Using IPR as a Business Asset in China for European SMEs

Davide Follador

30 May 2012

30 May 2012 1

Welcome to the webinar

Philippe Healey

China IPR SME Helpdesk Project Manager

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The China IPR SME Helpdesk

@iprchina

Fan page: 'China IPR SME Helpdesk'

'China IPR'

The China IPR SME Helpdesk provides free, confidential, business-focused advice

relating to China IPR to European Small and Medium Enterprises (SMEs).

Helpdesk Enquiry Service – question@china-iprhelpdesk.eu

Training & Events

Materials

Online Services - www.china-iprhelpdesk.eu

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Today’s Speaker

• Davide Follador

• Franzosi Dal Negro Setti Law Firm

• E-mail: follador@franzosi.com

• Direct Dial: +86 13466530421

Place

photo

here

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Agenda

• Defining IP as business assets

• Financing through IP

• Measuring IP value

• IP & tax

• Case study

• IP strategy and Key lessons learnt

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What can be considered as ‘Intellectual Property’?

Origin of goods

(Trademarks, Geographic Indications)

Key Technology (Patents &

Trade Secrets)

Goodwill/consumer

recognition (brands)

Original Creativity

(design and copyright)

Intellectual Property in everyday business

Financial planning Accounting

Licensing/ sell out

M&A

Litigation (damages

award)

Providing security loans /

sale and lease back

Poll 1

In your view, intangible assets represent what percentage of the value of your company?

A. 0-10%

B. 10-30%

C. 30-50 %

D. 50-70%

E. 70% +

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Poll 2

Which IP asset is more valuable to you and your company

A. Brand/trade mark

B. Designs and Patents

C. Know how

D. Copyright

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Poll 3

Which was the most valuable global brand in 2011?

A. Microsoft

B. McDonald’s

C. Coca-Cola

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2011 Ranking of the Top 10 Brands

Using IP to finance your business

• License / sell-out

• Loans / equity secured by IP

• Sale & lease back

• IP Securitisation

Using IP to finance your business

Licensing-out

•'Cash' can be generated by IP assets currently not used or in markets difficult to achieve directly

•Licensing can take place 'inside' the group, in order to benefit of the generated cash-flow

•Tax issues should be considered too (anti price transfer rules)

Using IP to finance your business

IP Securitisation

•It is a form of structured finance

•A 'package' of designated cash-generating assets are put together

•The 'package' is sold investors

•Investors buy the repackaged assets in the form of securities or loans which are secured on the assets and their associated income streams

Using IP to finance your business

IP Securitisation

•As such, securitisation converts illiquid assets into liquid assets

•In principle, these assets can be any asset that have reasonably predictable cash flows, such as exclusive rights to trademark or patents

•Thus securitisation is possible for future royalty payments from licensing a patent, trademark, to musical compositions or recording rights of a musician.

Using IP to finance your business

IP Securitisation

•Bowie Bonds: in 1997 securitised the future royalties of David Bowie’s 287-song catalogue

•That was a pioneer example of the use intellectual property (IP) for securitisation

•Although similar IP deals were rolled out after the 1997 Bowie transaction, the original excitement surrounding the ‘new trend’ quickly slowed

Using IP to finance your business

IP Securitisation

•More recently, though, IP securitisation was adopted in other fields

•In May 2006 Dunkin’ Brands, which runs the Dunkin’ Donuts and Baskin Robbins franchises, closed a 1.7 billion USD IP securitisation, the largest then to date

•Many market observers viewed the trademark-backed transaction as a landmark deal in various ways, mainly because of its size

Using IP to finance your business

IP Securitisation: summarising

•Securitisation is not for everybody

•Several factors are important in helping drive IP securitisations

•IP securitisation is therefore applicable under specific 'market' conditions

•At present, the markets for intellectual property asset-based securities are small

•As more cash flows are generated by intellectual property, more opportunities will be created for securitisation.

Using IP to finance your business

IP secured loans

•While securitisation appears to be gaining ground, conventional lending remains the main source of external finance for most SMEs

•The practice of extending loans secured solely by IP assets is not very common

•In fact, it is practised more by venture capitalists than by banks

Using IP to finance your business

IP secured loans

•Usually IP is part of the 'guarantee', together with other tangible assets

•Identify all the relevant IP assets of your SME and to obtain an objective valuation

•The increasing use of royalty streams arising from licensing is enhancing the acceptability of intellectual property assets as valuable assets providing security for debt financing and equity participation

Intellectual Property assets all have economic value

How do we measure the value of a brand/patent/design/copyright?

Intellectual Property monetary valuation

Example for trade marks:

ISO10668: standards for monetary brand valuation

Value concept: economic benefits created by the brand Aspects to consider: Financial (cash flow & incomes) Behavioural (stake holders) Legal (due diligence)

Intellectual Property monetary valuation

IP & tax advantages in China

• Incentives to innovation for tax resident companies

• Patents and utility models are the result of R&D

• Tax free areas for high-tech companies

• The 12th five-year plan: encouraged industry area (high-tech)

IP & tax advantages in China

The unification of China’s corporate income tax from 1 January 2008 focused tax incentives to projects encouraged and supported by the country:

•Reduced corporate income tax rate of 15% for new and high-tech enterprises

•Super deduction of R&D expenses for corporate income tax purpose

•Corporate income tax exemption or reduction on income derived from qualified technology transfer

•Different corporate income tax holidays for software and integrated circuit enterprises

•‘Immediate levy, immediate refund’ VAT tax policy for software and integrated circuit enterprises

IP & tax advantages in China

high-tech industries

•Reduced corporate income tax (CIT) rate: 15% instead of 25%

•Favorable CIT treatment for research and development (R&D) expenses: 1) If R&D expenses have been counted into the profit/loss during a certain period, but have not formed intangible assets, 50 % of the actual R&D expenses during the period may still be deducted from the company’s taxable income. 2) If R&D expenses have formed intangible assets (patents), 150 % of the intangible asset cost shall be deducted before taxation.

