By Casper Schouten, VP at Teknos Associates
Co-authored by Moish Peltz, Co-Managing Partner, Co-Chair of Digital Assets and Chair of Intellectual Property at Falcon Rappaport & Berkman LLP
Introduction
Over the past several years, US based digital asset and Web3 companies have chosen offshore legal structures, often utilizing Cayman or Panamanian Foundations to manage token issuance and protocol governance. Therefore, project teams often end up managing an international corporate structure that involves cross-border transfers of intellectual property (IP), licensing arrangements, or service contracts between disaffiliated entities.
Cross border arrangements give rise to significant tax and transfer pricing considerations, especially under Internal Revenue Code Section 482 (IRC § 482). This provision requires that intercompany transactions, as well as transactions between related companies and individuals, be conducted at arm’s length, as if the entities were unrelated, and properly documented to withstand scrutiny from tax authorities.
This article will discuss three common scenarios for managing cross-jurisdictional asset transfers, along with the associated valuation and transfer pricing issues, and will also cover the principal IP regimes most frequently impacted in Web3, such as copyright (and related open-source software issues), trademark, patent, and trade secret law.
Characterizing Digital Asset IP
In the context of Web3 and digital asset projects, intellectual property (IP) often encompasses a range of assets, including trademarks, protocol source code, smart contracts, whitepapers, tokenomics models, and other proprietary works. Unlike traditional IP, digital asset IP is frequently publicly available, decentralized, open-source, and may be governed by community-driven protocols or foundations. Much of the software may incorporate pre-existing open-source code, with varying levels of customization.
Further, open-source licenses such as MIT, GPL, and Apache 2.0 impose specific obligations that persist regardless of whether the code is owned by an offshore entity or a domestic company. When transferring or licensing code based on open-source components, it is essential to comply with the terms of the applicable license. For example, the GPL requires that derivative works also be distributed under a GPL license, which can restrict the ability to impose additional proprietary restrictions. Open-source obligations should be contemplated along with any transfer or licensing of code that incorporates open-source elements.
When managing intellectual property in a global context, Web3 companies must also consider international trademark protection. Trademarks are territorial, meaning that registration in one country does not guarantee rights in another. As projects expand across jurisdictions or utilize offshore structures, it is essential to develop a comprehensive trademark strategy that includes filing in key markets where the protocol, platform, or brand will operate. Failure to secure trademark rights globally can expose companies to infringement risks, loss of brand value, and costly legal disputes. A global trademark portfolio can be owned by either an offshore company, and licensed to operating affiliates that use the trademarks, or might also be held in local entities doing business relevant to that jurisdiction. Either way, companies should ensure that they have properly documented ownership of the company’s respective trademarks, including in any intercompany transfer, and recorded any change in ownership with the appropriate trademark offices. Companies should also put in place a comprehensive cross-licensing regime, to make sure any affiliates are properly documented as licensees of the trademarks they are using in their business. Lastly, companies should implement an enforcement strategy (mindful of the unique culture of open development in the industry). Following these steps will protect against companies inadvertently losing their trademark rights. Consulting with counsel familiar with global trademark prosecution and licensing in the web3 context is critical to navigate differing registration requirements, enforcement mechanisms, licensing considerations, and potential conflicts with existing marks.
The unique characteristics of web3 IP may complicate the process of identifying, valuing, and transferring the underlying IP rights, especially when these assets are moved across jurisdictions or between affiliated entities. Properly characterizing digital-asset IP is essential for ensuring compliance with tax and regulatory requirements, as well as for supporting defensible valuations and transfer pricing arrangements.
Given these requirements, Web3 companies must carefully consider how they structure cross-border transactions involving intellectual property. The following scenarios illustrate common approaches to managing IP transfers, licensing, and service agreements in this context. Each scenario highlights key compliance concerns and best practices for meeting the arm’s length standard.
Scenario 1: IP Transfers from the U.S. to a Cayman Foundation[1]
Many Web3 projects begin with protocol development, smart contracts, or other valuable IP being built by a U.S.-based development company. When this IP is later transferred to a Cayman Foundation or other offshore entity, the transfer must be valued at fair market value (arm’s length standard). This transfer often represents a taxable event, and an incorrect or undocumented valuation can expose the company to significant penalties (underpayment of transfer tax can result in significant penalties on the underpayment).
Key Compliance Concern
Without a defensible valuation, the IRS may argue that the U.S. entity undercharged for the transfer, resulting in improper income shifting offshore, and questioning the disaffiliation between the entities.
