Planning for Intellectual Property income
Patent Box Regimes – introduction
What is a “Patent Box” regime?
A number of countries have enacted “patent box” regimes that provide a low tax rate (5% to 15%) on profits derived from IP. These countries include the Netherlands, Ireland, Luxembourg, amongst others.
The objective of a patent box regime is to promote investment in new technology and incentivize innovation. Countries enacting these favorable tax regimes also hope to attract R&D activities to their countries.
How can your company incorporate patent box regimes into its strategy to reduce effective tax rates?
IP eligible for the low tax rates can include patents, designs, copyrights, models and similar product related rights. Some countries also include trademarks, trade names and other types of marketing IP.
The owner of IP may derive income from licensing it to related or unrelated parties. Profits may also be derived from selling products or providing services using the IP. Royalties and the IP portion of the profits from selling products or providing services can qualify for the low tax rate.
For example, a company operating in a country with a 35% tax rate generally would pay $35 million of taxes on $100 million of profits. If $40 million of the profits were IP related income qualifying for a 10% tax rate under a patent box regime, the company’s tax expense would be $25 million (a $10 million savings, or a 25% blended effective tax rate).
The patent box regimes enacted by countries in Europe do not require that the research activity giving rise to the qualifying IP be conducted in the country granting the tax benefit. IP that qualifies for the special rates may be acquired or licensed from other parties. Other countries require that the benefiting company engage in the development and management of the qualified patents.
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