The UK and Germany have reached a compromise over tax breaks provided for by the UK Patent Box. 

The Patent Box allows companies to pay lower taxes on profits from patented products. In effect, the current rate of 21 per cent can be reduced to 10 per cent by 1 April 2017.

Under the current scheme, companies can qualify for the Patent Box if they are liable for UK corporation tax and make a profit from exploiting patented inventions. However, Germany has been vocal in criticising the present arrangement on the basis that it encourages artificial shifting of profits from countries with higher tax regimes.

Under the new agreement, the UK will join other OECD countries in only granting tax breaks for patents directly tied to research and innovation at home. As such, the question of eligibility will be likely boil down to where the invention was devised (i.e. where the inventors were based at the time of the invention). For large multinationals, with research centres spread across various countries, it may therefore be necessary to show that at least one of the inventors was a UK resident at the time of the invention, in order for the patent to qualify for the scheme.

Notably, the Treasury has indicated that “grandfathering” will allow IP in the existing regime to retain tax benefits until June 2021.

This agreement comes just as the Irish government is considering introducing their version of a Patent Box – which they refer to as a “Knowledge Box”. It therefore remains to be seen, as to whether application of the Irish scheme is similarly curtailed.