Thursday, 25 October 2012

UK Patent Box Regime

The United Kingdom (“UK”) recently enacted a patent box regime that would allow companies to receive a 10 percent corporate tax rate on profits earned on locally-developed technology. The reduced tax rate will go into effect for profits earned after April 1, 2013, and will be phased in over a five-year period. The UK is the latest in a growing number of European countries (for instance, Belgium, Luxembourg, and the Netherlands) who have enacted similar legislation to incentivize companies to develop and own intellectual property within their borders.
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
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.
The guidance provided by HMRC walks the taxpayer through the following steps to determine if they qualify for patent box treatment and if so, the portion of profit eligible for the 10 percent tax rate:
  • 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.
Examples for each of the steps above are also provided within the HMRC guidance.
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