An intellectual property box regime (IP box or patent box) is a special tax regime used by several countries to incentivise research and development by taxing patent revenues differently from other commercial revenues.
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History
In the early 1970s Ireland introduced the first scheme in its Corporation Tax. Section 34 of the 1973 Finance Act allowed total tax relief in respect of royalties and other income from licenses patented in Ireland. It was not until 2000 that other countries started to introduce similar schemes.
Controversy
The Irish Patent Box system is one of the key benefits for companies paying Irish corporation tax. The system was criticised by Lionel Jospin in the early 2000s and more recently by both the EU (Ecofin assessment 2014) and the OECD under its base erosion and profit-shifting (Beps) project. The system has been key to attracting international IT companies to Ireland. The economic benefits of beneficial tax regimes for revenues from patents led to similar schemes being introduced in France in 2000 and amended in 2005 & 2010.
Ireland
The scheme which had existed since 1973 was withdrawn in 2010 under the National recovery Plan 2011-2015 of the Republic of Ireland. It exempted revenue from qualifying Patents from Irish corporation tax. The exemption is to be replaced by a “Knowledge Development Box” in 2015 offering a reduced tax rate of 6.25% on qualifying profits generated in periods commencing on or after 1 January 2016.
The key difference in the Irish KDB to those of other European countries is its compliance with the OECD’s Base Erosion and Profit Shifting (BEPS) programme, Ireland’s is the first patent-box type system to offer compliance in this area. Companies availing of the current R&D tax credit should be aware of the KDB and the potential for them to take advantage of both systems.
France
Introduced in 2000 the Patents and royalties regime allows companies paying French corporation tax to pay a reduced rate of 15% (instead of 33%) on patent and royalties income as they are treated as a long term capital gain. If the licensee is a French corporation and actually uses the qualified IP licensed, the licensee may deduct the royalty payments from its income taxable at the standard 33.33% rate even if the licensor is taxed at the reduced 15% rate
Netherlands
The Netherlands introduce a patent box tax regime referred to as the ‘innovation box’ in January 2007. This initial regime applied only to patents and applied a 10% rate of corporate tax. On 1 January 2010 the regime was expanded to include a much wider range of IP and the headline rate was reduced to 5%. The reduced rate of corporate tax applies to the net positive income derived from the qualifying IP ( gross income minus all related expenses and depreciation).
Belgium
The patent box scheme in Belgium was introduced in January 2007, and is known as a patent income deduction (PID). This PID allows a company, liable to pay Corporation Tax in Belgium, to deduct from its taxable income 80% of gross patent income. The remaining 20% of gross patent income is taxed at the standard corporation tax rate of 34% (including a 3% surtax). This results in an effective tax rate of 6.8% on the qualifying income.
Luxembourg
The Luxembourg IP regime has been abolished. IP regimes claimed before July 2016 can still continue to benefit from the preferential rate for the next 5 years. It is expected that Luxembourg creates a new IP regime following the OECD criteria.
In Luxembourg IP regime became effective in January 2008 and amended in 2008 to also exclude qualifying IP assets from Luxembourg’s net wealth tax. The scheme applies to the net income derived from the use of qualifying intellectual property acquired or developed after December 2007. 80% of income is exempted, giving an effective tax rate of 5.76%.
Hungary
Hungary introduced a scheme in 2003 including a provision according to which 50% of the pre-tax amount of the royalties received may be deducted from the tax base, this reducing the effective corporate tax rate on such royalties to 8%.
Spain
As of January 1, 2008, 50% of the gross income of Spanish domiciled companies derived from qualified Intellectual Property is exempt from Spain’s Corporation tax resulting in an effective tax rate of 15%.
United Kingdom
The United Kingdom introduced a Patent Box scheme in 2013 taxing qualifying IP at 10%.
Mixed-company
Switzerland allows companies who predominantly trade internationally to benefit from the advantageous “mixed-company” status that allows them to be taxed at a rate of just 8,5%. In 2007 the European Commission alleged the tax schemes for holding, mixed and domiciliary companies violated the 1972 FTA between the EU and Switzerland as it was State Aid. Although the Swiss government refuted the allegation in May 2012 the Swiss cantons gave the federal government the go-ahead to commence a tax dialogue with the EU. In May 2014 the EU and Switzerland reached agreement whereby the disputed tax regimes would be abolished.
Nidwalden Licence-Box regime
In 2011 the canton of Nidwalden introduced the Licence Box rule which allows companies located in Nidwalden to benefit from a cantonal tax rate on net license income reduced by 80% the effective corporate income tax rate is 8.8%