Transfer of Dual Application Technology in Ukraine

Setting up defense production facilities in Ukraine necessarily involves transfer of intellectual property rights, which includes dual application technologies that can be applied to both military and civilian sectors. 

For example, foreign defense companies, like the U.S.-based AeroVironment, work jointly with Ukrainian companies to produce Switchblade 600 loitering munitions in Ukraine using their dual application technology.  Initially AeroVironment will ship the components to Ukraine for assembly, followed by production of certain components in Ukraine, all of which requires transfer of intellectual property rights to the Ukrainian entity.

Still other foreign companies, such as Czech holding Czechoslovak Group (CSG) have signed an agreement with Ukrainian Armor, a private defense company, to cooperate on the production of 155mm shells.  Specifically, CSG will supply components and share the technology and manufacturing documentation for the production of the shells to Ukrainian Armor, with the licensing process to be finalized by the end of 2024, and production to start in early 2025.  Again, this project includes transfer of dual application technology.

With regard to the transfer of dual application technologies to a Ukrainian legal entity (joint venture or 100% foreign owned subsidiary), the owner of the intellectual property (IP) rights has two options: (a) contribute its dual application technology to the authorized capital of its Ukrainian subsidiary or (b) enter into a license agreement for the use of technologies (with corresponding royalty payments).

Below we discuss both options, as well as registration of dual application technology IP rights:

1. Contribution of Dual-Use Technology to the Authorized Capital

The parent company (owner of dual application technology) can transfer IP rights as part of its contribution to the authorized capital of its Ukrainian joint venture or subsidiary.  In this scenario, the Ukrainian company (joint venture or a 100% foreign subsidiary) effectively becomes the owner of the contributed technology, enabling it to use the technology freely without paying ongoing fees.  The subsidiary’s authorized capital increases, 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 intellectual property is crucial for determining the accurate contribution value of the technology to a company’s authorized capital, and it involves the following steps:

1. Licensed Appraiser: a certified valuation expert, accredited in Ukraine, must be retained to conduct valuation;
2. Document Review: the appraiser reviews all relevant documents related to the technology, including patents, licenses, and technical specifications;
3. 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;
4. Calculation and Report Preparation: the appraiser analyzes and determines fair market value and prepares a detailed valuation report; and,
5. Approval and Registration: the valuation report must be approved by the relevant authorities, especially if it’s being used for capitalization purposes.
6. License Agreement for Use of Dual Application Technology

The parent company can transfer IP rights by entering into a licensing agreement with the local company (joint venture 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.  Additionally, the parent company will receive regularly scheduled royalty payments abroad, which the Ukrainian company can deduct locally as a business expenses, potentially providing tax benefits.

The drawback for the Ukrainian company (joint venture 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 intellectual property, depending on the valuation.

3. Registration of IP Rights in Ukraine and Dual Application Technology

In Ukraine, dual application technologies can be protected under different intellectual property (IP) 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 trade secrets (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 IP rights—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.

Below we discuss the specific features of registering inventions, utility models, industrial designs, and know-how rights in Ukraine.

(a)       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.

(b)       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.

(c)       Know-How

In addition to formal IP rights, 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 IP rights, 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.

By Frishberg & Partners, Ukraine, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact ukraine@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 84 Brook Street, London W1K 5EH, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.