Transfer of Dual Application Technology to Defense Production Facilities in Ukraine

Setting up defense production facilities in Ukraine necessarily involves transfer of intellectual property rights, which can include dual application technologies applicable to both military and civilian materiel. 

For example, the US-based AeroVironment Inc, is working jointly with Ukrainian companies to produce its Switchblade 600 loitering munition in Ukraine using their dual application technology.  Initially it will ship the weapon’s components to Ukraine for assembly, followed later by the manufacture of certain components in Ukraine. This requires transfer of intellectual property rights (IPR) to the Ukrainian entities.

Other foreign companies, such as the Czechoslovak Group (CSG) have signed an agreement with Ukrainian Armor, a private defense company, to cooperate in the production of 155mm artillery ammunition.  CSG will supply components and share its technology and manufacturing documentation for the production of the rounds to Ukrainian Armor. The licensing process for this, which also includes the transfer of dual application technology, will be finalized by the end of 2024, with production to start in early 2025.

In respect of the transfer of dual application technologies to a Ukrainian legal entity (joint venture (JV) or 100% foreign owned subsidiary), the owner of the IPR has two options: Either to contribute its dual application technology to the authorized capital of its Ukrainian subsidiary or to enter into a license agreement for the use of the technology (with corresponding royalty payments).

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Let us now consider both options, along with the registration of dual application IPR.

Contribution of Dual-Use Technology to the Authorized Capital

The parent company (owner of the dual application technology) can transfer IPR as part of its contribution to the authorized capital of its Ukrainian joint venture or subsidiary.  In this scenario, the Ukrainian company (JV or a 100% foreign subsidiary) effectively becomes the owner of the contributed technology, enabling it to use it freely without paying ongoing fees.  This in effect increases the subsidiary’s authorized capital, which can help bolster the company’s financial standing.

The drawbacks can be significant because the owner of dual application technology loses all rights to this intellectual property.  Additionally, registering the technology as part of authorized capital can be time-consuming.  For example, the contributed technology must be officially appraised to determine its fair market value, the contribution needs to be formally registered with the state, and documentation must be filed reflecting the updated authorized capital.

Valuation of IPR is crucial for determining the accurate contribution value of the technology to a company’s authorized capital, and it involves the following steps:

• Licensed Appraiser: a certified valuation expert, accredited in Ukraine, must be retained to conduct valuation.
• Document Review: the appraiser reviews all relevant documents related to the technology, including patents, licenses, and technical specifications.
• Valuation Methodology: the appraiser selects an appropriate valuation method, which may include the cost approach, market approach or income approach, depending on the nature of the technology.
• Calculation and Report Preparation: the appraiser analyzes and determines fair market value and prepares a detailed valuation report.
• Approval and Registration: the valuation report must be approved by the relevant authorities, especially if it’s being used for capitalization purposes.

License Agreement for Use of Dual Application Technology

The parent company can transfer IPR by entering into a licensing agreement with the local company (JV or a 100% foreign subsidiary) in exchange for royalties.  According to Ukrainian legislation, license agreements are not subject to mandatory registration. Nevertheless, we highly recommend registration especially in the cases of dual-use technologies.

As a major benefit, the parent company retains ownership of the technology, maintaining full control over its use and which, additionally, it will receive regularly scheduled royalty payments. In turn the Ukrainian company can deduct these payments as a business expense which can, potentially, provide tax benefits.

The drawback for the Ukrainian company (JV or subsidiary) is the financial burden of paying royalties over a long-term period.  From a legal perspective, such royalties must be set at an arm’s length price to avoid transfer pricing issues, and this may require additional compliance and documentation.  Finally, there may be tax implications on the transfer of IPR, depending on their valuation.

Registration of IPR in Ukraine and Dual Application Technology

In Ukraine, dual application technologies can be protected under different IPR regimes, depending on the nature of the innovation. These technologies, which have both civilian and military uses, can be registered as inventions or utility models, while the appearance of such products may be protected as industrial designs. Furthermore, some aspects of these technologies can be safeguarded as commercially-in-confidence know-how.

When determining how to protect dual application technologies in Ukraine, it is crucial to consider the nature of the technology, the duration of the protection required, and the commercialization strategy.

Combining different IPR - such as patenting the core technology as an invention or utility model, registering the product's appearance as an industrial design, and protecting sensitive details as know-how - provides a comprehensive protection strategy that maximizes the value of the technology while maintaining its security and market advantage.

Let us now examine the specific features of registering inventions, utility models, industrial designs, and know-how rights in Ukraine.

Inventions and Utility Models

An invention is a novel and inventive technical solution to a specific problem, characterized by its ability to provide a practical or industrial benefit. In Ukraine, an invention must meet three primary criteria: novelty, inventive step, and industrial applicability. Registration of an invention provides the right holder with protection for up to 20 years.

Utility Models offer a more straightforward approach to protecting technical solutions. The requirements are less strict compared to inventions; specifically, utility models are not required to have an inventive step, making registration faster and less complex. However, the term of protection is shorter, with a maximum duration of 10 years. This form of protection is often preferred for technologies with a shorter commercial lifespan or for incremental improvements to existing products.

In Ukraine, both inventions and utility models are subject to examination by the Ukrainian IP Office. In the case of inventions, a substantive examination is conducted to ensure compliance with the novelty, inventive step, and industrial applicability criteria. For utility models, only a formal examination is required, which significantly expedites the process.

Industrial Designs

Industrial designs protect the aesthetic or ornamental aspects of a product, which may include the shape, configuration, or surface decoration. Dual application technologies often involve products that need to be both functional and visually appealing, making industrial design protection relevant.

The registration process for industrial designs in Ukraine is relatively straightforward and involves the examination of the design's novelty. Protection for industrial designs is initially granted for a term of five years and can be renewed for successive five-year periods, up to a maximum of 25 years.

Know-How

In addition to formal IPR, dual application technologies can also be protected as know-how. Know-how refers to valuable confidential information, methods, or processes that give a competitive advantage to the business holding them. Unlike registered IPR, know-how does not require disclosure to the public and can be kept confidential indefinitely, provided that adequate measures are taken to ensure its secrecy.

The nature of know-how makes it particularly valuable for dual application technologies, where maintaining the confidentiality of specific technical details or production processes is essential for security reasons. Protection of know-how in Ukraine is achieved through contractual agreements and internal security measures rather than formal registration.

In conclusion, transfer of dual application technologies to a Ukrainian defense production facility is a sensitive area, which requires careful attention on the part of the foreign investor.

The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.

Maksym Koval is a Partner specializing in intellectual property at Frishberg & Partners, an American-owned law firm that has been based in Kyiv since 1991 and is one of the oldest corporate law practices in Ukraine.