One of the areas of great interest in the intellectual property field is the subject of technology acquisition or licensing, as Brazil, being a developing country, is continuously receiving new technologies from abroad with the purpose of improving its economic capacity. It is through technology transfer agreements that the Brazilian and foreign parties negotiate and regulate these interests.
A brief history of Technology Transfer Agreements
The promotion of technology entry in Brazil was locally regulated in the beginning of the 1970s, when, through Law no. 5,648 of December 11, 1970, the Brazilian Patent and Trademark Office (INPI – Instituto Nacional da Propriedade Industrial) was created and appointed as the public agency responsible for intervening in technology transfer agreements, which are agreements related to industrial property rights (patent licenses, trademark licenses, industrial design licenses, etc.) and franchise, technology sully or specialized technical assistance agreements.
Consequently, on September 11, 1975, the newly created INPI enacted the Normative Act no. 15, adopting an extremely interventionist position in the technology transfer agreements, which ultimately cased the agreement registration process to be time lengthy, with official requirements that were issued by the INPI out of its self-established rules and interpretations.
In addition, technology transfer agreements could not be onerous when the parties were related, given that our Foreign Capital Law (Law no. 4,131 of September 3, 1962) prohibited the remittance of royalties from a subsidiary to its parent company abroad.
From the 1990s onwards, the deregulation of the Brazilian economy was initiated, thus allowing a progressive entry of new technologies originated abroad. With Law no. 8,383/91, by means of its article 50, it became possible to remit payments between a subsidiary and its parent company (controlled and controlling companies) under technology transfer agreements that had been executed and registered before the INPI and the Brazilian Central Bank – Bacen.
In the same decade, the rules related to the entry of technology in Brazil gradually become more flexible, with the advent of the Normative Act no. 120/93 and Law no. 9,279/96 (Brazilian Industrial Property law).
Article 211 of Law 9,279/96, interpreted in conjunction with tax, fiscal and foreign capital laws, resulted in the conclusion that technology transfer agreements should be registered before the INPI for the following purposes: (i) to make it possible to submit payments abroad, with due regard to the exchange and tax rules applied; (ii) enable the tax deductions of these payments, observing the tax laws; (iii) validity against third parties.
It is important to notice, in this sense, that even with the enactment of the Industrial Property Law, the INPI kept intervening and, in a way, continued to intervene in the autonomy of the parties during the registration processes of technology transfer agreements, making a prior assessment of the compliance of the agreement with Brazilian tax and foreign capital laws, and by establishing some specific contractual conditions that should be met by the parties, often to the detriment of what was stipulated by law.
The INPI, however, over the time, has gradually adopted an increasingly less interventionist position in the analysis of technology transfer agreements. In this sense, with the objective of further modernize the industrial property system in Brazil, as well as to limit the Institute’s interference in the agreements submitted for registry, in 2017 the INPI issued the Normative Act no. 70, in force since July 1, 2017.
Through Normative Act no. 70/2017, the INPI indicated that it would no longer carry out the fiscal/tax assessment of technology transfer agreements submitted for registration; the Certificate of Registration / Certificate of Recordal have, since then, reflected only the value and term declared by the parties, with the contractors being responsible for the validity and legality of the agreement and the remittances made.
Subsequently, on July 7, 2017, INPI promulgated Resolution INPI/PR no. 199, which established new guidelines for the examination of technology transfer agreements and registration of integrated circuit topography, technology transfer and franchise, recordable or registrable in the Institute.
In general terms, the Resolution indicated the rules, formalities and documents that support the requirements of recordal or registration, detailing how the formal and technical examinations of the agreements will proceed. If the guidelines established by the Resolution are not observed, the recordal request may suffer formal and technical office actions and may even result in the rejection and /or shelving of the request.
The Resolution complemented the Normative Act no. 70/2017, which limited INPI’s interference power and removed from its sphere of action the fiscal and tax analysis of agreements submitted to the recordal/ registration. In this sense, all the Certificates now contain the following note: “The INPI did not examine the Agreement in light of tax and foreign capital legislation”.
In accordance with those INPI rules, BACEN issued the Circular no 3,857/2017, regulating the rite of sanction administrative procedures for the application of penalties, coercive measures and methods for the settlement of disputes. Therefore, irregular royalty payments became subject to this administrative sanctioning process.
In this sense, although the INPI no longer interfered with or issued office actions related to the value and term of technology transfer agreements, it remained the responsibility of the contracting parties to respect the tax deductibility limits set forth in the Ministry of Finance Ordinance no. 436/58 which, in case of agreements entered between companies directly or indirectly related, also corresponded to the limits for the remittance of royalties abroad.
A bigger change came in 2021, with the publication of Law n. 14,286/2021 – Exchange Rate Framework, which brought changes to several other standards. The remittance of payments abroad, as royalties, which previously required that technology transfer contracts were registered with the INPI and the Brazilian Central Bank, now depends only on proof of payment of the Withholding Income Tax.
In this way, the registration of technology transfer contracts with the INPI only makes the values of technology transfer contracts deductible for purposes of calculating actual profit, subject to the limits and conditions established by law.
Another important milestone, in relation to technology transfer contracts, was the publication of Law No. 14,596/2023, which will come into force from 2024 (with the option of adoption in 2023), and which brought the application of the new Transfer Pricing rules in relation to intangible rights and royalties. Thus, the former foreign exchange and tax rules adopted until then for remittances and tax deductibility of royalty payments for intangibles were revoked.
With the publication of the new law, the remittance of royalties and technical, scientific, administrative, or similar assistance, must observe the Transfer Pricing rules.
