1. RESEARCH AND DEVELOPMENT TAX CREDITS & PATENT BOX REGIMES
Opening comments – Thanks – Welcome
BERNHARD GILBEY
18 November 2016

2. Patent Box Regimes The background Intellectual Property
Valuable, knowhow, income-producing, assets of company
Growth of a ‘knowledge based’ economy
Opportunities and problems:
Unlike large manufacturing machinery and assets
Easily moved, globally
Planning to ensure profits realized in low-tax jurisdiction
Fiscal policy to attract R&D activity and tax economic growth attributable to IP
Opportunity for PLC:
“progressive power acrylic lenses”
“high quality optical lenses for telescopic use”
Background – why do IP boxes exist?
What is IP?
Knowhow, patents, copyright
Income production from unique ‘knowledge’ – intellectual property
Why is it important?
Concentrating on developed countries (in the main)
Decline of traditional heavy manufacturing (declining natural [IMMOVABLE] resource, increasing costs, increasing competition etc)
Growth of knowledge based economy (services, technological advance, pharma, communications etc)
Encouragement of research & technological advance – regulatory protection of ‘intellectual property’
Importance of [MOVABLE] intangible assets – including, e.g. knowhow, patents…
Opportunities:
For knowledge based companies (like PLC)…
IP easily moved, globally – tax became incentive to cross-border migration
Tax planning = move IP to low (no) tax jurisdiction (Isle of Man[?]) + licence & royalties payments + repatriate profits with benefit of DTA protection
Problems:
For domestic tax authorities
Tax base erosion / profit shifting
Solution:
Onshore IP holding regimes through domestic fiscal stimulus
The greater the level of economic growth attributable to technological advance, the greater the level of fiscal policy response to claim / protect taxing rights
Domestic, tax-advantaged, IP Boxes

3. Patent Box Regimes What’s in the box? A relatively recent phenomenon
Two design principles:
Preferential rate of tax ; for
Income associated with intellectual property
Onshore IP:
Holding regime
Incentivize future (re)investment in research
Development of ‘patent box’ regimes relatively recent phenomenon
New global economy
Tax base protection etc
Focus of ‘patent box’ regime is on ‘back-end’ of knowledge / research process:
R&D = tax incentives (super deductions, accelerated deductions etc) for ‘qualifying activities’
IP Box = 2 design principles:
Preferential rate of tax (or special deduction for IP income, leading to same effect)
Income generated from the IP
Aim = relocate / onshore the holding and generation of IP
Advantages two-fold:
Reduce tax cost for company
Incentivize future generation (ease & reinvestment)

4. Patent Box Regimes Harmful Tax Practices – OECD BEPS, Action 5
BEPS Action Plan, Action 5 (2013):
“Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime…”
Promoting a level playing field
Common criteria & co-operative framework
Substance (basic BEPS pillar):
To realign taxation of profits with the substantial activities that generate them…
To realign the development of the IP with the tax advantage provided
The [modified] ‘nexus approach’
Qualifying expenditure as a proxy for qualifying activity
OECD ‘nexus ratio’ = 𝑎+𝑏 𝑎+𝑏+𝑐+𝑑
Changing
Incentive or unfair ‘State Aid’?
BEPS Action 5 – Harmful tax practices = State sponsored:
Artificial profit shifting
‘Grab’ for tax base
Aggressive tax competition
Aims:
“reducing the distortionary influence of taxation on the location of mobile … activities”
Promoting the “level playing field”
Combatting the “race to the bottom”
Basic BEPS pillar principle:
“realign taxation of profits with the substantial activities that generate them”
Or, in the IP Box arena, to realign the place where the IP is developed with the place where the tax benefit is provided / earned
The ‘nexus approach’:
Benefit of IP regime only available to taxpayers who incur qualifying R&D expenses
Expenditure as a proxy for activity:
Substantial activity in State offering IP box; and
Income from generated IP must be proportionate to R&D expenditure – real value added
OECD nexus ratio:
a = R&D expenditure incurred by taxpayer (qualifies)
b = expenditure for unrelated party outsourcing (qualifies)
c = acquisition costs (does not qualify)
d = expenditure for related party outsourcing (does not qualify)
Plus: transparency for preferential IP regimes:
Spontaneous information exchange
Self-regulating system

5. Patent Box Regimes
Harmful Tax Practices – OECD BEPS, Action 5 (continued)
Regimes meeting ‘nexus approach’ also require:
Qualifying taxpayers:
Resident companies
Qualifying IP assets:
Patents
Qualifying expenditures:
Incurred by claimant (but with a 30% up-lift)
Direct connection to IP asset
EU: The Anti Tax Avoidance Package (2016):
Member States committed to ensuring Patent Boxes accord with nexus approach
ECOFIN: Code of Conduct Group on Business Taxation ‘monitoring process’
BEPS AP 5 – further requirements:
Qualifying taxpayers:
Resident companies, PEs of foreign companies etc.
Qualifying IP assets:
Restricted
Patents (and similar legally protected assets ‘equivalent to patents’
Qualifying expenditures:
By taxpayer
For actual R&D activities
30% uplift because
Note: EU (the BEPS enforcer) response:
The Code of Conduct Group on Business Taxation has established a monitoring process which will ensure that Member States implement the revised approach to patent boxes. If Member States are not applying the new approach appropriately, then the Commission will consider introducing legislation to ensure its proper implementation.

