A patent box is a special very low corporate tax regime used by several countries to incentivise research and development by taxing patent revenues differently from other commercial revenues. It is also known as intellectual property box regime, innovation box or IP box. Patent boxes have also been used as base erosion and profit shifting (BEPS) tools, to avoid corporate taxes.
History In the early 1970s Ireland introduced the first scheme in its Corporation Tax. Section 34 of the 1973 Finance Act allowed total tax relief in respect of royalties and other income from licenses patented in Ireland.
The concept was applied in 2001 by the French Tax Authorities as a reduced rate of tax on revenue from IP licensing or the transfer of qualified IP. Within Europe, Belgium, Hungary, Luxembourg, Netherlands, Spain and the United Kingdom have also introduced similar schemes.
In the United States, Patent Box legislation has been introduced by Congress several times since 2007 but has not been enacted. In July 2015, Reps. Charles Boustany, R-La., and Richard Neal, D-Mass., introduced a discussion draft of the Innovation Promotion Act of 2015. Citing pressures introduced by the current economic climate, this act again aims to introduce a patent box to the Internal Revenue Code.
Controversy The Irish Patent Box system is one of the key benefits for companies paying Irish corporation tax. The system was criticised by Lionel Jospin in the early 2000s and more recently by both the EU (Ecofin assessment 2014) and the OECD under its Base Erosion and Profit-Shifting (BEPS) project. The system has been key to attracting international IT companies to Ireland. The economic benefits of beneficial tax regimes for revenues from patents led to similar schemes being introduced in France in 2000 and amended there in 2005 and 2010.
Schemes by country
Cyprus The Cyprus IP box rules were amended in October 2016, with effect from July 2016, to align the regime with the OECD modified nexus approach. Qualifying intellectual property includes patents, copyrighted software, utility models and certain other innovative intellectual property. Marketing-related intellectual property, including trademarks, does not qualify. The regime provides an 80% deduction on qualifying profits. Subject to the applicable nexus fraction, this can result in an effective tax rate of 3% following the increase of the Cyprus corporate income tax rate to 15% from 1 January 2026.On 17 July 2020, the Cypriot House of Representatives approved a bill amending Section 9(1)(l) of the Income Tax Law concerning the tax treatment of intangible assets. Where the disposal of an intangible asset constitutes a transaction of a capital nature, the resulting capital gain is not taxable. The changes took effect from 1 January 2020 and abolished the requirement to prepare a balancing statement upon the transfer or sale of an intangible asset.
Ireland
The scheme which had existed since 1973 was withdrawn in 2010 under the National recovery Plan 2011-2015 of the Republic of Ireland imposed by the European Financial Stability Facility and the IMF. It exempted revenue from qualifying Patents from Irish corporation tax. The exemption is to be replaced by a "Knowledge Development Box" in 2015 offering a reduced tax rate of 6.25% on qualifying profits generated in periods commencing on or after 1 January 2016.
The key difference in the Irish KDB to those of other European countries is its compliance with the OECD's Base Erosion and Profit Shifting (BEPS) programme, Ireland's is the first patent-box type system to offer compliance in this area. Companies availing of the current R&D tax credit should be aware of the KDB and the potential for them to take advantage of both systems.
France Introduced in 1979Code général des impôts Légifrance the Patents and royalties regime allows companies paying French corporation tax to pay a reduced rate of 15% (instead of 33%) on patent and royalties income as they are treated as a long term capital gain. If the licensee is a French corporation and actually uses the qualified IP licensed, the licensee may deduct the royalty payments from its income taxable at the standard 33.33% rate even if the licensor is taxed at the reduced 15% rate
Netherlands The Netherlands introduced a patent box tax regime referred to as the ‘innovation box’ in January 2007. This initial regime applied only to patents and applied a 10% rate of corporate tax. On 1 January 2010 the regime was expanded to include a much wider range of IP and the headline rate was reduced to 5%. The reduced rate of corporate tax applies to the net positive income derived from the qualifying IP ( gross income minus all related expenses and depreciation).
Belgium The patent box scheme in Belgium was introduced in January 2007, and is known as a patent income deduction (PID). The last revision applies from July 2016. This PID allows a company, liable to pay Corporation Tax in Belgium, to deduct from its taxable income 85% of gross patent income. The remaining 15% of gross patent income is taxed at the standard corporation tax rate of 34% (including a 3% surtax). This results in an effective tax rate of 5.1% on the qualifying income.
Luxembourg In Luxembourg the Patent box IP regime became effective in January 2008 and amended in 2008 to also exclude qualifying IP assets from Luxembourg's net wealth tax. The regime applies to the net income derived from the use of qualifying intellectual property acquired or developed after December 2007. 80% of income is exempted, giving an effective tax rate of 5.76%.
The Patent box IP regime was abolished in 2016 in response to BEPS concerns. IP regimes claimed before July 2016 can still continue to benefit from the preferential rate for the next 5 years. In March 2018, Luxembourg created a new IP regime following the OECD criteria.
