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Patent Box regimes: What does the future hold?

Contributed by TaxLinked.net
17 June, 2015

An announcement on November 11, 2014 revealed that the UK and Germany agreed to change the UK patent box tax incentive scheme. Soon after the announcement many widely reported this development as the “death” of the patent box.
Despite this doom and gloom, under the current proposals patent box regimes will remain open to new entrants until June 2016 and will stop operating in June 2021, at which point a new regime is likely to come into force, so UK businesses should continue to be able to benefit from patent-related tax relief.
The UK's proposal to close its patent box tax break, which allows income from the commercial exploitation of intellectual property (IP) to be taxed at 10 per cent, is a concession to German concerns about artificial shifting of profits between European countries.
Both the UK and Germany mentioned a "transition to new regimes" but did not give details of any future replacement for the patent box.
The UK government has widely been recognised as an avid promoter of attempts through the Organisation for Economic Cooperation and Development (OECD) to stop companies from shifting profits to countries with beneficial tax regimes, but the UK has had to defend the patent box scheme against accusations that it allows this kind of profit shifting.

Patent Box
Countries in the OECD and the G20 have been working tirelessly on base erosion and profit shifting (BEPS) to ensure that multinational companies are taxed in the jurisdiction in which their business activities take place. Jointly they have established proposed new rules based on what they call a 'modified nexus approach', which is designed to ensure that economic activity that actually takes place within the country that grants the research and development (R&D) tax break.
"[The UK and German proposal] aims to resolve the concerns countries have expressed about some features of the Modified Nexus Approach, and identify what further work is required in order to enable agreement to be reached on this issue during 2015," said the joint agreement. "Concerns have been expressed about how to calculate qualifying R&D expenditure, transitional arrangements between regimes and time allowed for this through grandfathering provisions, and the tracking and tracing methodology for R&D expenditure that will determine whether it qualifies."

Patent Licence Agreement
How the proposals could impact you:

  • Current Patent Box schemes would continue to be available until 2021 for companies who entered into existing schemes before June 2016. However, new IP and products would not be admissible after the 2016 cut off.
  • The UK now supports a new Patent Box regime, based on the Nexus Approach, to be introduced from June 2016. The new Patent Box regime would run in parallel with the current regime until 2021. 
  • Essentially, the Nexus Approach is designed to ensure claimant companies have good UK substance. It restricts qualifying IP income that can benefit from the Patent Box by reference to the claimant company’s qualifying research and development (R&D) as a percentage of total R&D and IP acquisition expenditure of the group.
  • A concession with respect to related party outsourced R&D expenditure is proposed, by providing a maximum 30 per cent uplift on qualifying expenditure to compensate for related party outsourcing and IP acquisition disallowances (subject to a cap based on actual expenditure). 
  • The UK is recommending that the FHTP work to reach agreement by June 2015 on a practical and proportionate tracking and tracing approach that can be implemented by companies and tax authorities, and which includes transitional mechanisms.


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