Transfer of Dual Application Technology to Defense Production Facilities in Ukraine

Ukraine's Defense Production: Navigating Intellectual Property Rights

The establishment of defense production facilities in Ukraine is crucial for enhancing the country's military capabilities, but it necessitates the transfer of intellectual property rights (IPR), particularly involving dual-use technologies that have both military and civilian applications. A prominent example of this is the collaboration between U.S.-based AeroVironment Inc. and Ukrainian firms to manufacture the Switchblade 600 loitering munition locally. Initially, AeroVironment will send components to Ukraine for assembly, transitioning to local production of certain components over time. This process involves significant IPR transfer to Ukrainian entities.

In another notable development, the Czechoslovak Group (CSG) has entered into an agreement with Ukrainian Armor, a private defense company, to jointly produce 155mm artillery ammunition. CSG will provide essential components and share manufacturing technology and documentation, with the licensing process for dual-use technology expected to conclude by the end of 2024 and production set to begin in early 2025.

For foreign companies looking to transfer dual-use technologies to Ukrainian legal entities, there are two primary options: contributing the technology to the authorized capital of a Ukrainian subsidiary or entering a licensing agreement for its use, complete with royalty payments.

Contributing Dual-Use Technology to Authorized Capital

When a parent company opts to transfer IPR as part of its investment in a Ukrainian joint venture or subsidiary, the local entity gains ownership of the contributed technology, allowing it to use it without ongoing fees. This approach can enhance the subsidiary's financial position but comes with notable drawbacks. The parent company forfeits all rights to the technology, and the process can be lengthy, requiring official appraisal, registration with the state, and comprehensive documentation.

The valuation process for IPR involves several critical steps:

1. Licensed Appraiser: Retain a certified valuation expert in Ukraine.
2. Document Review: The appraiser examines all relevant documents related to the technology.
3. Valuation Methodology: Choose an appropriate approach—cost, market, or income—based on the technology's nature.
4. Calculation and Report Preparation: The appraiser determines fair market value and prepares a detailed report.
5. Approval and Registration: The valuation report must receive approval from relevant authorities for capitalization purposes.

Licensing Agreement for Dual-Use Technology

Alternatively, a parent company can maintain ownership by entering into a licensing agreement with a local entity. This approach allows for royalty payments while retaining full control over the technology's use. Although license agreements in Ukraine are not mandated to be registered, registration is highly recommended, particularly for dual-use technologies. The Ukrainian company can deduct these royalty payments as business expenses, potentially yielding tax benefits. However, financial obligations for ongoing royalty payments may be burdensome in the long term, necessitating compliance with transfer pricing regulations.

IPR Registration and Protection in Ukraine

In Ukraine, the protection of dual-use technologies falls under various IPR regimes, contingent on the technology's nature. These technologies can be registered as inventions or utility models, while their appearance may be safeguarded as industrial designs. Moreover, some proprietary aspects can be protected as commercially confidential know-how. A comprehensive protection strategy that combines these various IPR types can maximize the technology's value while ensuring security.

Inventions and Utility Models: An invention must meet criteria such as novelty, inventive step, and industrial applicability, granting up to 20 years of protection. Utility models offer a simpler alternative with less stringent requirements and a protection term of up to 10 years, ideal for incremental improvements.

Industrial Designs: Protection of aesthetic aspects, such as shape and decoration, is vital for products requiring both functionality and visual appeal. Industrial designs can be registered for an initial five-year term, renewable for up to 25 years.

Know-How Protection: Know-how, encompassing valuable confidential information and processes, can provide a competitive edge without requiring public disclosure. Protection is achieved through contractual agreements and internal security measures.

In conclusion, the transfer of dual-use technologies to Ukrainian defense production facilities is a complex endeavor requiring careful legal and strategic considerations from foreign investors. The insights provided here reflect the expertise of Maksym Koval, a partner specializing in intellectual property at Frishberg & Partners, a law firm with a longstanding presence in Kyiv.

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