State of emergency – tax measures

state-of-emergency-tax-measures

By Executive Decree 1021 issued on March 27, 2020, the President of Ecuador, adopted the following tax measures within the state of emergency:

1. Income tax withholding:

The following entities will be required to withhold and pay on a monthly basis income tax over their total taxable income obtained in each month:

Entity activity 

RMonthly income tax withholding rate (%)

Financial institutions under the supervision of the Superintendency of Banks and entities that provide mobile telephone services. 1,75%
Entities that have entered into contracts with the Goverment for the exploration and exploitation of hydrocarbons under any modality or, contracts for specific works and services under the Hydrocarbons Law or, complementary petroleum services as well as transportation of crude oil. 1,5%

The withholding tax receipt must be issued in the name of the withholding agent and the value withheld will be consider as tax credit for paying the withholding agent’s income tax.

2. Tax payment deadlines:

For this time only, the taxpayers who at this date are considered as:

  • Micro-enterprises;
  • Those domiciled in Galapagos Islands;
  • Those who are regular exporters of goods, or that 50% of their income derived from the export of goods; or,
  • Those whose economic activity is:
    1. The operation of airlines,
    2. The tourism sector, exclusively those that provide accommodation and/or food services; or,
    3. The agricultural sector.

Will be able to pay the corporate income tax for the fiscal year 2019 and the value added tax (VAT) to be paid in April, May and June 2020 as follows:

  1. Payments will be made in 6 installments during the year 2020 in the following percentages: in each of the first two months, the taxpayers are required to pay 10% of the total value; and, in each of the remaining four months, taxpayers are required to pay 20% of the total value.
  2. These payments will be made according to the ninth digit of Tax ID as follows:
Ninth Digit of Tax ID 

Payment Date

1 10th of each month
2 12th of each month
3 14th of each month
4 16th of each month
5 18th of each month
6 20th of each month
7 22nd of each month
8 24th of each month
9 26th of each month
0 28th of each month

Taxpayers domiciled in the province of Galapagos are able to make the payment until the 28th of each month..

If a payment deadline overlaps with a mandatory rest day or holiday, the deadline shall be the next working day unless that day falls on the following month, in which case the payment deadline shall be anticipated to the last working day of the month.

If the taxpayer makes the payment after the deadlines have expired, he must pay the respective interest and fines in addition to the tax

  1. The payment of 2019 corporate income tax for the entities described above, will be made from April to September 2020 in the percentages and terms indicated in numbers 1 and 2 of this document.
  2. The payment of VAT for the months of April, May and June 2020 will be made in the percentages and terms described above, in the following months:
VAT to be paid in the month of

Months of Payment:

April 2020 From April to September, 2020
May 2020 From May to October, 2020
June 2020 From June to November, 2020
  1. Taxpayers subject to the Micro-enterprise Taxation Regime shall file their VAT return on a semi-annual basis. These taxpayers will not be subject to the exception regime detailed above.

 

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DISCLAIMER: The previous text has been prepared for informational purposes. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm.

CORRALROSALES

Income tax withholding rates

Regulation NAC-DGERCGC20-00000020 issued by the Internal Revenue Service and published on March 20, 2020 in the Official Registry Special Edition 459 established new rules to the income tax withholding regime:

  1. The following income tax withholding rate was modified:
Concept 

Previous
rate

New
rate
Acquisition of all types of movable property of a tangible nature 1%  1,75%
Payments that do not have a specific withholding rate 2% 2,75%
  1. It was clarified that the acquisition of goods of agricultural, poultry, livestock, beekeeping, bio aquatic, forest and meat origin, which are maintained in their natural condition, will be subject to 1% withholding regardless of whether an invoice or settlement for the purchase of goods or provision of services is issued.
  2. Additionally, it is clarified that this withholding rate (1%) applies to income from local production and marketing of agricultural activities, even if the taxpayer generating the income is subject to a special income tax regimen.

The new withholding rates are applicable beginning April 1st.

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CORRALROSALES

Ecuador: New measures against Covid-19

covid-19-labor.jpg

Since March 17, new limitations apply to mobility and the development of economic activities.

