France: The Business of Multimedia - A Legal Viewpoint from France No. 5

Last Updated: 5 December 1995
In a series of articles we will be focusing on 2 sets of issues which are relevant to the business of multimedia. First, intellectual property rights and rights clearance. Second, structuring and financing new businesses.

STRUCTURING AND FINANCING A NEW BUSINESS

Joint ventures
Financing a new business through a joint venture requires a lot of strategic thought and involves a good deal of groundwork. Significant time, effort and money often needs to be devoted to establishing the right financing structure, the right structure for the business and, most importantly, getting the working relationship right! A joint venture is not as straight forward as owning all the rights yourself, but it may be the only practicable solution where going it alone is not an option. A joint venture can enable you to penetrate a market more efficiently by sharing the know-how and facilities of others in return for offering your own.

In the following paragraphs we talk about tax planning and multimedia royalty structures, borrowing funds, and points to consider in constructing a joint venture.

Tax planning and multimedia royalty structures
Multimedia is as yet a relatively unexplored area from the tax point of view. Typically, multimedia publishers will process and integrate existing source materials into new multimedia products. These source materials (for example, motion pictures, music and other entertainment rights) may well be owned by others who will normally wish to receive some form of payment - commonly a royalty - for use of their material. Royalty payments may also be agreed between multimedia publishers and their distributors.

Careful tax planning in routing income flows generated from the licensing of intellectual property rights can result in reduced taxation, or deferred taxation as a means to enhancing cash flow. This, in turn, can result in an earlier pay-off of any financing raised to finance production.
In many situations, the parties involved in a multimedia transaction will be located in different countries. If, in those circumstances, cross-border royalty payments are made, the country of the payor will often wish to tax the royalty payments made abroad to the ultimate rights owner in the other country, generally by way of withholding tax from the gross royalty payments. Where the two countries involved have concluded a double income tax treaty (particularly when such treaty is based on the OECD Model Tax Convention) the taxation on the royalty payments in the source country is often significantly reduced, or sometimes eliminated altogether.

The recipient of the royalties may be able to credit against its own (local) tax liability the taxation on the royalty payments levied by the other country, whether the foreign taxation is reduced under an applicable double income tax treaty or not. In these circumstances, the foreign tax levied on the royalty payments received may not be an additional cost for the recipient. However, this is not always the case, for example, where the recipient cannot use the entire foreign tax charges as a credit against its own tax liability, or where such a credit cannot be used immediately. Alternatively, the recipient may have placed the rights in a low tax country (a tax haven), for example, to keep untaxed royalties out of its own high tax home jurisdiction. In those circumstances, the taxation on the royalty payments levied by the source country may easily become a real cost for the recipient.

It is for this type of situation, where the foreign tax charges on the royalty payments are a real additional cost, that international tax practice has developed certain royalty structures. To minimise foreign tax charges on royalty payments, royalty payments are often routed through a third country which has a double income tax treaty with the source country offering greater benefits in respect of withholding tax on royalty payments than is offered by the double income tax treaty, if any, between the source country and the country of the recipient of the royalties.

A typical royalty structure would involve the recipient of the royalties granting a licence to a company in the third country. That company, would in turn grant a sublicence to the person paying the royalties. This structure will only be beneficial where the tax on the royalty payments saved in the source country exceeds the total tax costs in the third country and the additional costs incurred in setting up and maintaining the licence company in the third country. A country that is often chosen as the location for this type of licence company is the Netherlands1. Hungary is also becoming increasingly popular for certain specific territories.

Using this type of licensing company is longstanding practice and the tax benefits can be significant. However, this type of licence company has recently come under attack in an increasing number of countries which reluctantly see an erosion of their tax claims on outgoing royalty payments as a result of what they consider "treaty shopping".

On this basis, these countries will often attempt to deny the reduction or exemption from local taxation on royalty payments made to the licence company in the third country as provided under the double income tax treaty with that third country. Some countries claim that the licence company cannot be regarded as the beneficial owner of the royalties, as is generally required for the purpose of claiming tax treaty benefits. Other countries will try to put a tax claim on the royalty payments made by the licence company in the third country to the recipient ("secondary withholding tax") although this is difficult to effect. Sometimes, a double income tax treaty provides that treaty protection may be denied where a given structure is set up and maintained not for bona-fide commercial reasons but primarily with a view to obtaining the benefits of the treaty (for example, the UK-Dutch double income tax treaty has such a provision in article 12(5)). Also, treaty protection is sometimes denied by countries where the royalty structure is considered a sham, or under application of domestic abuse of law provisions and principles. Notable examples of countries which are known to take a fairly aggressive stance in this regard are the USA, the UK and Germany.

As a separate issue, some recipients effect an outright assignment of intellectual property rights to a company in an appropriate jurisdiction such as the Netherlands. This can enable favourable amortisation of the value of the intellectual property rights. However, this is an area where tax planning possibilities are unclear. Apart from the practical difficulties of persuading the tax authorities to accept a sufficiently high valuation of the intellectual property in the first place, there may be no stated policy on how intellectual property rights such as trademarks or tradenames should be depreciated.

