Under the new patent box regime, worldwide profits from the exploitation of eligible patents or other qualifying rights held by qualifying companies will be subject to a lower UK corporation tax rate of 10%, rather than the main rate of 24% (currently). The new rules will come into force on 1 April 2013, but their effect will not be felt until 2017. Taxpayers will need to opt into the new regime.
What types of patent are eligible?
The new regime will only apply to certain types of patents with specific rights which the Government considers are akin to patent rights. Specifically, a UK company may be able to claim patent box benefits in respect of the following types of income:
- sales income arising in respect of eligible patented items, non-patented items that incorporate an eligible patented item and certain other products that are wholly or mainly designed to be incorporated into the two types of item referred to above;
- licence fees and royalties received pursuant to licences granted under eligible patents;
- proceeds from the sale of eligible patents;
- damages, insurance proceeds and other compensation relating to eligible patents;
- receipts from infringement proceedings and other compensation relating to eligible patents; and
- income derived from the sale of services or goods which are themselves the subject of a patent but produced using a patented process.
What is the scope of the new regime?
The scope of the new regime will extend to the worldwide income of eligible UK taxpayers from a product or process covered by or incorporating an eligible patent. One of the key requirements is that the company must be the owner or the licensee under an exclusive licence of an eligible patent and this does apply to intra group and third party arrangements. This means that careful attention must be paid to drafting future licences and when renewing existing licences to ensure that a patent box compliant licence is drafted.
What should companies consider?
Special attention will need to be paid to the scope of a licence, the parties to the licence and which party will obtain compensation for any possible future infringement of that patent.
Before a corporate merger, acquisition or group reorganisation, it must be considered whether any IP assets are eligible for the patent box regime and appropriate measures implemented. For example, when buying a company, the buyer will want to take appropriate warranties and indemnities from the seller as to the patent’s eligibility.