EC CHALLENGES THE UK PATENT BOX - DLA PiperThe UK patent box is a special tax regime that provides...
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The UK patent box is a special tax regime that provides an effective 10% rate of corporation tax on profits derived from patents and certain other rights. It was introduced by the UK Government as an important part of the UK's strategy to foster innovation. However, the European Commission has decided, in a report prepared in advance of the October 22 meeting of the Code of Conduct Group on business taxation, that the UK patent box amounts to harmful tax competition. Unless the Code of Conduct Group decides to publicise its findings earlier, we would expect the outcome of a meeting of the Code of Conduct Group to be reported officially in the next end of semester report of the Economic and Financial Affairs Council (ECOFIN), currently anticipated for December 2013. Although we are not expecting significant changes to the patent box in light of the EC's findings, companies that have opted in to the patent box (or are considering doing so) should continue to monitor developments. PATENT BOX KEY FEATURES ■ The patent box took effect on 1 April 2013 and will ultimately provide for a reduced corporation tax rate of 10% for companies within the charge to UK corporation tax. The benefit of this rate is given via an enhanced deduction in computing taxable profits. The regime is being phased in over a period of four years so its full benefit will only become available in April 2017. ■ The regime is optional - companies must opt in and can subsequently opt out (though companies that opt out won't then be able to opt back in for five years). ■ The regime applies to UK, European Patent Convention and other national patent rights of 13 specific EEA territories, as well as to EU marketing authorisations for medicinal and plant protection products, and some plant breeder and plant variety rights ("Qualifying Rights"). ■ Companies must own or have an exclusive licence of Qualifying Rights and must have been involved significantly in the development of the innovation to which the Qualifying Rights relate. Special rules apply to corporate groups and companies in partnership, where Qualifying Rights must also be actively managed (the intention being to exclude passive IP holding companies from the regime). ■ The regime is attractive as it is of very broad scope - it applies to profits derived from licensing or selling Qualifying Rights, selling products incorporating Qualifying Rights, using Qualifying Rights in a business to make profit (eg by EC CHALLENGES THE UK PATENT BOX Violates criteria for evaluating special tax regimes
Transcript of EC CHALLENGES THE UK PATENT BOX - DLA PiperThe UK patent box is a special tax regime that provides...
The UK patent box is a special tax regime that
provides an effective 10% rate of corporation tax on
profits derived from patents and certain other rights. It
was introduced by the UK Government as an
important part of the UK's strategy to foster
innovation.
However, the European Commission has decided, in a
report prepared in advance of the October 22 meeting
of the Code of Conduct Group on business taxation,
that the UK patent box amounts to harmful tax
competition.
Unless the Code of Conduct Group decides to
publicise its findings earlier, we would expect the
outcome of a meeting of the Code of Conduct Group
to be reported officially in the next end of semester
report of the Economic and Financial Affairs Council
(ECOFIN), currently anticipated for December 2013.
Although we are not expecting significant changes to
the patent box in light of the EC's findings, companies
that have opted in to the patent box (or are considering
doing so) should continue to monitor developments.
PATENT BOX KEY FEATURES
■ The patent box took effect on 1 April 2013 and
will ultimately provide for a reduced corporation
tax rate of 10% for companies within the charge to
UK corporation tax. The benefit of this rate is
given via an enhanced deduction in computing
taxable profits. The regime is being phased in over
a period of four years so its full benefit will only
become available in April 2017.
■ The regime is optional - companies must opt in and
can subsequently opt out (though companies that
opt out won't then be able to opt back in for five
years).
■ The regime applies to UK, European Patent
Convention and other national patent rights of 13
specific EEA territories, as well as to EU
marketing authorisations for medicinal and plant
protection products, and some plant breeder and
plant variety rights ("Qualifying Rights").
■ Companies must own or have an exclusive licence
of Qualifying Rights and must have been involved
significantly in the development of the innovation
to which the Qualifying Rights relate. Special
rules apply to corporate groups and companies in
partnership, where Qualifying Rights must also be
actively managed (the intention being to exclude
passive IP holding companies from the regime).
■ The regime is attractive as it is of very broad scope
- it applies to profits derived from licensing or
selling Qualifying Rights, selling products
incorporating Qualifying Rights, using Qualifying
Rights in a business to make profit (eg by
EC CHALLENGES THE UK PATENT BOX
Violates criteria for evaluating special tax regimes
02 | EC Challenges—The UK Patent Box
providing services) and to compensation received for
infringement of Qualifying Rights.
■ Although the benefit of the patent box can only be
claimed once a Qualifying Right has been granted,
the regime then allows profits arising up to six years
before the grant of a Qualifying Right (eg in the
period between application for and grant of a patent)
to benefit from the 10% rate.