I. Measures enforced throughout the country

The President of Ecuador, through Executive Decree 1017, declared a state of emergency throughout Ecuador, further declaring the Covid-19 (coronavirus) as a pandemic and issued additional control measures.

  1. Freedom of movement and mobility of people in the country have been limited and in-person work activities on public and private sector were suspended from March 17 to 24.
  2. Exceptionally, the mobility of people will be allowed in the following cases:
    • Workers and employees of entities that provide basic services relating to health, security, fire, airports, terminals (maritime, river), banking, food supply; the export sector and its logistics chain, strategic sector, those related to animal care and breeding, consular services accredited in the country.
    • Members of the National Police and Armed Forces.
    • Medical, health or relief personnel
    • Public and private transportation of entities authorized to operate.
    • People who must commute for emergency reasons.
    • People who need to stock up on food, medicine or fuel.
  3. Curfew has been established prohibiting any circulation of vehicles and people from 9:00p.m. to 5:00 a.m. each day, except for the cases listed in a. to f. of Paragraph 2.
  4. From midnight on Tuesday 17 to April 5, domestic air operations are suspended. Exclusive air cargo operations, domestic and international, are permitted and operational.
  5. Since Wednesday, March 18 vehicle circulation is restricted for people who commute to stock up on food, medicine or fuel. Circulation is limited to:
Day

License plate ending on:

Monday, Wednesday, Friday, and Sunday 1 – 3 – 5 – 7 – 9
Tuesday, Thursday and Saturday 0 – 2 – 4 – 6 – 8

II. Measures enforced in the Metropolitan District of Quito

The Mayor of M.D. of Quito announced additional control measures applicable exclusively in M.D. of Quito from 5:00 am of March 17 until March 31:

  1. Suspension of the use of public spaces including sidewalks, streets, parks, pedestrian bridges, passages, among others. Only the mobility of the persons listed in Section I.2 above is allowed with certain additions.
  2. Suspension of business activity licenses. Licenses for food and medicine sales activities are exempted.
  3. Full restriction for private vehicles´ circulation and buses (motorcycles, bicycles, trolleybus, Ecovía, Metrovía systems). Motorcycles that transport food and medicines with a maximum of one passenger are allowed to circulate.
  4. Taxis can circulate to transport authorized persons, with limitation established by the Mayor.
  5. Closure of land terminals and airports, except for cargo operations.
  6. Circulation of children, senior citizens or people with disabilities is not allowed.

III. Public sector operation and the judicial function

  1. The suspension of in-person work activities includes the public sector, which will limit its activity to what can be carried out by teleworking. This means that the majority of processes are suspended.
  2. Several public entities such as the Internal Revenue Service, the National Customs Service of Ecuador, the Superintendence of Companies, the Superintendence of Control of Market Power, Ministry of Labor have expressly suspended the terms within pending administrative proceedings.
  3. The Judicial Branch suspended activities while the state of emergency established by the President of the Republic lasts. Likewise, judicial processes dates and terms are suspended.

 

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CORRALROSALES

New deadlines for filing tax returns

tax-returns-new-deadlines

Regulation NAC-DGERCGC20-00000012 issued by the Internal Revenue Service and published on March 9, 2020 in the Official Registry 157 established new deadlines for filing the following tax returns and annexes:

    1. Value added tax (VAT) taxpayers and VAT and income tax withholding agents, whose ninth digit of the tax ID (RUC) is 4, for this occasion, may file the February monthly tax return, until March 17, 2020.
    2. Individuals and undivided successions that are required to file the income tax return for the fiscal year 2019, for this occasion, may file their tax return until the following dates:
Ninth digit of the tax ID (RUC) 

Maximum date of filing the return

1 Marzo 11 th
2 Marzo 13 th
3 y 4 Marzo 19 th
5 y 6 Marzo 25 th
7 y 8 Marzo 27 th
9 y 0 Marzo 31 st
  1. Taxpayers required to file the Simplified Transactional Annex, may file the annexes from January to September 2020, for this occasion, according to the following dates:
Periodo de 2020 

Meses de presentación

January and February September 2020
March and April October 2020
May, June and July November 2020
August and September December 2020

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DISCLAIMER: The previous text has been prepared for informational purposes. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm.

