The Contribution of Intellectual Property to Charter Capital

Igor Nevzorov
Manager, Legal Services
Ernst & Young

At the beginning of 2010, Russia marked the two-year anniversary of the entry into force of new intellectual property (IP) legislation (Part 4 of the Civil Code). Rarely clarified by Russian state arbitration courts until recently, the new legislation still contains a number of legal concepts that may give rise to contradictions and doubts as to their application by companies. One such legal concept mostly arising from the new part of the IP Civil Code is the contribution of IP rights to the charter capital of a company.

Intellectual property (or “intellectual rights” as it is defined in the code) may be contributed to the company’s charter capital generally based on the same rules as the contribution of any other assets (property, work, services, and so on). In particular, it can be contributed to the charter capital of a limited liability company or a joint stock company. The contribution can be either to a new company or as part of an increase of the charter capital of an existing company.

As with any other assets, the contribution of IP is eligible for standard tax benefits (see I.3, P.1, Clause 251 of the Tax Code). Also, it is subject to a number of standard procedures (such as valuation of the IP for the purposes of contribution).

Apart from general issues, which are the same for any type of assets contributed to the charter capital, there are certain legal aspects of IP contribution that should be noted.

The contribution of IP can take two forms:

• contribution of an “exclusive right” in specific IP, where the company receives the whole bundle of rights to use the IP,

• contribution of a limited “right of use” of specific IP, where the company is allowed to use the IP only in a limited territory and time period.

As it was clarified by the Supreme Court and the Supreme Arbitration Court (P.11 of the joint ruling dated March 26, 2009), in the case of IP contribution, the shareholder should enter into an agreement with the company to that effect (such as an exclusive right sale agreement or license agreement).

The Russian law governing IP provides for the priority of national legislation over foreign legislation (Clause 1231 of the Civil Code). This means that in Russia the law recognizes only IP that is directly specified in the Civil Code and/or international treaties to which Russia is a party.

Based on the above, the IP types eligible for contribution include without limitation the following:

(a) Copyright

Since Russia is a party to international treaties regulating copyright, the shareholder has the right to contribute to the company’s charter capital any copyright (such as design, slogans, literary work, images, music). At the same time, the contribution should be formalized in a formal agreement between the company and the shareholder, which should be in line with Russian legislation, containing all essential conditions stipulated in the law, including a precise description of the IP.

(b) Patent Rights

It is possible to contribute any rights relating to inventions, utility models or industrial designs. However, the Civil Code recognizes only patents issued by the Russian IP authorities (and some patents issued by the Eurasian Patent Office). The contribution of such IP (agreements) is subject to registration with the Federal Service for Intellectual Property (often known as Rospatent). It is also necessary to note that where the shareholder contributes IP under a foreign patent, the company will not be able to use such patent rights in Russia.

(c) Trademarks

Similar to patents, trademarks may be contributed only after obligatory registration of the agreement for such a contribution with the Federal Service for Intellectual Property. Likewise, in Russia, the company may use only those trademarks that are valid in Russia (meaning that trademarks registered in regard to other countries will not be effective in Russia).

(d) Know-How

The shareholder may contribute know-how to the company’s charter capital only where it has established a special commercial secret status by performing a number of specific measures to protect the know-how confidentiality (Clause 10 of the law on commercial secrets, Clause 1465 of the Civil Code). Where the mentioned measures are not implemented by the shareholder or by the company, the information contributed will not be recognized as know-how from the Russian law standpoint.

It is also necessary to mention that, since domain names are not currently recognized by the Russian law as IP, they may not, as such, be contributed to the charter capital. The only way to “contribute” it to the charter capital is to contribute the entire bundle of rights received by the shareholder from the service agreement concluded with the domain name register.

To summarize the above: When selecting the contribution of IP as a way to set up or increase the charter capital, it is recommended for the shareholder to analyze all the issues mentioned above to make the contribution more efficient.