H.M. Revenue and Customs (“HMRC”) has published guidance on its website outlining how companies can qualify for the reduced tax treatment. For more information, see http://www.hmrc.gov.uk/ct/forms-rates/claims/patent-box.htm.
To qualify for benefits under the patent box regime, a company must own or exclusively license-in patents granted by one of the following: (i) the UK Intellectual Property Office, (ii) the European Patent Office, or (iii) several European countries. The company is also required to have undertaken qualifying development for the patent by making significant contributions to either (i) the creation or development of the patent or invention, or (ii) a product incorporating the patented invention. Furthermore, income subject to patent box treatment must come from one of the following sources:
- selling patented products;
- licensing out patent rights;
- selling patent rights;
- infringement income; or,
- damages, insurance, or other compensation related to patent rights.
- Step 1 - Patent Ownership. Does the business hold a qualifying patent or patent right?
- Step 2 - Qualifying Income. Does the business receive qualifying income related to the qualifying patent?
- Step 3 - Profit on Income. Calculate total profits attributable to qualifying income.
- Step 4 - Residual Profit. Remove routine profit to calculate residual profit on qualifying income.
- Step 5 - Patent Profit. Attribute residual profit to patent and non-patent IP to calculate patent box profit.
In considering the new patent box regimes, taxpayers should evaluate each of the plans enacted within the various countries as there are differences in the effective tax rates offered and in the types of intellectual property that will apply.
Source: Ceteris' Transfer Pricing Times, Volume IX, Issue 10