CORRALROSALES

Ecuador: the current conundrum of registered trade names that are not in use

trade-names-not-use-intellectual-property-katherine-gonzalez

Rights in trade names are acquired through their use; therefore, the registration of these before the Ecuadorian IP Office, or SENADI according to its official name and acronym, is merely declarative. There is currently a tendency to deny trademark registration based on already registered trade names, even if their use has not been demonstrated. This practice forces the applicant to file administrative or judicial challenges to try to remedy the situation.

A trade name is any sign capable of identifying a person or business establishment in the exercise of its economic activity. Trade names are independent of the corporate name or commercial name. They can be the same or different. In any case they can coexist.

While trade names and trademarks both relate to a distinctive type of sign, trade names have some important differences compared to the latter. These differences and their treatment by the IP Office are those that eventually cause practical inconveniences that will be examined in this article. Among the most relevant differences are:

  • The rights to trade names are acquired through use; thus, the Andean and national regulations expressly state, “The exclusive right over a trade name will be acquired with its first use in commerce.” On the other hand, rights over trademarks are acquired only upon registration with the IP Office.
  • The registration of a trade name with the IP Office is only declarative, since the right arises only with the use, regardless of whether it is registered or not.
  • The rights to a trade name end once its use ceases or the activities of the person or company that uses it cease. In contrast, rights to a trademark will remain as long as renewed or not cancelled or invalidated.
  • Trademarks protect products or services, while a trade name identifies a commercial activity.

For the protection and defense of trade names, as with trademarks, there is the right of opposition against applications for signs that, among other grounds for refusal, are capable of creating confusion or association in consumers.

Article 416 of the Law of the Social Economy of Knowledge, Creativity and Innovation (hereinafter, Ingenuity Law) provides that: Declaratory registration of the Trade Name (…) In any case in which the exclusive right over a trade name is alleged or claimed, its public use must be proven, such use being continuous and in good faith, at least within six months prior to said claim or allegation. The proof of use will correspond to the owner of the trade name. For the purposes set forth in this subsection, if the holder is not a party to the respective procedure, he will be notified ex officio.” (emphasis added)

Therefore, if there is a trade name (registered or not) that is in use, its holder may file an opposition, in which case he will have to prove the use of the trade name, and the IP Office will decide on the granting or refusal of the applied-for mark.

The problem arises when a trademark similar to a registered trade name is applied for, and the owner of the trade name did not file opposition or, despite having done so, did not demonstrate the use of the trade name, which is essential to prove the existence of the right.

According to the Ecuadorian IP Office database there are about 30,000 registered trade names, which, depending on the validity of the registration, are potential obstacles to the registration of a mark even though many of them are not in use. The use of trade names is the prerequisite necessary for their validity and existence to comply with the Andean and national regulations.

As a consequence of the foregoing, the Ecuadorian IP Office currently tends to deny the registration of trademarks ex officio because they are similar to already registered trade names even without proving proper use of the latter.

The problem arises from the fact that the IP Office accepts applications for registration of trade names without requiring proof of use, as well as from the non-application of Article 416 of the “Ingenuity Law” regarding the obligation to require proof of use of trade names when they are invoked as the basis for the refusal of a trademark application. Conversely, the IP Office, despite not requesting proof of use in the two cases above mentioned, does so at the time of renewing the registration of the trade name.

To circumvent the problems derived from this practice, the Authority should apply the previously mentioned Article 416, notifying the holder of the trade name registration of its obligation to demonstrate its use; only when evidence of use is filed should the authority assess whether there is sufficient legal basis to prevent the registration of a third party’s mark.

In conclusion: only when certain as to the existence of the rights over the trade name should the Authority rule on an opposition or a refusal ex officio. Unfortunately, this does not happen in most cases, although the highest administrative authority has repeatedly expressed that a registered trade name whose use has not been proven should not prevent the registration of a trademark.

This would avoid numerous problems for users who are forced to incur unnecessary expenses and to further extend the time to obtain the registration of their mark by trying to remedy the situation through administrative and judicial challenges, which can take several years.