■ Patent box profits can be computed according to a
standardised formula intended to minimise the
compliance burden or according to a tailored
"streaming" calculation.
■ Companies exploiting Qualifying Rights
collaboratively via partnerships and cost sharing
arrangements can benefit from the patent box.
WHAT HAS THE EC DETERMINED?
The Code of Conduct for business taxation is intended to
discourage EU Member States from introducing tax
measures that constitute harmful tax competition. The
Code is not legally binding but, having been adopted by
Member States, carries political force.
The Code sets out criteria by reference to which
potentially harmful tax measures are tested. The EC has
determined that the patent box offends two of the five
criteria.
The patent box requires significant involvement in the
development of the innovation to which Qualifying
Rights relate and in the case of corporate groups,
Qualifying Rights must also be actively managed. The
EC has concluded that these conditions can be satisfied
without there being any real economic activity or
business substance in the UK. This offends the Code
criterion relating to the granting of tax advantages in the
absence of any real economic activity in the country
concerned.
The UK patent box also contains quite prescriptive rules
for determining patent box profits. The EC considers
that in certain respects, these rules depart from
internationally accepted principles, in particular those
approved by the OECD.
The EC concludes, however, that the UK patent box
meets the other three criteria set out in the Code - ie it
does not reserve tax benefits for non-UK residents; it is
connected with the UK economy and has an impact on
the UK tax base; and the legislation is publicly available
and therefore the regime is transparent.
DLA PIPER REACTION TO THE EC'S FINDINGS
The EC's finding that the development of Qualifying
Rights (eligible for the patent box) outside the UK is
harmful is something of a paradox, since a restriction in
the patent box regime to Qualifying Rights developed in
the UK might be contrary to the fundamental freedoms
enshrined in European law.
Further, while there is some basis for the EC's finding
that the patent box deviates from international standards
for determining profits (because it computes an enhanced
tax deduction by reference to a statutory formula), such a
deviation is necessary to the functioning of any special
tax regime which seeks to target a specific area.
The introduction of the UK patent box brought criticism
from certain quarters in Europe, such as the German
Finance Minister Wolfgang Schäuble, who spoke out
against it in July. It is rumoured that the EC's
examination of the UK patent box was at the behest of
certain (unnamed) EU Member States.
Although there has been no official response from the
UK Government, sectors of the press have reported that
HM Treasury disagrees with the EC's findings. Those
same reports suggest that HM Treasury considers the UK
patent box to impose tougher eligibility criteria than
similar regimes in France, Spain and the Benelux
countries. The effective rate of tax under the UK patent
box (10%) is also higher than the rates afforded by the
regimes in Belgium (7%), Luxembourg (6%) and The
Netherlands (5%).
The introduction of the UK patent box was seen by the
UK Government as an important part of the UK's
strategy to foster innovation and to create the most
competitive tax system among G-20 nations. Given the
initial reaction of HM Treasury reported in the press, it
seems likely that the UK Government will staunchly
defend the current regime. To the extent that changes are
required to meet any concerns, one might expect minor
changes to the rules, rather than a wholesale re-write.
WHAT SHOULD COMPANIES DO NOW?
Companies that have opted in to the patent box (or are
considering doing so) do not need to take any action at
this stage. If the EU Code of Conduct Group (in their
meeting on 22 October) agrees with the EC's findings, it
will then be a matter for the UK Government to
determine how best to adapt the patent box to meet any
concerns. We may not know the Code of Conduct
Groups official position on the matter until December
2013, when ECOFIN publishes its end of semester
report. Until the UK parliament amends the patent box
rules, companies can rely upon the existing regime.
CONCLUDING REMARKS
DLA Piper is well-placed to assist companies in
considering the potential benefits of the regime given our
www.dlapiper.com | 03
team of lawyers and economists with expertise in
intellectual property, tax and transfer pricing. Sometimes
it will be more beneficial, in particular for international
groups, to take advantage of the equivalent regimes in
(say) Luxembourg and The Netherlands, and DLA Piper,
with is offices in those jurisdictions, can also assist
clients in making the right choice.
For further information please contact the following
individuals (or your usual DLA Piper contact):
Paul Rutherford
Partner
T +44 (0)207 796 6300
Adam Cooke
Partner
T +44 (0)207 796 6124
Claire Bennett
Partner
T +44 (0)207 796 6991
www.dlapiper.com
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Copyright ©2013 DLA Piper. All rights reserved. | OCT 13 | Ref: UKG/Tax/16678080
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking
legal advice in any specific situation. DLA Piper UK LLP and DLA Piper SCOTLAND LLP will accept no responsibility for any actions taken or not taken on the basis of
this publication. If you would like further advice, please speak to your DLA Piper contact on 08700 111 111.
