HOW TO TRANSFER TECHNOLOGY IN BRAZIL

As defined by WIPO – World Intellectual Property Organization – “intellectual property (IP) refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.”

Intellectual Property is divided into two categories: (i) industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and (ii) copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs.  Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs.

Intellectual property protection allows individuals to profit from their innovative or creative activities thereby creating an incentive to innovate and promote technological progress. In this sense, industries such as pharmaceuticals, technology, software, entertainment etc. are extremely dependent on intellectual property protection.

From an economic point of view, the reasoning for protecting intellectual is quite easy to explain and understand. Human beings react to incentives, which can be either positive or negative. Most of us do not commit a crime because our society gives a strong negative incentive, the punishment of going to jail or even to be executed. The same happens with activities that a society wants to develop. A donation to a charity group has a positive incentive from the Government by a deduction in its the taxation of the donor.

This mechanism is well understood andcan be applied to the protection of intellectual property. Once a new product is developed, the inventor has the right to exploit it exclusively for several years, in the case of a patent for example. Hence, there is a positive incentive to invest money and time to develop new technologies. In summary, the creator is in a position of competitive advantage by investing in research and development. On the other hand, if the new creation did not have an exclusive right granted to the creator, it would be copied and exploited by others. Thus, entrepreneurs would not have enough incentive to expend so much effort in developing a new technology.

In this sense, intellectual property confers exclusive rights on its holders. A holder of IPR is authorized to prevent any unauthorized use of its intellectual property. However, the owner of an intellectual property right may also allow the use of it by others, through licensing and assigning. These two tenants play a key role in the development strategy of a company and it is very important to know the difference between them.
In a license agreement, the licensor grants the right to use the IPR for a certain period of time to the licensee. In this case, the licensor retains the ownership of the IPR.

An assignment agreement is characterized for the transfer of the ownership, i.e., the assignee is the new owner of the IPR.
In Brazil, there are several rules dealing with technology transfer, among which are the Tax Laws (Law No. 4.131/1962; Law No. 10.168/2000, income tax rules, etc.), Antitrust Law (Law No. 12.529/2011), Industrial Property Law (Law No. 9.270/96), besides the INPI’s normative acts (IN No. 16/13).

For WIPO, there are lots of methods or legal arrangements through which technology may be transferred or assigned, such as: (a) assignment of intellectual property rights – IPR; (b) license of IPR; (c) know-how contract; (d) franchise; (e) acquisition of equipment; (f) consultancy arrangements; (g) joint venture agreement; and (h) turn-key projects.

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1) INPI control and regulation over transfer of technology

​According to Brazilian rules, technology transfer contracts have to be registered by the Brazilian National Institute of Industrial Property (INPI, acronym in Portuguese). The INPI has very peculiar rules – some of them are not even written – to register the transfer of technology agreements, which depart completely from similar institutes abroad.

Therefore, it is highly recommended that the investor seeks local specialized advice when drafting its contract. Our law firm will be happy to provide this service by drawing on our wealth of skill and experience.

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2) Remittance of royalties abroad

​Royalties are the remuneration received as the result of an IPR. For example, in the case of a license agreement the remuneration is paid by the licensee to the licensor for the use of the IPR. In common law language, it can be referred to as the consideration of the contract. The amount paid to the licensor is often sent to a different country and such a transaction draws attention of taxation rules. In the Brazilian scenario, the Central Bank requires the registration of the contract by INPI to allow the transfer of money paid as royalties.

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3) Tax deduction

​Entering into a transfer of technology agreement requires a huge investment for the licensee, as it intends to use the technology for its own profit and development of its business. Under the Brazilian taxation rules, the amount invested to pay for the license can be deducted from the annual income tax. In order to be granted the deduction, the contract must be regularly registered with INPI.

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4) Royalty limitation

​In contracts involving a Brazilian company and its parent foreign company, for tax deductibility purposes, the royalty compensation is limited to 5% (five percent) of the gross income.  This means that the tax deduction is limited to a small share of the contract. However, if a contract stated a higher amount of royalties to be paid, for example, 15% of the gross income for the Brazilian party, this would mean that, although declaring 15%, only 5% could be deducted. As parties should be free to negotiate the contract, they should be allowed to reach such an agreement.

However, the INPI muddles the meaning of the tax deductibility rule and applies it to the amount of royalties to be paid for the license. In other words, the INPI does not register licenses which establish payments of royalty higher than 5%.

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5) National and international standards

​Whenever parties are negotiating a contract, the most sensitive subject is the price paid, the consideration. Prices may vary not only from one market to another, but also (and mainly) according to the parties will in negotiation.

For this reason it is almost impossible to state the usual prices paid in a transfer of technology contract.

However, the INPI imposes a duty on parties to demonstrate that the contract has a consideration amount that meets national and international standards. In other words the royalties to be paid to the foreign companies must be similar to other contracts.  If they are not similar, the contract will not be registered.

Based on this requirement, the INPI reviews the values negotiated between the parties at its own discretion.

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6) Prohibition of license of know-how

​One common transfer of technology agreement is the know-how license. Know-how is any industrial information and technique likely to assist in the manufacture or processing of goods or materials. In this contract, the party who developed the peculiar technique (licensor) agrees to share it with the other party (licensee), receiving in return a sum of money. Once the period agreed in the contract expires, the licensee may no longer use the technology, the know-how developed by the licensor.

However, the INPI (BrPTO) does not register know-how licenses; it only registers know-how assignment. According to the BrPTO’s understanding, it is not possible to return the know-how technology by the end of the contract. In other words, once a know-how is acquired, it cannot be given back.

The agency´s practice, once again, fully diverges from the world experience. In the European Union and in United States, parties frequently enter into a know-how license, which of course lasts for a certain term, after which the licensee may not use it.

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7) Time limit for non-patent technology

​During negotiations, parties agree on price, term and other rights and obligations. It is quite common in this field to share the technology for a certain period of time.

However, in the case of non-patent technology, the INPI establishes a maximum term of five years, renewable for another five-year term, according to the INPI (BrPTO) discretion.

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8) Payment of royalties prior to the grant of the IP right

​Whenever a new technology is developed, the inventor files it in the patent and trademark office. The protection is granted after an analysis of the requirements by the INPI (BrPTO), such as novelty and industrial application. The administrative procedure may take a few years. In the European Union and in the United States, it takes around two years for the patent to be granted. Meanwhile, in Brazil it may take up to eight or even ten years.

Companies, however, do not wait for the final decision to use the technology nor to license it.

The tricky point here is that the INPI does not allow the payment of royalties in this case. That means that while the IPR is under analysis no contract can be closed with the proper payment of royalties. It would be like having a contract without proper consideration. In short, INPI only authorizes the payment of royalties when the patent or the trademark is already granted. Therefore, in the case whereby the license involves a patent application, the licensor has to wait until the patent is granted to receive any royalties due.

9) Further information

​If you are considering transferring technology in Brazil, we also recommend that you check our guide for:
– How to incorporate a company in Brazil
– How to register and protect a trademark in Brazil
– How to register and protect a patent in Brazil

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