•Business tax (BT) exemption on technology transfer and development: The revenue from the technology transfers and development conducted by an individual (including a foreign individual) and an enterprise (including a foreign-invested enterprise and a foreign-invested R&D center) is exempt from BT.

IP & tax advantages in China

Qualified technology transfers means:

Six types of qualified technology transfer:

1. Transfer of patented technology, utility model and layout-design

2. Transfer of copyright of software

3. Transfer of design or composition right of integrated circuit

4. New plant variety

5. New biological and medical variety

6. Other transfers as prescribed by the MOF and the SAT

Technology transfer refers to the transfer of ownership or a five-year or more global exclusive licensing right of the technology listed above

Case Study: sale & lease back

•Company PANDORA Ltd is a long established firm in the food industry

•PANDORA is also the name of a well known brand on the market for chocolate biscuits

•PANDORA wants to expand the business activity to China but at the moment the requested investment is too high for the company’s financial possibilities

•PANDORA GmbH decides to sale & leaseback its registered trademarks

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Case Study: sale & lease back

What is sale-leaseback financing?

•The sale-leaseback is a form of financing in which a company sells some assets for cash and simultaneously signs a long-term lease with the buyer

•Sale-leasebacks enable companies to realize 100% of the true market value of their corporate facilities and re-invest that capital

•Sale-leaseback can apply to IP assets, and has been largely adopted for trademarks

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Case Study: sale & lease back In our case study scenario:

•Pandora GmbH sells the trademark to a so called Special Purpose Vehicle (SPV) for a price, thus generating immediate cash flow (capital)

•The SPV grants a license back to Pandora GmbH for the use of the trademark in an certain period of time (typically between 5 and 10 years)

•Pandora GmbH pays monthly royalties (capital + interest)

•SPV grants Pandora GmbH an option to re-acquire the trademark PANDORA at the end of the initial license or the license can be extended

•SPV could also discount the promissory notes of payment from Pandora GmbH with a Bank

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Case Study: sale & lease back

A typical sale and leaseback transaction scheme:

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Case Study: sale & lease back

The benefits generated by the transaction include:

•Immediate access to capital

•100% market value realization of otherwise illiquid assets

•Continued operational control of facilities (use of the trademark)

•Increased Return on Assets (ROA) and on Invested Capital (ROIC)

•Increased borrowing capacity through strengthened balance sheet

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Case Study: sale & lease back

Tax profiles of sale and lease back

•The transaction may have issues with respect to anti-avoidance provisions of Income Tax legislation

•Sale and leaseback in practice is a loan – X receives R (capital) upfront and repays this together with (discounted) interest (in the form of minimum royalties) over the life of the loan (the period of the license)

•The interests are deductible

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Case Study: sale & lease back

Sale and lease back can be applied for

•Debt Reduction

•Mergers & Acquisitions

•Leveraged/Management Buyouts

•Corporate Restructuring/Exit Financing

•Acquiring additional facilities, technology and equipment to grow the business

•Constructing new facilities

•Transition out of a synthetic lease, mortgage, or other binding debt instrument

•Matching long-term assets with long-term liabilities

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Lessons Learnt

• Intellectual Property Rights all have economic (monetary) value

• Remember that China is first-to-file country, no or extremely limited official recognition is granted to non-registered rights

• Registered Intellectual Property Rights can become valuable assets for financing your business

• Banks, equity partners will request evidence of ownership (registration) and availability to use on an exclusive basis (protection)

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Lessons Learnt

• If you seek to use IP assets as collateral to obtain financing, your IP assets stand a greater chance of being accepted as collateral if:

- you are able to prove their liquidity

- and that they can be valued separately from your business

• Furthermore, you have to show that your IP assets are durable, at least for the period during which you have to repay the loan, and marketable in the event of foreclosure or bankruptcy.

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Lessons Learnt

•Also, major tax advantages can be acquired only if the R&D costs have generated Intellectual Property assets

•Build IP awareness in your business organization

•Make IP management strategy a priority

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• Davide Follador

• Franzosi Dal Negro Setti

• E-mail: follador@franzosi.com

• Direct Dial: +86 13466530421

Place

photo

here

Q&A

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Helpdesk Guide: Guide to Using IPR as a Business Asset in

China for European SMEs

http://www.china-

iprhelpdesk.eu/docs/publications/Managing_IP_

as_a_Business_Asset_final.pdf

To access all our publications click here

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Upcoming Helpdesk Events & Webinars

Save the dates of our upcoming webinars: 19 June – Webinar: Online IPR Protection 21 June, London – Seminar: The fundamentals of Design and China 26 June, Wrocław – Seminar: Chinese Business Kung-Fu for Polish Companies 26 June, Chongqing – Seminar: Trade Secrets and Non-competition:

Protecting IP in Employment and Commercial Relations 27 June, Chengdu – Seminar: Trade Secrets and Non-competition: Protecting

IP in Employment and Commercial Relations

FOR MORE INFORMATION ON THESE EVENTS CLICK HERE

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Thank you

The China IPR SME Helpdesk provides free, confidential, business-focused advice

relating to China IPR to European Small and Medium Enterprises (SMEs).

Helpdesk Enquiry Service – question@china-iprhelpdesk.eu

Training & Events

Materials

Online Services - www.china-iprhelpdesk.eu

For more information please contact the Helpdesk:

Room 900, Beijing Sunflower Tower

No. 37 Maizidian Street

Chaoyang District

Beijing 100125, P.R. China

Hotline number: +86 (10) 6462 0892

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