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In 2012 Member States and the European Parliament agreed on the "patent package" - a legislative initiative consisting of two...

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Patent Box opened April 2013
The UK Government legislation on the Patent Box tax incentive came into effect in April 2013. The incentive is a reduced corporation tax rate of 10% on net profits attributed to patents, with the aim of encouraging development of patentable technology in the UK. To ensure that the tax incentive is aligned with that aim, the legislation includes rules for determining whether a company qualifies for the incentive, and how the attributed profits are calculated.

Qualification for Patent Box Regime
To qualify for the Patent Box, a company must own, or be an exclusive licensee of, a granted patent: this can be a UK or European patent, or a patent granted by another EEA country with similar patentability criteria, such as a German patent. US patents do not qualify, as they may cover inventions such as business methods that would not be patentable in the UK.

The tax incentive is not limited to profits derived from countries where the patent is granted; instead, the existence of a qualifying patent is taken as an indication that the technology meets the requirements of technicality, novelty and inventive step.

Pending patent applications do not qualify, but once a patent is granted, profits arising up to 6 years before grant may qualify for the reduced tax rate.

The company must have undertaken ‘qualifying development', by making a significant contribution to the creation or development of the invention claimed in the patent, or a product incorporating the patented invention; mere ownership of the patent is not enough. A company can also qualify if it actively manages the portfolio of patent rights for another company in the same group that has undertaken the ‘qualifying development'.

Calculation of Net Profits Attributed to Patents
Qualifying profits may arise from sale or licensing of products covered by the qualifying patent, damages or other compensation under the patent, or sale of the qualifying patent itself. The qualifying profit is then reduced by removing a notional ‘routine return' of 10% on relevant expenses, which is assumed to be the level of profit the company would have made without the qualifying patent. The qualifying profit is reduced further by removing a return due to marketing. The profit that qualifies for the 10% rate may then be a relatively small proportion of the overall profit of the company.

The patent need not cover the whole of the product, but must at least cover an item that is part of the product and intended to remain so for the life of the item. For example, if the patent covers an ink cartridge for a printer that is not intended to be removed until the cartridge is empty, profits from the sale of a printer including the cartridge will qualify, even if the printer itself is not patented. However, if a patent covers a DVD intended to be removed from a player after use, profits from the sale of the DVD player will not qualify. Packaging is not considered part of a product, unless the packaging performs a function essential to the use of the product.

The Patent Box is voluntary: a company may elect to join the regime. The company then stays within the regime until it elects to leave, but cannot then re-enter for the next 5 years.

The tax implications of the Patent Box are complex, and specialist tax advice will be needed to determine the proportion of profits that qualify, and whether this proportion can be increased. From a patents perspective, the Patent Box introduces some important strategic points:

  • Patents may be filed purely to gain a tax benefit: there is no need to enforce the patents against competitors.
  • UK national patents attract low official fees, so are a cheap way to qualify for the Patent Box without the need to file in other countries.
  • The scope of the qualifying patents needs only to cover the products for which the Patent Box regime is to apply, so can be narrow in scope and therefore more likely to be granted.
  • A qualifying patent may be directed to a minor feature which is nevertheless part of the product which is to be sold. If necessary, the product may be redesigned to include the patented feature.
  • Software-related inventions may be patentable in the UK or Europe, depending on the nature of the invention, so the Patent Box regime may be attractive to software companies.

We therefore expect that the Patent Box regime will make patenting attractive to companies which previously had little reason to do so.