Of course, global business expansion is critical and the myriad of different ways to achieve expansion is dizzying. Licensing is one of the lower cost more effective methods of gaining a foothold in a foreign market. Generally licensing includes, patent and know-how licensing, copyright licensing, and trademark licensing, but this is certainly not exhaustive. There are challenges to cross-border licensing, but there may also be significant benefits. The following Post raises just a few of the many issues that are essential to a successful cross-border license program.
Intellectual Property Protection: When analyzing whether licensing is the best option, first determine what intellectual property protection is available in the country and/or region being considered. A Nondisclosure/Confidentiality Agreement is particularly essential when talking with potential foreign licensees. Make certain there is one in place prior to discussing any specifics with regard to your intellectual property. Obtaining patent, copyright or trademark protection in the licensee host country is also important. Although, the license agreement could shift the burden of these expenses to the licensee, the resulting royalty stream would necessarily thereby be reduced, and protection may be difficult to control. If possible, register your key intellectual property assets in your target markets. Decide whether any derivatives, improvements or modifications to the intellectual property will be owned by your business or the licensee. Make certain you include provisions that include assignment of any such derivatives, improvements or modifications.
Tax consequences: One of the benefits of licensing is that no Permanent Establishment is created. The license agreement should be designed to ensure the activities of the licensee, and the relationship created by the license agreement does not create a Permanent Establishment. Determine whether there are withholding taxes due on payment of a royalty. In most cases there will be withholding tax, but often this is mitigated by a double tax treaty which results in a lower or zero withholding tax. There are a number of different license models, where one model can attract withholding tax another model may be considered delivery of a service.
Hedging for foreign exchange risks: Determine whether your business is willing to take the foreign exchange risk. For example, will the licensee in France pay royalties or license fees in US dollars or Euros. If the licensee pays in Euros, and the business must convert the Euros into US dollars what will the exchange rate be at the time of payment or the time of conversion? Exchange rates fluctuate and the result may be an increase or decrease in your overall margin, if for example, the Euro weakens against the US dollar.
In conclusion, cross-border licensing transaction can be good for the bottom line, take the time to complete your due diligence and understand the risks are before proceeding to avoid any surprises.