A “patent box” is a tax regime that is designed to incentivize research and development by taxing revenues derived from patented technologies at a lower rate.
What is the patent box?
A “patent box” is a tax regime that is designed to incentivize research and development by taxing revenues derived from patented technologies at a lower rate. Patent boxes encourage companies to keep and commercialize their intellectual property (IP). Many patent boxes around the world have undergone substantial reforms due to profit shifting concerns. In the United Kingdom, when companies elect in to the patent box, the corporation tax rate is lowered to 10% in respect of qualifying revenue. As the name suggests, the tax break relates mostly to patents, but in the United Kingdom certain other rights, including data exclusivity for medicinal products, can also benefit.
Who can benefit from the patent box?
In the United Kingdom, patent box eligibility is based on whether a company is liable to corporation tax, makes a profit from exploiting patented inventions, owns or has exclusively licensed the patents, and has undertaken qualifying development on the patented technology.[1]
If a company is a member of a group, it must actively own the patents and take a significant role in managing the whole portfolio of eligible patents. What qualifies as taking a “significant role” is based on the given resources the company employs, the breadth of its responsibilities for the IP, the nature of the IP rights held, the amount of management the IP rights require, and the significance and impact of the decisions and plans it (as opposed to other group companies) makes in relation to that IP.[2]
After June 30, 2016, benefits from the patent box are restricted if a company incurred expenditure in acquiring the patents and made payments to connected parties for their research and development (R&D) expenditure. [3]
What makes a patent eligible for the patent box?
To benefit from the patent box, a company must own or exclusively license patents granted by: the UK Intellectual Property Office, the European Patent Office or certain countries within the European Economic Area.[4] Also, a company, or a group of companies, must have undertaken “qualifying development work” in respect of the patent.[5] In other words, the company must have made a significant contribution to either the creation or development of the patented invention, or a product incorporating the patented technology.
How to elect in to the patent box?
In order to benefit from the reduced rate of corporation tax that applies to the patent box, a company must elect in to the patent box within two years after the end of the accounting period in which the relevant profits and income arose.[6] There is no special form of words for this election, and no box on the corporation tax return.[7] Elections can be in the computations accompanying a company tax return, or separately in writing.
What about exclusively licensed patents?
If a company licenses others’ patented technology, it may use patent box benefits if the licensee has: rights to develop, exploit and defend the patented invention, to the exclusion of all other persons – including the licensor – throughout an entire national territory.[8] Rights to manufacture or sell in part of a country would not qualify. Also, the licensee must be able to bring infringement proceedings to defend their rights, or be entitled to the majority of damages awarded in successful proceedings relating to its rights.[9]
When happens if a group company holds an exclusive licence?
Within a group, one company may own a portfolio of patents while others exploit them. A group company will be treated as holding an exclusive licence if it has been granted exclusive rights within an entire national territory and no other party has these rights, including the licensor or the group intellectual property holding company. The group company does not need to have the rights to enforce, assign or grant a licence for these rights.[10]
What income is applicable to patent box benefits?
To be classified as intellectual property income, the revenue must come from: selling patented products, licensing patent rights, selling patented rights, or receiving infringement income, damages, insurance or other compensation related to patent rights.[11] Manufacturing and service sector companies can generate qualifying income for the patent box if they manufacture using a patented process, and provide a service using a patented tool.[12] In these circumstances a notional royalty can be treated as income from intellectual property.[13] A notional royalty is the royalty paid to an independent owner for the company’s exclusive use of those rights to generate the IP-derived income.[14]
The patent box and the associated calculations can be daunting, but in view of the extremely generous regime, is certainly worth evaluating. Cleveland Scott York can help you review your current portfolio of patents and advise on whether current R&D activities are potentially patentable to help you benefit from the patent box.
[1] Guidance: Use the patent box to reduce your Corporation Tax on profits, UK.GOV, https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird210210 (last updated May 27, 2020).
[2] patent box: qualifying companies: groups: active ownership condition, UK.GOV, https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird210210 (last updated Feb. 18, 2021).
[3] UK.GOV, supra note 1.
[4] Austria, Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.