The new Patent Box regime Colin Smyth

2 Overview of session The new UK patent box regime Including latest (June 2011) consultation document Comparison with other jurisdictions Planning points

3 Patent Box IP is mobile Many other territories have more favourable regimes Desire to make UK more competitive Consultation is ongoing November 2010 June 2011 Rules to be included in FB 2012 Effective from 1 April 2013

4 Patent Box Will be limited to patents, not other IP Regime will be optional 10% tax rate on net profits Was to apply to patents first commercialised after 29 November 2010, but now may apply to all patents, with 5 year phase-in

5 Design principles Broad scope: Will apply to both royalties and “embedded” income Formulaic approach: Particularly as includes “embedded” income The box should apply to profits, not receipts: Will only apply to net income Encourage active ownership and innovation: Therefore, will not apply to passive ownership

6 Chart 1 A Overview of proposed formulaic framework Patent ownership Does the business hold a qualifying patent or patent right? Qualifying income Does the business receive qualifying income related to the qualifying patent? Profit on income Calculate total profits attributed to qualifying income Residual profit Remove routine profit to calculate residual profit on qualifying income Patent profit Attribute residual profit to patent and non-patent IP to calculate patent box profit

7 Qualifying patents Restricted to patents issued by UK IPO/EPO and other limited forms of comparable IP SPCs, regulatory data protection, plant variety rights Trademarks and copyrights excluded Company-by-company basis Includes worldwide income earned from inventions covered by qualifying patent Company or group must be actively involved in development of patent

8 Qualifying income Royalty and licence fees Embedded income Income from non-patented products, but made by patented process, can fall within box too Services Income from financial arrangements also excluded Once patent granted, income earned between application and grant (restricted to 4 years before grant) can be included in box

9 Calculating the net Patent Box income Formulaic 3-step approach to calculating income Principle – isolate the value brought by the patent Routine profits must be identified using cost-plus methodology and excluded Pro-rata basis for allocating profits and expenses will be norm, but divisionalised approach may be acceptable (or required, in certain cases). Residual profit derived from all IP must be allocated between patent-related and other income, using ratio of related costs or alternative method. Companies with < £500K IP profits can treat 50% of profits as arising from patents, if profit allocation calculations onerous Companies can opt out of regime at any time, but will have to stay out for minimum of 5 years

Tax Journal 2/9/11

11 How material will this be Simple example from condoc Profitable company with 70% of income from patented products How much falls into the box?

12 Other Transfer pricing requirements must be complied with in all aspects relating to patent box income. Applies to all affected companies, including those not otherwise subject to transfer pricing Patent box losses carried forward and set off against future patent box profits Anti-avoidance rules, to prevent abuse Pre-submission clearance process will be introduced

13 How will this compare with other regimes? A number of other Western European territories already have tax-favoured IP holding regimes (in each case 80% of relevant income exempt): Belgium (7%) – patents only Netherlands (5%) – non-patented IP too, but only where developed by DutchCo Luxembourg (6%) - non-patented IP too, does not need to be developed by LuxCo, but does not apply to IP from related parties Other territories without special IP regime still very attractive Cyprus – 10%, no CGT, no withholding taxes, EU membership, treaty network Ireland had patent box, now withdrawn, but only 12.5% tax rate anyway

14 Planning Act now! Impact on R & D tax relief Opt in or out ? Patent protection Where to patent

15 Questions ?

16 Contacts Colin Smyth Tax Partner

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