Other kinds of structures can combine the features of the two kinds of licensing arrangements discussed above. This may well be attractive in the case of multimedia products. For example, a Dutch licence company could become the registered proprietor of the intellectual property - but in circumstances where a spread ruling is obtained1. Such an arrangement would, for example, exist where the Dutch licence company acquires legal ownership of the property under a contingent sale agreement (e.g., the ultimate rights owner sells to the Dutch licence company for a percentage of royalties received) or where the Dutch licence company holds the property on trust for the economic benefit of the ultimate rights owner and receives a fee equal to a percentage spread for its trouble.

Tax planning in routing income flows raises complex issues and needs to be carefully thought through. Nevertheless, it can make a significant contribution to successful and profitable exploitation of rights.

Joint venture structures
The choice of vehicle for a joint venture will be affected by the tax and accounting implications for the business and the participants in the applicable jurisdictions. A strategic investor may attach importance to being able to use the start-up losses of the new venture to shelter tax liabilities relating to its other businesses. A company is a legal and taxable entity. A partnership, on the other hand, is transparent for tax purposes, each partner having to account separately for tax on its share of the profits and gains of the partnership's business, and, similarly, each partner being entitled, broadly, to set against its other taxable profits its share of any losses of the partnership's business.

It is probably true to say that, in the absence of compelling tax reasons - for example where participants come from very different tax jurisdictions - the most common vehicle for a joint venture remains the standard company whose members' liability is limited to the amounts payable on their shares. Companies are creatures of law and are subject to restrictions prescribed by applicable laws. Where a simple structure is required, these applicable laws may be unduly restrictive. On more complicated financings, however, the restrictions themselves may offer a useful framework for a complex investment structure. Where tax transparency is required some form of partnership structure often involving a limited partnership is used.

Finding the right investors
Having developed your business plan and determined how you wish to structure your joint venture, you now need to find investors who are willing to share in your vision. You may well enlist the help of a financial adviser to find potential investors. At this stage, a financial adviser will generally require the involvement of consultants specialising in your industry and accountants to review your business plan. If your financial adviser needs to market the investment to a number of prospective financial and strategic investors, it will prepare with you, and circulate to prospective investors, an information memorandum describing the business. The marketing and advertising of investment opportunities is heavily regulated in most jurisdictions. Your main concern, however, is likely to be confidentiality.

If your business depends on a novel invention or being first to the market with a new product or service, keeping it confidential will be essential. Leaving aside the enforcement of any intellectual property rights you may have in the business, each potential investor should be asked to sign up to a legally binding confidentiality undertaking in your favour before receiving any information about the business. This undertaking should not only require the investor to keep confidential the information which you provide, but also not to use that information for any purpose other than considering whether to invest in your business. A number of European countries impose a basic obligation on parties to negotiate in good faith and provide for pre-contractual liability where the trust or reliance of one party is abused by the other. This could work in your favour, or it could work against you if you choose arbitrarily to terminate negotiations with a potential investor, for example. National laws vary as to when and whether letters of intent or memoranda of understanding create binding legal obligations. Oral agreements may also be enforceable.

For further information please contact either Yves Wehrli or Francois Bloch, Avocats, Clifford Chance, 112 avenue Kleber, 75116 Paris, France, Tel: +33 1 44 05 52 52, Fax: +33 1 44 05 52 00 or enter text search "Clifford chance" and "Business Monitor".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

NOTE: 1. Dutch companies are often established by the ultimate rights owner to act as licence companies in this type of royalty structure. The Netherlands has an extensive network of double income tax treaties which generally provide for significantly reduced withholding tax rates on royalty payments (often to nil). In addition, the level of Dutch taxation can often be kept at a relatively low level. In principle, the Dutch licence company will be subject to Dutch corporation tax levied at 40-35 per cent on the difference between royalties receivable and royalties payable. This royalty spread or margin is generally not challenged by the Dutch revenue where the Dutch licence company is unrelated to the ultimate rights owner and the ultimate licensee. Where the Dutch licence company would be related to either of these two, it will generally be possible to obtain advance clearance by way of a tax ruling confirming the minimum royalty margin that is acceptable for Dutch tax purposes. Under prevailing Dutch ruling practice, the minimum royalty spread is 7 reducing to 2 per cent of the royalties received, depending on the total amount of royalties received in the year concerned (for film royalties and lump-sum royalties the minimum spread is 6 per cent flat). Note that the margins under a tax ruling are minimum margins. If the actual royalty margin retained in the Dutch licence company is higher than the minimum margin under a tax ruling, the higher actual royalty margin will be subject to Dutch tax. A third important factor that would make the Netherlands a preferred choice of location is the fact that the Netherlands does not levy tax on outgoing royalty payments made by the Dutch licence company to the ultimate rights owner abroad, wherever located.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions