Are there any particular tax regimes applicable to intellectual property, such as patent box?
Tax (2nd Edition)
On the 5th of October 2015, the OECD published the final reports of the BEPS project (Base Erosion and Profit Shifting). In Action number 5 relating to Countering Harmful Tax Practices More Affectively, Taking into Account Transparency and Substance, it treats intellectual property/patent box.
The patent box regime was modified in Spanish regulation regarding Corporate Income Tax by means of Law 48/2015. Such Law established a reduction of tax base in the percentage resulting of multiplying by 60% the income coming from the assignment of intangible assets. Notwithstanding this, such reduction depends on how much the entity participates in the creation of the assigned intangible asset compared to the expenses/investments linked to such asset.
The application of the reduction is conditioned to the fulfilment of the following requirements:
- The assigning company has to assume at least 25% of the cost of creation of the assigned intangible asset.
- The assignee has to use such assets to an economic activity. The results of such activity shall not imply the delivery of goods or services susceptible of generating deductible expenses for the linked assigning company, if that would be the case.
- The assignee shall not reside in a tax haven, except if it is a member of the European Union and the assignee proves that operative responds to valid economic reasons and effectively carries out an economic activity.
- In case that accessory obligations are included in the same assignment contract, these shall be limited in such contract. And
- The entity has to have the necessary accounting records to determine the income and the expenses coming directly from assigning the assets.
When a company fulfils all these requirements, the income coming from intangible assets will have a bonus of 60%. They will pay taxes at a real rate of 10% instead of 25%.
No special tax regimes, except for the R&D incentives as mentioned above.
There is no specific tax regime which applies to intellectual property. However, there are some specific rules and concessions which are focused on intellectual property. For example:
- The research and development tax incentive which is intended to encourage research and development activity which benefits Australia; and
- Expenditure which falls within the software development pool provisions is eligible for accelerated depreciation.
Queensland, Western Australia and the Northern Territory impose stamp duty on transfers of intellectual property (IP). However, in Queensland, IP is not dutiable unless it is transferred with Queensland land or a Queensland business asset other than IP or personal property.
In Western Australia, a transfer of IP is not dutiable if the only dutiable property the subject of the transaction is IP. Note that a “business identity” (a business name, trading name or internet domain name, or a right to use such name) is a separate asset to IP in Western Australia. Therefore, if one of these items is transferred with IP (as defined), both the business identity and the IP will be dutiable.
Capital gains from the sale of patents, patentable inventions and industrial manufacturing processes attached to those patents and patentable inventions, as well as licensing income related to such intangible assets, are taxed at a 15% CIT rate (effective tax is 17.1%).
However, the French patent box regime may be an issue in the context of BEPS Action 5. According to the 'nexus' approach chosen by the OECD, income derived from intangible assets may benefit from an IP regime only to the extent that it is generated by qualifying research and development expenditures. The French patent box regime was considered to be inconsistent with this approach. However, the French authorities consider that the patent box regime is not constitutive of a harmful practice and are not currently planning to change the regime.
Canada does not have a patent box regime.
Canada does have a tax incentive program for scientific research & experimental development (SRED) performed in Canada. Under this program, a taxpayer carrying on business in Canada is permitted a current deduction for SRED expenditures that would otherwise not be deductible on the basis that they were capital expenses or were not incurred for the purpose of earning income from business or property. In addition, an investment tax credit is available for many types of SRED expenditures. Generally, a non-refundable tax credit equal to 15% of qualified SRED expenditures is available. For small Canadian-controlled private corporations, a refundable tax credit equal to 35% of qualified SRED expenditures is available. This can be an important source of government funding for early stage Canadian owned technology companies. Certain provinces have similar tax credit programs to encourage scientific research and development.
A new IP regime, the Innovation Income Deduction, recently entered into force as from 1 July 2016 as a substitute for the Patent Income Deduction, which has been abolished because it was inconsistent with, amongst others, the OECD modified nexus approach. A grandfathering regime is foreseen till 30 June 2021.
This Innovation Income Deduction allows companies to deduct 85% of the net income derived from qualifying IP assets, which results in an effective tax rate of a maximum 5.1 percent. As mentioned before, the corporate tax rate should decrease from 33,99% to 29,58% by 2018, which should result in an effective tax rate of maximum 4,44%.
The scope of the beneficial tax regime is broadly defined. Eligible IP rights are eg patents, data and market exclusivity, copyrighted computer programs and orphan drugs. The tax deduction applies to IP income derived from arm’s length license fees, IP income embedded in the sales price or in the production processes and damages received for infringements of IP rights. Capital gains may, subject to certain conditions, fall under the scope of qualifying income. A carry forward of unused deductions is applicable.
The nexus approach ensures that IP income can only benefit from the tax deduction to the extent that expenditures are effectively incurred by the taxpayer to develop the qualifying IP rights.
Subject to certain conditions, a company may benefit from other IP and R&D related tax incentives.
No, this is not applicable in Bulgaria.
The United States does not have a patent box regime. There have been recent proposals for the United States to adopt a patent box regime, but it is unclear if any will be included in current tax reform efforts.
The United States does have a research and development tax credit that provides an incentive to develop intellectual property. In addition, Section 174 of the tax code provides for an immediate deduction of research and development expenses, i.e. such expenses are not required to be capitalized.
There are no particular tax regimes applicable to intellectual property, such as a patent box.
In May 2012 Cyprus introduced a package of incentives and tax exemptions relating to investment in intellectual property rights, commonly known as an IP box. This combines the lowest rate of tax (effectively less than 2.5%) with the widest range of qualifying assets and the fewest restrictions compared to other countries’ IP boxes. Following the adoption of the modified nexus approach under action 5 of the G20/OECD base erosion and profit shifting project the IP box regime applies to a more limited range of assets than previously. Nevertheless, it continues to provide considerable tax savings, and companies that joined the scheme before June 2016 can look forward to benefiting from substantial savings until mid-2021.
There is no tax regimen applicable to intellectual property.
The Patent Box enables UK companies to apply a lower rate of 10% corporation tax to profits earned after 1 April 2013 from its patented inventions. The patent box regime was designed to attract companies with intellectual property overseas to choose the UK as a jurisdiction in which to develop the asset. Following OECD concerns that Patent Box was open to abuse, the UK government committed to making changes to the regime. In particular, it is no longer possible to use the standard method of calculating the percentage of taxable profits that could benefit from the regime. Instead, only profits derived from research and development activities carried out by the company will be allowed in a claim.
In addition to the Patent Box, the UK also gives tax relief in the form of Research & Development Tax Relief for projects that advance overall capability or knowledge in a technological or scientific area (note: this is not just increasing the company’s knowledge). There are two schemes, one for SMEs – up to 500 employees, up to €100m turnover and up to €86m balance sheet – which gives tax relief at 230% of the R&D costs and one for Large Businesses, those that are not SMEs, which gives relief at 130%.
Currently, only the canton of Nidwalden has introduced a special IP box regime. In practice, mixed companies (with an effective tax rate between 9 and 12%) are often used for the exploitation of IP in Switzerland. Holding companies (with an effective tax rate of 7.8%) may be used as well, if the exploitation of IP does not qualify as a business activity.
The ‘Projet fiscal 17’ (see 11. and 17. above) includes a patent box, mandatory for all cantons, as a replacement measure after the elimination of the various special taxation regimes.
Yes. A recently enacted law that came into effect on January 1, 2017, introduced a new intellectual property regime (the “IP Regime”) in Israel applicable to technology and hi-tech companies that develop their intellectual property in Israel. Companies that qualify under the IP Regime would benefit from a reduced preferential corporate tax rate of a 12% on qualifying income (which rate is reduced to 7.5% in certain a specified development zone). In certain cases concerning multinationals (in general, where the turnover of the company is higher than NIS 1 billion), the applicable tax rate can be reduced to only 6%.
In order to be entitled to these benefits, the said law sets out certain convoluted conditions the purpose of which is to ensure that the benefits will be provided only when the intellectual property is actually developed in Israel.
In 2014 Italy has introduced a patent box regime, mostly based on international OECD standards. In essence the regime provides for a partial exclusion from taxation of the business income derived from certain qualifying intangible assets. Taxpayers may activate a ruling procedure with the tax authorities in order to agree in advance the criteria relevant to the application of the regime in their specific case.
