Transfer Pricing Associates

The Next Patent Box Regime: The UK

post Wednesday June 13, 2012


The UK has recently become a major player in financial and business services sector exports, about a third of their GDP is attributed to the financial sector. This has been in part due to great efforts by the government to invest in research and development, design and training in those sectors. The British Government now wants to move away from its heavy dependence on the financial sector and focus more on the research and development, as well as the manufacturing sector to create more equilibrium. They aim to keep the commercial development of research in-house.


In order to accomplish this, several things must be done. First, corporate taxes must be reduced. The UK has devised an incentive program giving companies favorable tax treatments on the profits obtained from the exploitation of inventions. Such an initiative is more commonly referred to as a Patent Box regime, has already been included in the Finance Bill 2012 and should be brought into effect by 2013 or 2014.

So what implications does this have on corporations wanting to enter this Patent Box? Companies chosen to be part of the region, will pay a 10% tax rate on the profits generated, as opposed to the usual 20-24%. The rule counts for UK corporations as well as foreign corporations in the UK which are liable to the UK tax authorities.

However, is this decreased tax rate enough? When comparing it with surrounding regions such as the Netherlands, Luxembourg, Belgium and Spain, whose tax rate is reduced to 5-7%, the new tax rate for companies in the UK does not seem as attractive. However, the government hopes that coupled with the strong research base and lower corporations taxes in general, businesses will be more inclined to establish operations in the UK.

The patent box however does not provide unlimited rights, it gives benefits to patents, supplementary certificates, UK and EU plant breeders rights and UK and EU data exclusivity rights. The benefits will thus not apply to copyrights or trademarks as the main aim is to stimulate R&D leading to industrial exploitation.

For a corporation to qualify for Patent Box treatment, they need to be involved in the organization, development and/or management of the rights in question or products incorporating those rights. It also applies if the entity has the benefit of an exclusive license under the right in question.

The profit that qualifies for the preferential tax treatment is only the portion of the total profit which can be attributed specifically to the patent. Hence profits that arise from the normal course of the business (not attributed by the patent) will not qualify for the reduced tax rate. The reduced tax does however apply to other patent related cash flows, such as royalties allocated to a patent whose process it exploits in its own manufacturing. Income from the sale or licensing of qualifying rights and sums received as compensation for infringement.

Overall it is clear that this Patent Box regime in the UK will help companies save a substantial amount of money on their taxes.
Source: IP today

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