The UK and German governments have agreed a joint proposal which may result in the abolition of the UK’s Patent Box regime in its current form. The main theme of the proposal is that preferential tax regimes for intellectual property (IP) should require substantial economic activities to be undertaken in the jurisdiction offering the tax break, by requiring tax benefits to be connected directly to expenditure incurred in the jurisdiction on research & development (R&D) in developing the patent or product.
The UK Patent Box regime currently permits companies to apply a lower rate of corporation tax on qualifying worldwide profits which are attributable to patents and similar forms of IP even if the IP was created and/or developed outside the UK, provided that the IP was developed by a company in the same group as the company claiming the lower tax rate. The relief came into force on 1 April 2013 and is being phased in; the effective tax rate is currently 13.3% and will reduce to 10% from 1 April 2017.
The proposal by the UK and Germany recommends that existing tax breaks for patents and other eligible IP (such as the UK’s Patent Box regime) should be closed to new entrants (patents and products) from June 2016. IP within existing tax regimes before this cut-off date would continue to receive the tax benefits of these regimes until June 2021, at which point all such regimes (which are currently in existence) must be abolished. It is also intended that there will be some restrictions on uplifts of qualifying expenditure where related party outsourcing or acquisition costs are incurred.
The approach taken in the proposal is designed to advance the OECD’s “Base Erosion and Profit Shifting” (BEPS)project, which aims to reform international tax systems to prevent companies from shifting their profits from the countries where their business activities take place to countries with more advantageous tax regimes; a practice which Germany has argued the UK’s Patent Box facilitates.
The next step will be for the OECD’s Forum on Harmful Tax Practices to form a view on the proposal. If the G20 and OECD member countries of that Forum agree to the proposal, it would be open to the UK to introduce a new, more limited, Patent Box regime under which participating companies can receive tax benefits only where substantial economic activities relating to the IP (i.e. development / R&D expenditure) have taken place in the U.K.
There may be significant repercussions for groups which are patent-rich or otherwise engaged in substantial R&D activities. In particular, such groups may want to consider electing into the existing UK Patent Box regime before it closes to new entrants in June 2016, as those that do so will benefit from the existing (more favourable) regime in relation to patents and products in existence until June 2021. Furthermore, those that wish to benefit from any new regime may want to consider moving personnel and R&D activities to the UK.
If you would like to discuss any aspects of the Patent Box regime or these proposals, please contact Natasha Kaye (Natasha.Kaye@olswang.com / 020 7067 3389) or Mark Spinney (Mark.Spinney@olswang.com / 020 7067 3383).