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Patents and Tax Advantages

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Patents and Tax Advantages

A number of countries, including the UK, have fiscal arrangements in place offering reduced tax rates on patent-related revenues and designed to encourage research and development, and, secondly, to make themselves fiscally more attractive than neighbouring countries.

The UK version, known as the UK Patent Box, allowed a reduced corporation tax rate of 10% on profits derived from products which incorporate patents. Qualifying patents were those granted by the EPO, by the UK IP Office and by several national patent offices across Europe, although patents granted by the USA, France and Spain are excluded. Income from such patents is eligible (qualifying income) if, for example, it is sales revenue from a product covered by a qualifying patent, royalty revenues from a license on a qualifying patent or proceeds from the sale of a qualifying patent. For the company to be itself eligible for the patent box, it has to practice “active ownership” of the relevant patent and formally elect into the patent box.

After an investigation by the OECD and liaison between the UK and German governments, the UK Patent Box was significantly modified, such that there must additionally now be a “nexus” between the UK company’s own R&D activities and the patent concerned ie in order to be a qualifying patent the patent must additionally be based on a qualifying development by the UK company. This modification is designed to stop businesses “relocating” to UK company ownership patents which are based on R&D carried out elsewhere. The modification, known as the “modified nexus approach” means that significant R&D has to be carried out by the company in the UK and traceable to the qualifying patent. This represents a significant scaling back on the original fiscal benefits of the UK Patent Box.

Nevertheless, the Patent Box continues to represent a significant incentive to UK businesses to carry out R&D and obtain the corresponding patent rights. Tracing the patent back to relevant R&D may be difficult and calculating tax benefits (which can also be negative) is complex, so election into the patent box should be done blindly.

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