Scenario 2: IP Licensing from the U.S. to the Cayman Foundation
In some cases, projects choose to retain IP ownership within the U.S. development company but license it to the Cayman Foundation. This structure also falls under IRC § 482, requiring an arm’s length licensing fee – often paid in the protocol’s native tokens as opposed to a royalty percentage of revenue.
Key Compliance Concern
Licensing fees must reflect what an unrelated third party would pay for similar technology under similar circumstances. To support the arm’s length nature of licensing fee, an independent IP valuation is required.
Scenario 3: Master Services Agreement with a Cost-Plus Model
Another common structure involves the Cayman Foundation entering into a Master Services Agreement (MSA) with the U.S. development company. Under this arrangement, the development company is paid on a cost-plus basis for engineering, marketing, and other services.
Key Compliance Concern
The markup must reflect what independent service providers would charge to avoid claims of income shifting or related-party abuse. To properly document this, an independent benchmarking study for the markup is required.
The Disaffiliation Challenge
Even with clean legal structures, companies must be prepared to defend the substance of the separation between the Cayman Foundation and the U.S. development company. Factors such as overlapping personnel, shared token allocations, or interdependent governance may raise red flags for regulators. Many disaffiliated entities are still considered to be “acting in concert” with the U.S. development company.
To comply with IRC § 482, every transaction—whether a transfer, license, or service agreement—must be documented and priced as if the two entities were dealing at arm’s length. The IRS is particularly sensitive to arrangements that appear to shift valuable income-producing activities offshore without proper compensation to the U.S. entity.
Similar Concerns Around the World
Although this article has focused on the US, most other jurisdictions around the world have similar concerns. Therefore, it is important to consult with local tax counsel to understand the specific interpretation of local tax law and the associated documentation requirements.
Conclusion
For digital asset companies employing offshore structures, proactive tax compliance is essential. IP valuations and benchmarking studies are not just formalities; they are critical for satisfying the arm’s length standard under IRC §482 and minimizing audit risk. Teknos Associates and Falcon Rappaport & Berkman each bring deep expertise in digital asset valuation and IP transfer pricing, helping projects navigate these complex cross-border structures with confidence.
[1] There are seemingly endless possible tax considerations here, including transferring intangibles to foreign entities under IRC § 367, withholding under Subchapter A (IRC § 1441, et seq.), concerns about hybrid and reverse-hybrid entities, etc. For purposes of brevity and clarity, we will limit our discussion to IRC § 482.
Navigating IP Transfers, Licenses and Service Agreements in Web3
By Casper Schouten, VP at Teknos Associates
Co-authored by Moish Peltz, Co-Managing Partner, Co-Chair of Digital Assets and Chair of Intellectual Property at Falcon Rappaport & Berkman LLP
Introduction
Over the past several years, US based digital asset and Web3 companies have chosen offshore legal structures, often utilizing Cayman or Panamanian Foundations to manage token issuance and protocol governance. Therefore, project teams often end up managing an international corporate structure that involves cross-border transfers of intellectual property (IP), licensing arrangements, or service contracts between disaffiliated entities.
Cross border arrangements give rise to significant tax and transfer pricing considerations, especially under Internal Revenue Code Section 482 (IRC § 482). This provision requires that intercompany transactions, as well as transactions between related companies and individuals, be conducted at arm’s length, as if the entities were unrelated, and properly documented to withstand scrutiny from tax authorities.
This article will discuss three common scenarios for managing cross-jurisdictional asset transfers, along with the associated valuation and transfer pricing issues, and will also cover the principal IP regimes most frequently impacted in Web3, such as copyright (and related open-source software issues), trademark, patent, and trade secret law.
Characterizing Digital Asset IP
In the context of Web3 and digital asset projects, intellectual property (IP) often encompasses a range of assets, including trademarks, protocol source code, smart contracts, whitepapers, tokenomics models, and other proprietary works. Unlike traditional IP, digital asset IP is frequently publicly available, decentralized, open-source, and may be governed by community-driven protocols or foundations. Much of the software may incorporate pre-existing open-source code, with varying levels of customization.
Further, open-source licenses such as MIT, GPL, and Apache 2.0 impose specific obligations that persist regardless of whether the code is owned by an offshore entity or a domestic company. When transferring or licensing code based on open-source components, it is essential to comply with the terms of the applicable license. For example, the GPL requires that derivative works also be distributed under a GPL license, which can restrict the ability to impose additional proprietary restrictions. Open-source obligations should be contemplated along with any transfer or licensing of code that incorporates open-source elements.