In 2016, Portugal adopted a new patent box regime that follows closely the OECD BEPS Action 5 “modified nexus” approach. The Corporate Income Tax Code provides 50% exemption on the gross income derived from the assignment or temporary use of patents and industrial models or designs, as well as to any indemnities resulting from the infringement of those IP rights, as long as certain conditions are met. This regime is not applicable for income derived from an assignee resident in a blacklisted territory.
Kenya does not have any particular tax regimes in relation to intellectual property such as patent box.
Expenses on R&D activities, apart from being tax-deductible costs based on general rules, can be deducted (however partially, up to 50%, depended on the types and size of the taxpayer's activities) from the tax base. These costs are deductible if they are not reimbursed to the taxpayers in any way.
Extra deductions are made in the return for the tax year in which the costs were incurred (not on an on-going basis). If the taxpayer reported a tax loss, or that their income was lower than the amount of the deductions to which they were entitled, the deductions are carried forward for three tax years – in the total amount, or the remaining part.
No, we do not have a patent box regime or other regimes providing a preferential tax treatment for income and gains generated from intellectual property. That is, royalties and capital gains generated from intellectual property derived by a Japanese corporation are taxed in the same manner as ordinary business profits.
In order to stimulate research and development activities by Dutch taxpayers, self-developed registered patents and certain other assets for which a so-called research and development statement has been requested (collectively, “R&D Assets”) may be placed in a so-called Innovation Box. Pursuant to the Innovation Box regime, a 5% effective tax rate applies to income generated by a qualifying intangible, to the extent the income from the intangible exceeds the related R&D expenses, other charges, and amortization of the intangible. Income includes royalty income such as license fees and other income stemming from R&D Assets. The taxpayer should be the registered and beneficial owner of the patents and the beneficial owner of the other assets for which a so-called R&D statement has been requested. Trademarks are specifically excluded from this beneficial regime. This 5% effective tax rate will apply only to qualifying income. The non-qualifying income will continue to be subject to tax at the statutory rates of 20% and 25%.
Following the outcome of the OECD’s BEPS Project, minimum requirements for the application of so-called preferential IP regimes, such as the Dutch Innovation Box regime, have been established by the OECD. Consequently, the Dutch Innovation Box regime has been amended, resulting in the following five main changes:
- A so-called “nexus approach” has been introduced to determine income that is attributable to the innovation and eligible for the reduced rate;
- To be eligible for the reduced rate, all technical innovations must be developed as part of an “approved project,” which is an R&D project that qualifies for the Dutch R&D subsidy (also known as “WBSO”);
- For larger companies, i.e. companies with a global group-wide turnover of at least €50,000,000 annually or income generated by technical innovations of at least €7,500,000 per year, technical innovations must (i) be protected by a patent or plant breeders’ rights, or (ii) qualify as software;
- More extensive documentation and administrative requirements have been introduced; and
- Grandfathering rules will apply up to 2021 for innovations that were produced before June 30th, 2016 and that were already benefitting from the Innovation Box at that time.
These adjustments became effective as of January 1st, 2017. However, it should be noted that the new minimum requirements apply to new technical innovations that were produced on or after July 1st, 2016.
No special tax regimes concerning intellectual property are considered by Mexican tax laws.
Norway does not have a specific tax regime for intellectual property. However, Norway has a tax credit scheme for research and development (R&D) costs called SkatteFUNN.
Normally, the tax deduction is limited to 18 % of incurred R&D costs. Under specific conditions a deduction of up to 20% of the company’s R&D costs may be granted. The maximum basis for deduction is Nkr 25 million for self-developed R&D and Nkr 50 million for R&D purchased from approved institutions. If the company does not have taxable income for the income year in question, the company will receive a cash refund for the year following the income year.
Germany does not operate any particular tax regime with respect to intellectual property. On the contrary, in 2017 Germany has implemented into its tax law a provision stipulating that royalties paid for intellectual property and other rights are not deductible in case the royalties paid are subject to a low tax preference regime unless qualifying as a patent box with the BEPS nexus approach.
There is no patent box, but a premium of 14% applies to R&D expenses for R&D inhouse activities performed in Austria.
Conversely, intra-group interest and royalties are non-deductible if the foreign receiving company is subject to low taxes (i.e. less than 10%).