License Agreement Withholding Tax

So what can we learn from the Wistron case? First of all, in order to avoid surprises, the parties should discuss tax obligations during license negotiations, in the license agreement and in a dispute resolution procedure, otherwise a third party can decide on these issues and it can be assumed that objections have been waived. Second, although in most countries the law may impose a tax burden on licensors, it may be possible to override this legal presumption through contractual language formulations. The language of the APL Mondis/Wistron has achieved this. A “big-up” language like this can also do the job: Mondis v. Chimei-Innolux (“Innolux”) affected the same NPE and Innolux, another Taiwanese manufacturer of consumer electronics. In this case, there was no license agreement. Instead, Mondis sued Innolux for patent infringement and won a final verdict on more than $15 million in past damages, as well as ongoing royalties. The court then scheduled a hearing to clarify several questions about the final verdict. In particular, while the court had asked Innolux to comply with the decision “without discounts or deductions”, Innolux argued that it was required by law to withhold 20% of payments, and under a double taxation agreement between the United Kingdom (Mondis` residence) and Taiwan, Mondis should be entitled to a 50% refund on all taxes withheld. In view of this genesis, it appears that an exclusive and perpetual agreement, whether a licensing agreement or an asset purchase agreement, would constitute the transfer of all essential intellectual property rights. Even if the licensor does not insist on shifting the tax burden through such provisions, it will at least want to include language stating that the licensee must cooperate in all efforts to obtain an exemption from the tax authorities of the licensee`s country.

As in the Wistron case, Mondis objected to restraint and the court sided with Mondis, but for other reasons. In the present case, the judgment was directed against two Innolux companies – the Taiwanese parent company and a US subsidiary – and the two defendants were therefore jointly and severally liable for the judgment. The court noted that “if foreign and U.S. companies are jointly and severally liable, U.S. judgments must be paid in full, regardless of foreign withholding taxes.” Mondis v. Innolux, loc. cit., relying on QinetiQ Ltd.c. Samsung Telecomms. On the.

L.P., Case No. 2:03-cv-22 (E.D. Tex. 7 September 2005). As in the Wistron case, the court`s decision effectively forced Innolux to pay Mondis` Taiwanese taxes. Although Taiwanese law explicitly states that 20% of all royalty payments are “withheld” by Taiwanese licensees from foreign licensors and paid to the authorities, the court found no reason why a Taiwanese company cannot comply with the law by paying taxes in addition to royalty payments instead of deducting taxes from payments. The court found that Wistron had not provided any evidence to the contrary, and such a finding was supported by the people`s Liberation Army`s language, which required Wistron to make payments in full and without holdbacks. The IRS`s position on the rights Mylan has retained is unclear, which is why Mylan said in his petition that the IRS`s position was worthless. The IRS`s response to the petition should give taxpayers a good overview of how the IRS frames its analysis of the license versus the sale, and should help provide additional guidance to pharmaceutical companies in entering into such agreements, regardless of the final conclusion in this case. In both cases, the U.S. court issued a decision that, at first glance, appeared to violate the requirements of Taiwanese law. As in most countries, Taiwanese tax law requires all local companies that pay intellectual property royalties to a non-resident licensor to withhold a portion of the payments (20% in the case of Taiwan) and pay them to the tax authorities to meet the licensor`s tax liability.

Essentially, the foreign licensor is liable for the taxes, but the local licensee acts as a collection agency for the tax authorities. A first consideration would be whether the agreement involves the sale of intangible assets, rather than initial and milestone payments under a cooperation agreement or possibly a partial sale and partial collaboration agreement. Even though the research will be clearly successful, it is usually unlikely that the auditor will meet with a party that directly sells this proven research, as this proven technology may be the most valuable asset of this corporate governance and/or serve as a basis for the development of other intangible assets. If the sale is sold, the sale can be made on a contingency of use. In any event, if the advance payments and milestone payments represent the proceeds of the purchase of all material rights in the research, the payments are intended for the purchase of an asset with a useful life of more than one year and must be capitalized under R.I..C§ 263(a). In November 2016, a U.S. District Court ordered a Taiwanese company to pay taxes on royalties it paid to a foreign licensor, although those taxes are usually the licensor`s obligation. Mondis Technology Ltd.c.

Wistron Corporation, Case No. 15-cv-02340-RA (S.D.N.Y. 3 November 2016). A few years earlier, the same licensor had forced another Taiwanese licensee to pay his Taiwanese taxes. Mondis Technology Ltd.c. Chimei-Innolux Corp., Case No. 2:11-cv-378-JRG (E.D. Tex.

30 April 2012). Given the nature of the life sciences industry, including the desire of companies to share their know-how and enter into joint research agreements and other collaborative partnerships in the drug development process, pharmaceutical companies are often grappling with the question of whether a transaction is a license or a sale. The main tax difference between a license and a sale transaction is that royalty payments are taxed as ordinary income and the proceeds of sales as capital gains. Finally, it should be noted that issues relating to the international patent licensing fee are neither trivial nor unique to Taiwan. In September 2016, Microsoft filed a lawsuit with South Korean tax authorities, demanding a refund of 600 billion won ($533 million) in taxes it allegedly overpaid, based on patent royalties it paid to Samsung and other Korean companies. Microsoft claims that patent licenses covering jurisdictions other than Korea have not been properly taxed. .