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Intellectual property remains a significant challenge facing the boardrooms of technology companies of any size

While the world’s biggest companies battle over IP rights in the courts, the protection of intellectual property remains a significant challenge facing the boardrooms of technology companies of any size.

According to the World Intellectual Property Organisation, 2012 saw the highest number of patents filed worldwide in the last 20 years. The volume and pace of registration of IP interests brings additional risks and complexity for the technology sector for which staying one step ahead of the competition is fundamental to success. A recent survey of 30 of Europe’s most innovative technology companies, undertaken by CPA Global, identified that over 70% of respondents said they place significant efforts in ensuring that they can freely develop, manufacture and sell their products globally.

For technology companies, IP protection is a key element to successfully attracting investors or buyers. A failure to demonstrate adequate protection of IP may cause a company to struggle to obtain capital or funding. However, patent and trademark registration can be expensive to obtain and maintain and such ongoing expenditure can impose additional pressures on the financial performance of technology companies.

As the quantity of trademarks and patent applications and registrations increases, so too does the threat of patent infringement and litigation. Litigating over IP can be enough to cause a company to fail, irrespective of the merits of its claim. Technology companies must be increasingly vigilant of unwittingly infringing third-party patents, as the rise of so-called “patent trolls” has heightened the risk of litigation, even in relation to peripheral infringement. Patent trolls have in many instances proved to be extremely damaging to small and medium-sized technology companies in particular, on occasion prompting abandonment of promising IP in preference to costly and lengthy litigation or unforeseen license fees.

The method of IP protection and the deliberate location of IP can be significant drivers in the financial and tax outcomes for multi-national technology business. Choices made early on in the development of core technology can enable or inhibit tax efficiency, including through profit allocation to lower-taxed jurisdictions and repatriation of profits through royalty streams.

Further, by streamlining its supply chain, a technology company can achieve significant economies of scale and reduce costs or achieve a favourable worldwide effective tax rate. Strategies to help businesses optimise their operating structures may include:

  • offshoring the development of IP to low cost jurisdictions;
  • centralising e-commerce operations in a low tax jurisdiction; 
  • centralising business trademarks and brands to enable cost-effective cash repatriation

Each of these strategies will require careful consideration of the legal and tax environment in multiple jurisdictions and the issues to address are often complex. However, experience shows that comprehensive up-front planning is often rewarded by a reduced likelihood of a costly restructure. Movement of mature IP between jurisdictions can be one of the most expensive transactions that a technology company can undertake and should in most instances be avoided.

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