For international transactions involving such payments between related companies, one of the five methods (PIC, PRL, MCL, MLT and CDM) will be adopted, with the possibility of selecting the most appropriate method for the transaction, or other methods, provided that the adopted alternative methodology produces a result consistent with that which would be achieved in comparable transactions carried out between unrelated parties.
General Rules Applicable to Technology Transfer Agreements in Brazil
The following agreements may be submitted for registration / recordal before the INPI:
- Patent License Agreements;
- Industrial Design License Agreements;
- Trademark License Agreements;
- Patent, Industrial Design or Trademark Assignment Agreements;
- Technology Supply Agreements (know-how);
- Technical and Scientific Assistance Agreements;
- Integrated Circuit Topography License Agreements; and
- Franchise Agreements (Law no. 8,955/94).
Technology transfer agreements can be recorded / registered before the INPI for the following purposes:
- Allow the deductibility of payments abroad, as long as the tax legislation is observed (purpose valid until 2024, pursuant to Law no. 14,596/2023, as we will see later); and
- To make the agreement effective against third parties.
Technology transfer agreements will only be effective against third parties after its registration before the INPI. The registration of these agreements has, in addition to the possibility of tax deduction of royalties – for onerous agreements – the following effects:
- a) Warranted exclusivity as to the right granted to the licensee, in the case of exclusive licenses; and
- b) Legitimate the licensee to figure as a party in lawsuits related to trademarks and patents, severally or as a co-plaintiff or co-defendant along with the licensor, if the contract so allows.
It should be noted that, under the current law, the registration of trademark or patent licenses is not a condition for the purposes of validating the use of a trademark or patent by a third party, provided that the owner proves that the user holds an authorization therefor.
For related parties, the remittance of royalties abroad, that could not exceed the deductibility limits provided for in the Foreign Capital Law and in the Ordinance no. 436/58 issued by the Ministry of Finance, which established the deductibility limits as being 1% to 5% of the net sales revenue of the contractual products, can be freely traded, given the recent changes mentioned above, however the deductibility limits will remain according to the new Transfer Princing rules.
We can also mention that Law n. 14,596/2023 brought an interesting change regarding the contract terms. The article 12, §3 of Law no. 4,131/62, now revoked, determined that, for technical and scientific assistance and technology supply agreements, the deductibility and remittance limits also mean that the agreement could not have a term longer than five years, counted from the introduction of a special production process, renewable for another period of five years provided that the need to renew the technological link is justified. Such limitation does not remain with the effectiveness of Law n. 14,596/2023.
The registration process before INPI now is completely digital, and there is no longer need to present a physical copy of the agreement, as well as any other documents, unless expressly requested by the INPI, and the Institute started to admit the digital signature, which in this case, the consular apostille/legalization is also not required. In other cases, physical signatures outside Brazil, the need for consular apostille/legalization remains.
Although the INPI is stricter about the formal aspects of the agreement, the flexibilization in the analysis of the agreement’s terms and conditions resulted in a substantial reduction time for the registration / recordal process, since most of the Certificates are now issued between two to three months – half the time it took a few years ago.
Technology Supply Agreements
In Brazil, the Industrial Property Law did not brought any specific definition or criteria aimed at the protection and defense of non-patented technologies, except for the responsibility for the improper use of confidential knowledge, information or data usable in industry, commerce or services, that were framed in unfair competition crimes.
In this sense, INPI used to adopt the understanding that knowledge and techniques that are not supported by intellectual property rights (the know-how) could not be proprietary and, therefore, could not be subject to licensing, and their contracts must be established as the acquisition or mere dissemination of knowledge. This understanding was modified at the end of 2022, when, through the Minutes of the Meeting of December 28, 2022, effective from January 23, 2023, the Institute, seeking alignment with the best international practices, began to admit the possibility of licensing non-patented technology, as it is understood to be an atypical contract, approved by art. 425 of the Civil Code.
Traditionally, technology supply contracts are defined in Brazil as any type of transaction where one of the parties transfers to the other technical knowledge used in the manufacture of a product or service, provided that such transfer has not been carried out mainly through the rendering of technical services.
In this sense, what helps to characterize technology supply contracts are the delivery of technical documents, such as manuals, guides or drawings, and the remuneration, which, in these cases, is calculated based on a royalty rate on the net sale of the products or services developed with the transferred technology.
Regarding software agreements, only contracts providing for technology transfer must be submitted for registration before the INPI; in other words, the software agreement must establish the acquisition or assignment of all documents related to the software, particularly the notes on the source code, description memorial, internal functional specifications, diagrams, flow charts and other technical data required to absorb the technology, in order to produce effects against third parties (article 11 of the Software Act – Law no. 9.609/98).
Software licenses are not required to be submitted to the INPI’s scrutiny, and the remittances of the related royalties may be done directly through a commercial bank authorized by the Central Bank (BACEN) to perform such operation.
As to the taxation of technology transfer agreements between national and foreign companies, the following taxes might apply: withholding tax (“IRF”) – 15%; economic domain intervention contribution (“CIDE”) – 10%, with possibility of credit on patent and trademark license agreements; service tax on the import of services (“ISS-Importação”) – maximum duty rate of 5%; Contribution for the Social Integration Programs on the import of foreign products or services (“PIS/PASEP-Importação”) – 1.65%; Contribution for the Financing of the Social Security System by Importers of Foreign Goods or Services from Abroad (“COFINS-Importação”) – 7.6%; Tax on Financial Operations (“IOF”) – 0.38%.
Constitutionality and effective application of some of the above taxes remain questionable, and might be subject to revision by the Brazilian Judiciary Power.
Author: Marina Inês Fuzita Karakanian
Av. Rodolfo Amoedo, 300 – Barra da Tijuca
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E-mail: [email protected]
Patents, trademarks, designs, technology transfer, licensing, franchising, software, trade names, unfair competition.