Introduction of Patent Box heralds new tax regime
Carpmaels & Ransford LLP - UK
27 Jun 2012
The Finance Bill 2012 is to introduce legislation to provide a new tax regime: the Patent Box.
The Patent Box will come into force on 1st April 2013 and is designed to incentivise companies to commercialise their existing patents and expand their patent portfolio, and to develop new products incorporating patented technology.
The Patent Box provides companies with the opportunity to elect to apply a 10% rate of corporation tax (rather than 23%) to worldwide profits attributable to certain IP rights.
The basic criteria which a company must satisfy to benefit from this financial incentive are as follows:
Qualifying IP rights
Although its name implies otherwise, the Patent Box also extends to other IP rights similar to patents, including:
The scope of the regime will therefore make it attractive to a large range of companies, particularly those operating in the life sciences sector.
Other key points in relation to the “qualifying IP right” criterion are as follows:
The Patent Box will be available to companies holding qualifying IP rights as either owners or exclusive licensees.
In order to “actively hold” a qualifying IP right, a company must be creating, or significantly contributing to, the protected invention, or performing a significant amount of activity to develop the protected invention or any product or process incorporating the protected invention.
If a company is part of a group and satisfies this condition only because of the activity of a fellow group member, the company in question must perform activities such as:
In this regard, the company qualifying for the Patent Box is not a passive IP holding company, but either has developed the intellectual property or is actively managing it.
The profits to which the reduced tax rate applies are calculated as a proportion of the corporation tax profit of the company’s trade. The relevant IP income that is considered for this calculation is the income derived from the qualifying IP rights. This income is typically derived from:
The regime also extends to income from the sale of items designed to be incorporated into a protected item (ie, spare parts for the protected item). Income from licences to use a patented process may also be included in the calculation.
The Patent Box is particularly generous in that it can extend to worldwide income from sales and licensing, including income from territories where a qualifying IP right is not held.
Similarly, if a company has only a UK patent in respect of a process but licenses the use of the process worldwide, income from the worldwide licences will be considered as relevant IP income.
The Patent Box provides an additional financial incentive to be taken into account when considering IP filing strategy and portfolio management. In view of this, it is worth considering taking steps to expedite the prosecution of relevant pending patent applications so as to benefit from the Patent Box sooner rather than later.
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