Guernsey: Managing intellectual property in an offshore, tax neutral environment

By Jason Romer, Senior Lawyer, Collas Day Advocates, Guernsey (30/01/2007)

THE INTELLECTUAL PROPERTY (IP) laws introduced in Guernsey have been designed to be flexible and modern, taking advantage of Guernsey’s position outside the EU. They provide Guernsey with an unique opportunity to afford protection where such protection does not otherwise exist to address the rapidly changing needs of certain markets which IP law tends to concentrate on.

The Intellectual Property (Enabling Provisions) Bailiwick of Guernsey Law 2004 created the power for the States of Guernsey (Guernsey’s parliament) to introduce separate ordinances relating to IP. Current ordinances cover copyright, database rights, performers’ rights, registered designs, trademarks and unregistered design rights, including those relating to semiconductors. Further ordinances relating to patents, registered plant breeders’ rights and image rights are anticipated before the end of 2006. The ordinances and exploitation create opportunities for tax-effi cient protection of IP assets.

A specific example is the raising of finance on the back of IP rights in Guernsey, which requires security to be taken over the IP. Guernsey has a well-established security law (The Security Interests (Guernsey) Law, 1993 (the ‘Security Law’)).

The Security Law provides that a security interest may be created in any intangible moveable property other than a lease. The security is created where the secured party has title to collateral pursuant to a security agreement and, where that title is acquired by assignment, certain requirements for the giving of notice have been met. These requirements are primarily that express notice in writing that collateral has been assigned must be given by or onbehalf of the secured party to the persons from whom the assignor would have been entitled to claim collateral.

Most of the current IP ordinances provide that Guernsey IP rights are personal or moveable property and are generally transmissible by assignment or by operation of law as personal or moveable property. The Trademark Ordinance specifically provides that a registered trademark may be the subject of a charge in the same way as other personal property. Hence, for the purposes of securitizations, structured financings or more simple means of financing, it is possible to rely on Guernsey security over Guernsey based IP.

Using holding structures to maximise advantage

There are two main scenarios for IP businesses looking to take advantage of the new IP laws in Guernsey. The first is the new IP-intensive company which can operate from Guernsey and the second is an existing company based, for example, in the UK establishing a subsidiary in Guernsey and subsequently transferring IP to that subsidiary. The transfer of IP at a stage when it has acquired signifi cant value may have negative tax implications and the most tax-efficient approach may be to generate the IP in Guernsey.

The company formation process in Guernsey is well established, easy to use and Guernsey company law broadly follows English company law principles with some specific exceptions. The use of a trust structure combined with an IP holding company is a structure well known to Guernsey law and would provide several advantages as a vehicle for owning and managing IP in Guernsey.

Guernsey has expertise in the development of structures to protect capital gains and income flows for companies. This experience might well be applied to the management and exploitation of IP in an offshore environment. It is possible to envisage a relatively simple scenario where a holding structure can be established in Guernsey. The Guernsey IP holding company could establish exclusive licensing structures with an onshore subsidiary company that would be able to (i) take advantage of a large number of double taxation treaties with countries that have a high GDP and high market potential, and (ii) benefit from a favourable withholding tax regime in respect of royalties being transferred out of that country. The onshore company would then issue sublicences to develop market potential in relevant jurisdictions. The Guernsey based bankruptcy-remote trust structure would ultimately benefit from licensing revenues from the IP holding company, thus facilitating long-term management and exploitation of IP in a tax-benign environment. The use of a trust structure would depend on the specific tax advice received. The structure is represented in the diagram below.

More complex structures could readily be developed but this example gives an indication of an approach that could be adopted.

The IP Portfolio shown in the diagram below may consist of a range of IP rights or may actually relate to the image rights of a variety of individuals being managed from Guernsey. The possibilities of using Incorporated Cell Company (ICC) or Protected Cell Company (PCC) structures for IP management are wide-ranging. The next step in managing and exploiting IP from Guernsey, once reliable and long-term royalty flows have been established, might be to develop a multi issuance securitization programme using IP that is based in Guernsey and focused around a PCC or ICC.

There is a new opportunity to manage IP and brand from a well-regulated, internationally recognised offshore jurisdiction, offering security and the potential for innovative financing structures