Some specialists in the area see a solution in the possibility of filing cancellation actions for lack of use against registered trade names. SENADI has not maintained a unanimous approach on this issue, since, although there are cases in which these actions have been accepted (Resolution of August 25, 2010 procedure No. 08-973-AC-RR. Trade name “Compacalza Leopard ”), the most common approach of the IP Office is to declare the inappropriateness of these actions due to the legal nature of trade name registrations and their declarative nature (for example, resolution No. 121-2013-CPI-1S issued in the process 07-050-AC-2S on March 5, 2013 of the trade name “Natusal”).

In order to eliminate the problems examined in this article, the IP Office could incorporate into the relevant trademarks regulations – the draft of which they are currently working on – a norm that reiterates the correct application of Article 416 of the “Ingenuity Law.”

Katherine González
Associate at CorralRosales
katherine@corralrosales.com

Case Highlight: Custodial sentences for the distribution of counterfeit pharmaceuticals

pfizer-case-highlights-pharma

Six people involved in the counterfeiting of pharmaceuticals have been handed prison sentences, representing the largest group of people sentenced for being part of a distribution network of counterfeit medicines, being found guilty of illicit association.

The Attorney General’s Office with the support of Customs and the Tax Crimes Unit, after a follow-up of several months that included telephone calls and personal follow-ups, carried out a simultaneous raid on several commercial premises and homes located in the cities of Quito and Ibarra. They seized hundreds of thousands of pharmaceutical products and arrested seven people involved in the operation.

Almost everyone involved in the illegal operation had family ties to each other or worked together for several years, using legal businesses as façades including several stores located in the center of the aforementioned cities. Those involved also distributed original pharmaceuticals, in inappropriate conditions, and even lacked authorization to store or distribute such products.

Through a private prosecution, CorralRosales formally participated in the proceeding on behalf of Pfizer, thereby joining the Attorney General’s Office as prosecutor. This allowed for a joint effort in which several investigations were carried out confirming that the seized products were counterfeit and the degree to which each person charged had participated in the illegal network.

Within the earlier hearing, the judge accepted the charges presented by the prosecution and by CorralRosales against all of those involved in the operation, following which the case went to oral trial before a criminal court consisting of three judges.

In the oral trial hearing that lasted several days, all the evidence collected in the investigative process was disclosed, proving the existence of the offence and the participation of each person accused.

In an oral sentence issued at the end of the hearing, the judges unanimously decided to sentence six of the seven defendants with three years in prison, highlighting the seriousness of the crime and its potential risks to the health and safety of the public.

Those sentenced requested conditional release, which would have meant no prison time being served. The prosecution did not present any opposition to this request, but CorralRosales objected on behalf of Pfizer. In particular, we emphasized the gravity of the crime and the ease with which the same offence could be committed again. The judges granted our request, thereby rejecting the petition of defense.

Those sentenced have appealed against the ruling. To date, the appeal has not been resolved.

The importance of this ruling lies not only in the number of people sentenced, but also for the way in which the proceeding was handled, in particular by turning it into an “illicit association” case in the face of the procedural inconveniences of investigating and prosecuting the matter under the sale of counterfeit pharmaceuticals.

This is the second sentence obtained in Ecuador for the counterfeiting of pharmaceuticals, and again a recognized international laboratory intervened. In addition, CorralRosales acted as a private prosecutor in both cases.

The sentence complies with the control and sanction responsibilities of the judicial authorities. Additionally, it seeks to be an exemplary sanction for potential offenders, and sets a precedent that should be used in similar cases.

 

CORRALROSALES

Withholding percentage – dividends

withholding-percentage-dividends-tax

Regulation NAC-DGERCGC20-00000011 issued by the Internal Revenue Service establishes the withholding percentages applicable to the dividends distributed by entities with tax residence or permanent establishments located in Ecuador to: (i) individuals with tax residence in Ecuador; or, (ii) foreign entities which beneficial owners are individuals with tax residence in Ecuador.

