Licensing of Plant Breeder’s Rights: Legal and Tax Aspects

author: Olena Bukuyeva

source: "The Ukrainian Journal of Business Law" 

03 October, 2013 Press

Scope of protection in Ukraine

Article 485 of the Civil Code of Ukraine (Civil Code) and Article 10 of the On Protection of Rights in Plant Varieties Act of Ukraine of 21 April 1993 No. 3116-XII as restated and amended (PVP Act) provide for three types of intellectual property rights which are protected in Ukraine with respect to plant varieties: moral intellectual property rights verified by certificate on authorship (which are not discussed herein); intellectual property rights verified by patent; and intellectual property right to commercialise plant variety verified by the certificate on state registration of plant variety.

Under Article 39 of the PVP Act if a patent is received in the territory of Ukraine, this means that the owner of the patent has the exclusive rights to authorise or restrict the following acts in respect of the planting material of the protected variety:

  • production or reproduction (for the purpose of propagation);
  • conditioning for the purpose of propagation;
  • offering for sale;
  • selling or other marketing;
  • exporting from Ukraine;
  • importing into the customs territory of Ukraine;
  • stocking for any of the purposes mentioned above.

As regards the intellectual property right to commercialise the plant variety, it appears upon registration of plant variety in the National Listing of Plant Varieties and receipt of the certificate on state registration. Entry to the mentioned Listing means not only the intellectual property right to commercialise the plant variety. It is also a prerequisite for commercialising planting material in the territory of Ukraine, since Article 38 of the PVP Act prohibits commercialising plant varieties, which are not listed in the National Listing of Plant Varieties. Registration in the National Listing might be carried out along with claiming patent protection of plant variety or without claiming such protection.

According to Article 39-1 of the PVP Act the intellectual property right to commercialise the plant variety implies the right to commercialise planting material of this plant variety in the territory of Ukraine and authorise or prohibit the following acts in respect of planting material of this plant variety:

  • offering for sale;
  • selling or other marketing;
  • stocking for any of the purposes mentioned above.

Licensing

The issue of transfer of plant breeder’s rights (intellectual property rights in plant varieties) is specifically covered by Article 40 of the PVP Act. The mentioned Article deals with transfer of rights in and licensing (granting the right to use) those plant varieties, which are protected by patent. Therefore, license agreement within the meaning of the PVP Act might be concluded only in respect of those plant varieties, which are protected by the patent. Such conclusion is also supported by Article 1 of the PVP Act, which defines the term ‘use of plant variety’ as any activity in respect of plant variety, which requires authorisation of the patent holder.

However, it is often the case that a plant variety commercialised on the territory of Ukraine has no patent protection in Ukraine. By virtue of the registration of such plant variety in the National Listing of Plant Varieties and receipt of the certificate on state registration the holder of the certificate on state registration enjoys only the intellectual property right to commercialise plant variety in Ukraine.

Despite the fact that the right to commercialise plant variety is clearly defined in the Civil Code and the PVP Act as intellectual property right, authorisation to commercialise plant variety given by the holder of the certificate on state registration of plant variety to another entity is not covered by the notion of license (license agreement) mentioned in Article 40 of the PVP Act. As was mentioned above, license (license agreement) within the meaning of Article 40 might be issued (concluded) only in respect of those plant varieties, which have patent protection.

Yet, authorisation to commercialise plant variety given by the holder of the certificate on state registration of plant variety may be recognised as a license or other agreement on transfer of intellectual property rights by virtue of Article 1107 of the Civil Code.

Thus, there are two types of license agreements which might be concluded in respect of intellectual property rights in plant varieties: (i) license agreement in respect of patented plant variety under Article 40 of the PVP Act and (ii) license agreement in respect of plant variety, which is registered in the National Listing of Plant Varieties but has no patent protection in Ukraine.

Tax perspective

Sub-paragraph 14.1.225 of para. 14.1 of Article 14 of the Tax Code of Ukraine defines royalty as any payment received as remuneration for the use or the right to use any copyright or neighboring rights for works of literature, art or science, including computer programs, other records on media, video or audio records, cinematographic films or tapes for radio or television broadcasting, shows of broadcasting organizations, any patent, registered trademark, design, secret drawing, model, formula, process, right to industrial, commercial or scientific experience (know-how).

