Patent Box is a tax incentive aimed at encouraging UK entrepreneurs to commercialise their patents in the United Kingdom. In an attempt to boost economic growth, many countries have recently introduced a competitive tax regime, one that promotes native research and development, from inception to monetisation.
Although the concept is about 15 years old, it has already been adopted by a slew of European nations, including Belgium, Spain, Netherlands and more. It was enacted in the UK on April 1st, 2013. It’s also worth noting that this is not an example of retroactive legislation, meaning that it only provides relief for profits earned after the date that the law was adopted.
In a nutshell, the Patent Box introduces a lower rate – 10% – of Corporation Tax on profits derived from patented inventions. In comparison, the main rate of Corporation Tax in the United Kingdom is 19%.
Legal requirements for patent box
There’s a wide range of conditions one must meet to be eligible to benefit from the Patent Box. For starters, while it might seem obvious, it’s necessary for the company in question to be liable to Corporate Tax, and to actually be making a profit by exploiting (in one way or another) their patented inventions. Here, exploiting refers to using the invention in various ways that generate profit. These include:
- Selling the patented product
- Licensing out your patent rights to third parties
- Selling your patent rights to third parties
- Any income derived from others infringing on your patent
- Other damages, insurance or compensations in connection to your patent rights
Next, the company hoping to qualify for Patent Box must own or exclusively license-in the patents. In other words, if you own a license to other people’s technology, you can still benefit from a reduced tax rate, if the following conditions are met:
- Your company has the right to develop, exploit and defend patent rights
- Your company owns one or more rights to the exclusion of everyone else (including the inventor/licensor)
- Your company has an exclusive right to manufacture or sell the invention throughout, at a minimum, the whole national territory.
In addition to everything mentioned above, it’s also required that your company has engaged in qualifying development for the patent. It can do so by either making a significant contribution to the creation/development of the invention, or another product which incorporates said invention.
Finally, to benefit from the Patent Box, your company needs to own (or license-in) patents that are granted by one of the three regulatory bodies. These include the UK IP Office, the European Patent Office, or a national patent office from a selection of countries in the European Economic Area. You can find the entire list of eligible countries here.
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If your company meets all of these requirements, you must make an election, which you can either write separately or add it in the computations that accompany your Company Tax Return.