to enforce but has not actually suffered the majority of the loss as a result of infringement and so cannot recover full damages and the entity which has suffered the majority of the loss has no legal standing to enforce the rights.

These issues are particularly acute if group companies are using the IP rights on a non-exclusive basis. These issues can sometimes be overcome by appropriate licensing arrangements being implemented, but not always and you should always check with an IP adviser before moving rights such as patents, designs, trademarks and copyright.

Treaty benefits

Does the relevant jurisdiction benefit from key IP treaties? In any migration of IP, careful consideration must be given to whether the target jurisdiction in which the IP will be legally owned is a member country of, and enjoys treaty protection under, the various international IP treaties that afford IP owners reciprocal rights in other member jurisdictions.

In particular, if the entity concerned uses the Patent Cooperation Treaty (PCT) for filing patent applications and/ or the Madrid Protocol for filing trademark applications, confirmation should be obtained that:

. Locating the IP in the target jurisdiction will not compromise the businesses' ability to file future applications using those treaties.

. The business has a real and effective business in the country in which it will file its founding applications.

Costs

What will it cost to migrate the intangibles? For registered IP rights, migration is a two-step process:

1) A legal assignment will be entered into which transfers legal ownership from A to B. 2) That change of ownership must then be recorded with the relevant registration body.

A similar process is advisable to record any licences of IP rights. Failure to record these transactions can result in sanctions such as an inability to recover damages or even, in certain cases, invalidity of the IP right itself. As IP rights are territorial, their transfer must be recorded at each local registry involved.

The process of recording assignments following the migration of a large worldwide portfolio of registered rights can therefore involve large numbers of local registries. Local agents usually need to be instructed and local registries can be exceedingly fussy about formalities such as translation, powers of attorney, notarisation and legalisation.

Large programmes to record assignments can take years to complete and the costs can add up quickly. In addition, consideration needs to be given to the administrative burden and ongoing inconvenience these programmes can create for companies.

Provided that a migration of IP rights addresses the issues identified above, it can provide companies with real tax benefits without jeopardising the very reason why those IP rights have value in the first place: namely their ability to be enforced against third parties to maintain a company's competitive advantage.

Michelle Dillon is a senior associate in the intellectual property department of Baker & McKenzie in London.