As appears from the above definition, license fees for the intellectual property rights in plant varieties based on the license agreement might qualify as royalties within the meaning of the Tax Code of Ukraine, provided that respective plant varieties enjoy patent protection. As regards payments for the right to commercialise plant varieties, registered in the National Listing of Plant Varieties but having no patent protection in Ukraine, such payments are not covered by the discussed definition.

Still, such payments should be qualified as payments for services, other than royalties. Namely, sub-para. 14.1.185 of Para. 14.1 of Article 14 of the Tax Code of Ukraine defines the supply of services as any transaction, which is not supply of goods, or other transaction on transfer of rights in objects of intellectual property and other non-tangible assets or granting other proprietary rights in respect of such objects of intellectual property. Sub-paragraph 14.1.203 of Para. 14.1 of Article 14 of the Tax Code of Ukraine defines the sale of the results of works (services) as any transactions on supply of works, services, including, inter alia, granting the right to use non-tangible assets. According to the mentioned sub-paragraph sale of results of works (services) includes transfer of right under copyright or license agreements as well as other methods of transfer of copyrighted objects, patents, trademarks, other objects of intellectual and industrial property.

The above-mentioned difference in qualification of payments for intellectual property rights in plant varieties results in different tax treatment. Thus, payments for intellectual property rights in plant varieties protected by patent, which fall under the definition of ‘royalty’, are not subject to VAT under sub-para. 196.1.6 of Para. 196.1 of Article 196 of the Tax Code of Ukraine. If paid to foreign entity, such payments are deductible under the conditions set by sub-para. 140.1.2 of Para. 140.1 of Article 140 of the Tax Code of Ukraine, which provide for certain limitations in respect of deductibility of royalties. In addition, if such royalties are paid to foreign entity, they are subject to withholding tax under Article 160 of the Tax Code of Ukraine.

At the same time, payments for intellectual property right to commercialise plant variety, which has no patent protection and, therefore, do not qualify as ‘royalty’ within the meaning of the Tax Code of Ukraine, might be fully deductible. Such payment shall be subject to VAT.

Why is different tax treatment important?

It is often the case that under the license agreement/ commercial concession agreement the licensor/ owner of rights grants not only intellectual property rights in plant varieties, but also intellectual property rights to trademarks, used in respect of planting material, and know-how.

When the granting of rights for different intellectual property is combined in one agreement, such an agreement might also provide for single license fee for all the rights granted. For example, the license fee for the rights granted might be calculated pro rata the sales of planting material produced and sold, using intellectual property licensed under the agreement, or as a lump-sum.

The mentioned structuring of payments might be acceptable in case plant varieties have patent protection in Ukraine, and, therefore, payment under the agreement fully corresponds to the definition of ‘royalty’ under the Tax Code of Ukraine as payment for patent, registered trademark, khow-how.

Yet, a single license fee for all the rights granted under the license agreement/ commercial concession agreement would not be quite appropriate in case the plant variety has no patent protection in Ukraine. As was discussed above, payment for the right to commercialise a plant variety, registered in the National Listing of Plant Varieties, does not fall under the definition of ‘royalty’ provided by the Tax Code of Ukraine. Therefore, qualification and tax treatment of single payment for combination of rights to commercialise plant variety, use trademark and know-how is not entirely clear. In this case the division of payments for each type of intellectual property might be suggested.

In addition to the above it should be also noted that single payment for all of intellectual property rights granted under the license agreement/ commercial concession agreement, if paid to foreign entity, might not be appropriate in case the parties to the agreement wish to enjoy tax relief based on respective provisions of double tax treaties.

Under Article 12 of the OECD Model Tax Convention on Income and Capital the term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Considering this basic definition, which is usually incorporated into effective double tax treaties with similar wording, the license fee might be considered to be royalties within the meaning of double tax treaties, if paid for intellectual property rights in plant varieties protected by patent. Payment for the intellectual property right to commercialise a plant variety, which is not protected by a patent, is not covered by this definition.

In addition, in some cases double tax treaties provide for a different tax regime and different tax rates applied to royalties for trademarks, royalties paid for know-how and royalties paid for patents. This aspect should be also considered while structuring payments for intellectual property granted under license agreements/ commercial concession agreements with foreign entities.

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