The withholding percentage will apply over 40% of the amount of the dividend, according to the following:

Taxable income from
(basic tax bracket) 

Taxable income until
(surplus tax bracket)

Withholding over the
basic tax bracket

Withholding percentage over
the surplus tax bracket

20.000,00 0 0%
20.000,01 40.000,00 0 5%
40.000,01 60.000,00 1.000,00 10%
60.000,01 80.000,00 3.000,00 15%
80.000,01 100.000,00 6.000,00 20%
100.000,01 Forward 10.000,00 25%

The withholding receipt must be issued with the name of the individual with tax residence in Ecuador even if the amount to withhold is zero.

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CORRALROSALES

Tax Regime for Microenterprises

tax-regime-microenterprises-lawyers

Regulation NAC-DGERCGC20-00000011 issued by the Internal Revenue Service and published on February 21, 2020 in the Supplement to the Official Registry 148, establishes the rules for applying the Tax Regime for Microenterprises created by the Law of Simplification and Tax Progressivity.

Microenterprises are those individuals or entities whose annual income is equal to or less than US $ 300,000.00 and, that have 1 to 9 workers.

The Internal Revenue Service is able to include or exclude from the especial regime, taxpayers who meet the conditions to qualify as microenterprises. For this purpose, the Tax Authority is able to update the taxpayer tax ID without prior notice and, it must publish a microenterprises registry on its web page (https://www.sri.gob.ec/web/guest/catastros).

Taxpayers who consider that they should not have been included in the microenterprises tax regimen may request their exclusion until April 7, 2020.

Taxpayers included in the Tax Regime for Microenterprises must comply with the following:

  1. Issue invoices in accordance with current regulations.
  2. Request proof of sale to support the acquisition of goods or provision of services.
  3. Keep accounting books or a record of income and expenses as appropriate.
  4. File tax returns when appropriate. In the case of VAT and excise tax (ICE), the tax returns must be filed semiannually in the months of July and January of each year.
  5. Submit the annexes of information when appropriate, and
  6. Fulfill the other formal duties indicated in the Tax Code.

Taxpayers registered in the microenterprise’s registry must apply the regime from February 2020. Therefore, they will not act as withholding agents for income tax or value added tax since said month.

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CORRALROSALES

The Role of INEN in the Administrative Process for Regulatory Infringement

INEN-regulatory-miguel-maigualema-corralrosales

The Ecuadorian Standardization Service (INEN) is part of the Ecuadorian Quality System and plays an important role in regulation, standardization and metrology. It also participates in administrative proceedings carried out by the Sub-Secretary of Quality for infringements.

INEN is responsible for conducting inspections to verify compliance with technical standards before and during an administrative proceeding. The first inspection, which can be ex officio or by complaint, is intended to determine the conformity or not of a product with the corresponding technical standards. If the result is “non-compliant”, the Sub-Secretary of Quality will bring a sanctioning administrative proceeding.

As an example, in the controls carried out in compliance with the Ecuadorian Technical Regulation RTE INEN 284 “Quantity of product in prepackaged / pre-encased”, a term of 30 days is granted for the company to amend or justify the nonconformities detected in the first inspection. At the end of the 30-day term, INEN carries out the second technical inspection and if the non-conformity still exists, the Sub-Secretary of Quality can apply the sanctions provided in the Law of the Ecuadorian Quality System.

The 30-day term granted to execute corrective actions is sufficient in the case of national products, but it is not sufficient for foreign products. This situation has caused several companies to be sanctioned without considering the time, costs, and other eventualities that importing products entails.

When applying sanctions, the Sub-Secretary of Quality takes into account the reoccurrence of such nonconformities, so it is very important that companies make the necessary changes and file the required technical justifications, as well as their legal arguments before the second verification.

As derived from the preceding paragraphs, the function of INEN is to ensure compliance with mandatory technical standards whose main objective is to protect consumers.

INEN is part of several international organizations and applies international standards or parameters in the controls it performs; an aspect that has contributed to the acquisition of new skills, the application of new guidelines, and the accumulation of experience in the execution of its work. This office has put emphasis on the above-mentioned quality controls, especially regarding the net content of a product. To do so, it has adopted a monthly schedule to perform random inspections and verifications for each type of product.

