The UK Patent Box Proposal: How Does It Measure Up?


This article comes courtesy of our friends at DLA Piper.

Her Majesty’s Treasury recently released a “Patent Box” proposal that would provide substantial tax incentives for UK companies that derive profits from patents.

While the proposal would make the UK a more desirable location for IP-producing companies, the tax regimes in several neighboring European nations continue to provide better alternatives from a tax minimization perspective. How does the UK proposal measure up to the tax regimes in the Netherlands, Luxembourg, Belgium and Ireland?

The bottom line: comparing effective tax rates

Starting in April 2013, the UK Patent Box proposal would tax profits derived from qualifying patents at an effective rate of 10 percent. This rate is substantially lower than the general corporate tax rate in the UK (scheduled to be 24 percent in April 2013). However, it is still substantially higher than the effective tax rates available in several neighboring European nations.

For example, the effective tax rate established by the “Innovation Box” in the Netherlands is 5 percent. The effective tax rate established by Luxembourg’s “IP Box” is 5.76 percent. In Belgium, the equivalent effective tax rate is 6.8 percent.

On the other hand, the effective tax rate proposed by the UK Patent Box is lower than the statutory tax rate established in Ireland for “trading income,” which is 12.5 percent.

Which IP qualifies?

The UK Patent Box would only apply to profits derived from patents granted by the UK or EU patent offices, though Her Majesty’s Treasury has expressed a willingness to consider including patents granted by other nations’ patent authorities in the future. Additionally, the current Patent Box proposal would include profits derived from all valid patents granted by these offices.

In comparison, the Dutch Innovation Box does not impose any formal restrictions on which patent offices may grant the patent from which profits are derived. In addition, the Innovation Box applies to profits derived from non-patented IP for which an “R&D certificate” is acquired. R&D certificates are given for activities that either cannot receive a patent (but yet are recognized as innovative and socially useful) or could receive a patent but have not because the company is reluctant to make the details of those activities public knowledge. The Innovation Box only applies to profits derived from patents and R&D certificates first registered after December 31, 2006.

The IP tax regime in Belgium mirrors the Dutch Innovation Box with regard to qualifying IP.

The tax regime in Ireland is unique in that the “trading profits” rate applies to profits derived not only from patents, but also from copyrights, trademarks and even know-how. Additionally, there is no cut-off date for IP to qualify for inclusion.

Luxembourg’s IP Box is also fairly inclusive, as it applies to patents, copyrights on IP software, trademarks (including service marks and domain names) and designs and models. However, the regime does not apply to copyrights on literary or artistic works, plans, secret formulas or processes or know-how. Additionally, Luxembourg’s IP Box only applies to profits from IP acquired or constituted after December 31, 2007.

How a company qualifies

The UK Patent Box is relatively generous in only requiring that a company be the legal owner or exclusive licensee of a patent in order for profits derived from the patent to be taxed at the lower rate. Consequently, the profits a UK company derives from a patent that it purchases or even from an exclusive license it acquires (including geographic exclusivity) would be taxed at the lower rate.

In principle, the Dutch Innovation Box requires that a patent be self-developed or, if acquired, that the company have developed the patent further (though no new patents need to have been created in the process of “further development” of the acquired patent). However, a company still qualifies for the reduced rate of taxation under the Innovation Box even if it outsources up to 50 percent of R&D activities. When more than 50 percent of the R&D activities are outsourced, the company must prove that it both bears the risk and expense of these activities and that it directs and coordinates the activities.

Belgium’s IP tax regime applies to income generated by Belgian companies as well as Belgian branches of foreign companies. The Belgian IP tax regime also shares many of the characteristics of the Dutch Innovation Box (i.e., requiring that a patent either be self-developed or, if acquired, further developed). However, a Belgian company or branch may use both related as well as unrelated subcontractors for development (or further development) of patents.

Luxembourg’s IP Box has relatively relaxed standards in this area. It generally only requires that a company be the economic owner of the IP for the lower tax rate to apply wherever the IP is registered.

In Ireland, in order to be subject to the lower rate awarded for trading income, an Irish company only needs to be active in carrying on a trade which includes the management and exploitation of the IP. There are a variety of factors the Irish Tax Authorities will consider when evaluating this requirement. Essentially, as long as a company is not merely receiving passive income related to IP, profits derived from the IP should be subject to the reduced rate applicable to trading income.

For a more in-depth analysis of this issue, please review the full article here.

This article originally appeared in DLA Piper’s Intellectual Property and Technology News, Q3, 2011, which can be found here:

Tags: , ,

Leave a Reply

You share in the PLI Practice Center community, so we just ask that you keep things civil. Leave out the personal attacks. Do not use profanity, ethnic or racial slurs, or take shots at anyone's sexual orientation or religion. If you can't be nice, we reserve the right to remove your material and ban users who violate our Terms of Service.

You must be logged in to post a comment.