Patent tax break ticks the box

From 1 April 2013, the UK Government will reduce to 10 per cent the rate of corporation tax payable in the UK on profits arising from patents and some other forms of intellectual property (IP).

This so-called Patent Box scheme clearly represents an opportunity for technology-owning organisations that derive material income from patent rights.

IT companies such as IBM and Accenture have been actively growing their patent portfolios for years.

When seen alongside the flurry of patent acquisitions by IT companies and the active patent-based litigation by companies such as Apple, the patent box concept represents a further potentially significant boost to the relevance of patents in a company’s portfolio.

The patent box is not just available to UK companies involved in the initial development of technology: IP-holding companies based in the UK can, in some circumstances, also apply the reduced rate of tax to their worldwide income from patents transferred to them and which they actively manage.

From 1 April 2013, companies can elect to apply the reduced rate to patent-derived profits from that date.

The benefits of the regime will be phased in over five years, and the regime will apply to worldwide income earned by UK businesses from the inventions covered by such patents and will cover profits arising from the sale of a patent.

Companies seeking to claim the protection of a patent box must have been involved in the creation of the qualifying IP right. But the regime is not limited to patent owners.

It will also apply to exclusive licences and assets created under partnership, joint venture and other similar cost sharing arrangements. This could be particularly helpful to UK subsidiaries of multinational groups.

An exclusive licence must meet specific criteria to qualify for patent box treatment, including that the licence must be genuinely exclusive (for example, in terms of the ability to sue infringers without the consent of the patent owner) and must extend at least over the whole of a national territory.

All in all, the UK’s patent box regime is welcome and is likely to encourage both the development of patented technology in the UK and the relocation of IP-holding companies to the UK as long as companies can fulfill the criteria needed to qualify for the reduced tax rate.

Patents seem to becoming increasingly valuable properties, although it’s probably no surprise that few expect licensing royalty rates to fall even though licence revenue will be more lightly taxed from next year.