Miguel Maigualema
Asociado en CorralRosales
miguel@corralrosales.com

Ecuadorian IP Office Overturns Problematic Lower Instance Decision on Recognition of English Language Terms

animal-planet-propiedad-intelectual-idioma-ian-wall

The territory of the Republic of Ecuador is predominantly Spanish speaking. Amerindian languages are also widely spoken, particularly provincially, but their use is gradually diminishing. Despite the dominance of Spanish in Ecuador, the English language is everywhere, and its influence could be said to be growing. This poses certain interesting questions from a trademark law perspective, since the general approach of the Ecuadorian IP Office is to consider terms in foreign languages as “fantasy terms”. That is, foreign language terms will not be considered as being understood by the general public, except in the case of the most commonly known words.

The stated position is more complex in practice when one considers that due to the continued encroachment of the English language throughout the American Hispanic region, generally accepted as even more marked than in the case of the Iberian-Hispanic world, the list of well-known English words is growing and therefore not a fixed concept. In addition, what is or is not a “well-known English word” is largely subjective, with such an assessment often being reduced simply to the personal experiences of the examiner in question. It should also be pointed out that levels of English competence vary greatly among Ecuadoreans, producing somewhat of a lottery in the application of this doctrine.

An interesting case arose a several years back in relation to DISCOVERY COMMUNICATIONS, LLC’s enforcement of its ANIMAL PLANET mark for its well-known television series and documentaries about wild animals and domestic pets. Specifically, CENTRO DE RADIO Y TELEVISION CRATEL C.A., the company behind a national television channel in Ecuador, applied to register MUNDO ANIMAL in Classes 35, 38 and 41 (‘mundo’ means ‘world or ‘earth’). DISCOVERY opposed the applications on the basis of their Ecuadorian registrations for ANIMAL PLANET in Classes 38 and 41.

The oppositions were initially refused, following which all cases were appealed. Upon appeal before the IP Committee in Class 35, the authorities referred to studies as to the penetration of the English language in various countries around the world, saying that it would be incorrect to state that English had penetrated Ecuadorian culture. From there the reasoning was somewhat confused, but it was understood that the authorities considered the terms ‘animal’ and ‘planet’ as not easily understood by the general Ecuadorian public. This was quite an astonishing finding given that the the word ‘animal’ is the same in Spanish as in English, and that the Spanish for ‘planet’ is ‘planeta’. Clearly, this was the wrong starting point for deciding the cases.

It should be pointed out though that above Committee level decision contained a dissenting judgement from one of the Committee members, setting out in no uncertain terms that ANIMAL PLANET would be easily understood by Spanish speakers. The Committee is made up of three members, therefore the opposition was still rejected by 2 to 1. Nevertheless, dissenting judgements are rarely seen within such decisions, and needless to say the dissenting voice was encouraging for DISCOVERY, who decided to further appeal.

A reconsideration motion was filed against the mentioned decision, which is a request for the relevant authority to review its prior finding. Within such action, in contrast to the previous instance the authorities acknowledged that the meaning behind the mark ANIMAL PLANET would be easily understood by general Ecuadorian public, given the Spanish translation of the same is essentially identical except for the addition of the extra letter ‘a’ within the Spanish word ‘planeta’. The Office then went to conclude that the terms MUNDO and PLANET relate to an identical concept, and therefore that there was a risk that consumers would be confused. This reasoning was then followed within the related matters in Classes 38 and 41.

While the Ecuadorian trademark authorities’ acceptance that the meaning of ANIMAL PLANET can be deciphered by the average Ecuadorian consumer represents a welcome return to common sense, the Office’s position as a whole is interesting since the respective marks are being used on television programmes for content relating to animals. That is, in terms of inherent distinctiveness, the marks are towards the lower end of the spectrum. In addition, ‘mundo’ is not in fact a translation of ‘planet’, but rather means ‘world’ or ‘earth’. Therefore, the decision highlights that even in the case of non-literal translations, a conceptual link can still be inferred and be sufficient for a finding of confusing similarity. CorralRosales agrees with the decision, since it reflects the reality in that translations themselves are not always literal or direct.

A similar article was published in WTR on January 16th. Click to read it.

Ian Wall
Associate at CorralRosales
ian@corralrosales.com