When managing intellectual property in a global context, Web3 companies must also consider international trademark protection. Trademarks are territorial, meaning that registration in one country does not guarantee rights in another. As projects expand across jurisdictions or utilize offshore structures, it is essential to develop a comprehensive trademark strategy that includes filing in key markets where the protocol, platform, or brand will operate. Failure to secure trademark rights globally can expose companies to infringement risks, loss of brand value, and costly legal disputes. A global trademark portfolio can be owned by either an offshore company, and licensed to operating affiliates that use the trademarks, or might also be held in local entities doing business relevant to that jurisdiction. Either way, companies should ensure that they have properly documented ownership of the company’s respective trademarks, including in any intercompany transfer, and recorded any change in ownership with the appropriate trademark offices. Companies should also put in place a comprehensive cross-licensing regime, to make sure any affiliates are properly documented as licensees of the trademarks they are using in their business. Lastly, companies should implement an enforcement strategy (mindful of the unique culture of open development in the industry). Following these steps will protect against companies inadvertently losing their trademark rights. Consulting with counsel familiar with global trademark prosecution and licensing in the web3 context is critical to navigate differing registration requirements, enforcement mechanisms, licensing considerations, and potential conflicts with existing marks.
The unique characteristics of web3 IP may complicate the process of identifying, valuing, and transferring the underlying IP rights, especially when these assets are moved across jurisdictions or between affiliated entities. Properly characterizing digital-asset IP is essential for ensuring compliance with tax and regulatory requirements, as well as for supporting defensible valuations and transfer pricing arrangements.
Given these requirements, Web3 companies must carefully consider how they structure cross-border transactions involving intellectual property. The following scenarios illustrate common approaches to managing IP transfers, licensing, and service agreements in this context. Each scenario highlights key compliance concerns and best practices for meeting the arm’s length standard.
Scenario 1: IP Transfers from the U.S. to a Cayman Foundation[1]
Many Web3 projects begin with protocol development, smart contracts, or other valuable IP being built by a U.S.-based development company. When this IP is later transferred to a Cayman Foundation or other offshore entity, the transfer must be valued at fair market value (arm’s length standard). This transfer often represents a taxable event, and an incorrect or undocumented valuation can expose the company to significant penalties (underpayment of transfer tax can result in significant penalties on the underpayment).
Key Compliance Concern
Without a defensible valuation, the IRS may argue that the U.S. entity undercharged for the transfer, resulting in improper income shifting offshore, and questioning the disaffiliation between the entities.
Scenario 2: IP Licensing from the U.S. to the Cayman Foundation
In some cases, projects choose to retain IP ownership within the U.S. development company but license it to the Cayman Foundation. This structure also falls under IRC § 482, requiring an arm’s length licensing fee – often paid in the protocol’s native tokens as opposed to a royalty percentage of revenue.
Key Compliance Concern
Licensing fees must reflect what an unrelated third party would pay for similar technology under similar circumstances. To support the arm’s length nature of licensing fee, an independent IP valuation is required.
Scenario 3: Master Services Agreement with a Cost-Plus Model
Another common structure involves the Cayman Foundation entering into a Master Services Agreement (MSA) with the U.S. development company. Under this arrangement, the development company is paid on a cost-plus basis for engineering, marketing, and other services.
Key Compliance Concern
The markup must reflect what independent service providers would charge to avoid claims of income shifting or related-party abuse. To properly document this, an independent benchmarking study for the markup is required.
The Disaffiliation Challenge
Even with clean legal structures, companies must be prepared to defend the substance of the separation between the Cayman Foundation and the U.S. development company. Factors such as overlapping personnel, shared token allocations, or interdependent governance may raise red flags for regulators. Many disaffiliated entities are still considered to be “acting in concert” with the U.S. development company.
To comply with IRC § 482, every transaction—whether a transfer, license, or service agreement—must be documented and priced as if the two entities were dealing at arm’s length. The IRS is particularly sensitive to arrangements that appear to shift valuable income-producing activities offshore without proper compensation to the U.S. entity.
Similar Concerns Around the World
Although this article has focused on the US, most other jurisdictions around the world have similar concerns. Therefore, it is important to consult with local tax counsel to understand the specific interpretation of local tax law and the associated documentation requirements.
Conclusion
For digital asset companies employing offshore structures, proactive tax compliance is essential. IP valuations and benchmarking studies are not just formalities; they are critical for satisfying the arm’s length standard under IRC §482 and minimizing audit risk. Teknos Associates and Falcon Rappaport & Berkman each bring deep expertise in digital asset valuation and IP transfer pricing, helping projects navigate these complex cross-border structures with confidence.
[1] There are seemingly endless possible tax considerations here, including transferring intangibles to foreign entities under IRC § 367, withholding under Subchapter A (IRC § 1441, et seq.), concerns about hybrid and reverse-hybrid entities, etc. For purposes of brevity and clarity, we will limit our discussion to IRC § 482.