Hungary Hungary introduced a scheme in 2003 including a provision according to which 50% of the pre-tax amount of the royalties received may be deducted from the tax base, this reducing the effective corporate tax rate on such royalties from 9% to 4.5%. The legislation is BEPS compliant.
Spain As of January 1, 2008, 50% of the gross income of Spanish domiciled companies derived from qualified Intellectual Property is exempt from Spain's Corporation tax resulting in an effective tax rate of 15%.
United Kingdom The United Kingdom introduced a Patent Box scheme in 2013 taxing qualifying IP at 10%. The Patent Box in the UK is a tax incentive introduced in 2013 designed to encourage companies to make profits from their patents by reducing the UK tax paid on those profits.
History The UK Patent Box went live in April 2013. The UK government wants to encourage high-value growth in UK plc through a competitive tax regime that supports UK R&D from conception to commercialisation. The Patent Box forms a key part of this strategy by encouraging companies to commercialise their patents and R&D in the UK. Other countries (e.g., Belgium, Luxembourg, the Netherlands) already operate schemes to provide incentives for companies to retain and commercialise existing patents.
The scheme was first proposed in the 2009 Pre-Budget Report and went through various iterations and public consultations until final legislation was passed in the Finance Act 2012. The legislation is now formally a new Part 8A of the Corporation Tax Act 2010 entitled "Profits Arising from the Exploitation of Patents etc". The Finance (No. 2 Bill) 2015/16 includes proposed amendments, which, if implemented, will amend the patent box rules.
The Patent Box initiative is complementary to the R&D tax incentives which encourage companies to undertake their R&D in the UK.
The Patent Box allows a 10% tax rate on profits derived from any products that incorporate patents. The net benefit for claiming companies is likely to be several percentage points of their corporate earnings, given that the main rate of UK corporation tax is 19 per cent.
The steady state cost, after the initial phasing- in period, of the Patent Box is forecast to be approximately £1.1 billion in terms of corporation tax revenues foregone by HM Treasury.Budget 2012
The claim process is as follows: calculate qualifying income by identifying revenue streams from qualifying patents, calculate the profit generated from this qualifying income, then calculate residual profit by deducting routine profit made from routine business activities, then calculate the Patent box profit by deducting any profits derived from branding or marketing attributes then use the HMRC formula to calculate the corporate tax deduction.
How to claim Companies must calculate their qualifying Patent Box profit and then apply a specific formula in their tax computation to calculate the deduction in their tax liability. Then they can take the tax deduction as a benefit in their CT600 tax return. The formula to calculate the amount of the tax deduction is
where PB is the Patent Box profit for the company, MR is the main rate of corporation tax, and PBR is the special Patent Box tax rate (10 per cent)
Qualifying patents Qualifying patents must have been granted by an approved patent-granting body, including the UK Intellectual Property Office, the European Patent Office, and designated European territories:HMRC,"CIRD Patent Box manual" Retrieved 15 May 2013UK Statutory Instrument 2013 No. 420 The Profits from Patents (EEA Rights) Order 2013. Austria; Bulgaria; the Czech republic; Denmark; Estonia; Finland; Germany; Hungary; Poland; Portugal; Romania; Slovakia and Sweden.
Currently, the Patent Box excludes patents registered in territories such as the US, France, and Spain because of differences in the search and approval process for patent applications.
The Patent Box excludes products that only have copyright or trademark protection.
Qualifying income There are five categories (“heads”) of qualifying income: head 1: worldwide income from the sale of products incorporating at least one embedded patent (and including income from sale of integral spare parts) head 2: licence fees or royalties from qualifying IP head 3: sale or disposal of qualifying IP and rights over qualifying IP heads 4 & 5: damages/compensation income from infringement/loss of sales of qualifying IP rights
Income generated from exclusive licenses will be qualifying income on both sides of the agreement – i.e. for the licensor and the licensee – subject to specific conditions concerning the meaning of exclusivity.
“IP-derived income”, where patented products or processes are used in the manufacture or delivery of non-patented products or services, will be qualifying income to the extent of a notional royalty which values the specific patented product or process as a proportion of the value of the non-patented product or service.
Qualifying company must hold qualifying IP rights must elect into the scheme must fulfill “development” and/or “active ownership” conditions
Details in the legislation to look out for notional royalty notional marketing royalty and marketing intangibles (including transfer pricing) streaming meaning of exclusivity R&D shortfall
Anti-avoidance The following situations will be against the law: where a functionally irrelevant patent is incorporated into a product with the sole purpose of achieving Patent Box eligibility commercially irrelevant grant of exclusivity with the sole purpose of achieving Patent Box eligibility any scheme designed to inflate artificially qualifying IP income or qualifying Patent Box profits. Reasonable and commercially appropriate steps to restructure corporate arrangements to take advantage of the Patent Box will be considered legitimate.
Other technology tax reliefs Research and Development Tax Credit Research and Development Expenditure Credit Above the Line R&D Tax Relief Research and Development Capital Allowances