6. Patent Box Regimes Global ‘Patent Boxes’:
OECD considered 16 ‘Patent Box’ type regimes around the world:
Belgium
Netherlands
China
Portugal
Colombia
Spain
France
Spain (Basque)
Hungary
Spain (Navarra)
Israel
Switzerland (Nidwalden)
Italy
Turkey
Luxembourg
United Kingdom
All 16 considered (in whole or part) as inconsistent with nexus approach.
OECD examined 16 different regimes as part of BEPS AP 5…
Others exist[ed] – e.g. Cyprus
… all 16 failed, to some degree, the new [modified] nexus approach set out in the final report…
Time now to reconsider position and reassess IP regime offering
We’ll consider, as possible options for PLC (not all assessed by OECD):
United Kingdom
Spain
Netherlands
France
Ireland

7. POLYCON IPR LOW-TAX STATE (Brand & Product Owner)
Patent Box Regimes
STEPHEN HOLMES
POLYCON
LENS COMPANY
(manufacturing)
INT. LICENSING
HIGH-TAX STATE
Third Party Licensing & Franchise Agreements
SESSION 2
RESEARCH & DEVELOPMENT TAX CREDITS & PATENT BOX REGIMES
POLYCON IPR LOW-TAX STATE (Brand & Product Owner)

8. Patent Box Regimes
United Kingdom: Patent Box (since 2013, as amended 2016)
Tax rate:
[Minimum] reduced corporate tax rate = 10% [to be fully operational by 2021]
Income profits from qualifying IP assets
Qualifying taxpayers:
Companies holding:
Qualifying IP rights
Exclusive licence in respect of qualifying IP rights
Qualifying IP assets:
Patents (and similar)
Non-qualifying IP assets:
Software copyright
Qualifying expenditures:
Incurred by claimant – the development condition
Income sub-streamed for proportionality (to meet modified nexus approach) UK

9. POLYCON IPR LOW-TAX STATE (Brand & Product Owner)
Patent Box Regimes
STEPHEN HOLMES
POLYCON
LENS COMPANY
(manufacturing)
INT. LICENSING
HIGH-TAX STATE
Third Party Licensing & Franchise Agreements
SESSION 2
RESEARCH & DEVELOPMENT TAX CREDITS & PATENT BOX REGIMES
POLYCON IPR LOW-TAX STATE (Brand & Product Owner)

10. Patent Box Regimes Spain: Patent Box (since 2008, as amended 2016)
Tax rate:
60% exemption for income (includes capital gains) derived from licencing qualifying IP
40% taxed at standard rate (25%) = effective rate of 10%
Qualifying taxpayers:
Companies (licensee must not be resident of low-tax jurisdiction)
Qualifying IP assets:
Patents, plus
Designs, models, secret formulas & procedures, industrial, commercial, or scientific information
Non-qualifying IP assets:
Software copyright, trademarks
Qualifying expenditures:
2016 amendments apply modified nexus approach in Spain
Deduction now limited to ratio of expenses directly related to creation / development
Transitory regime applies
Spain

11. POLYCON IPR LOW-TAX STATE (Brand & Product Owner)
Patent Box Regimes
STEPHEN HOLMES
POLYCON
LENS COMPANY
(manufacturing)
INT. LICENSING
HIGH-TAX STATE
Third Party Licensing & Franchise Agreements
SESSION 2
RESEARCH & DEVELOPMENT TAX CREDITS & PATENT BOX REGIMES
POLYCON IPR LOW-TAX STATE (Brand & Product Owner)

12. Patent Box Regimes
Netherlands: Dutch Innovation Box (since 2007, as amended 2017)
Tax rate:
Reduced corporate tax rate = 5%
Qualifying income (including royalties & capital gains)
Qualifying taxpayers:
Companies
Reduced controls / restrictions on ‘small taxpayers’
Qualifying IP assets (new, connected and on-developed):
Patents (and similar)
Software copyright
Licences to distribute medicines (human and veterinary)
Qualifying expenditures:
Incurred by claimant – limitations where R&D outsourced to related parties
Other: extensive grandfathering + connected and on-developed rules
Netherlands

13. POLYCON IPR LOW-TAX STATE (Brand & Product Owner)
Patent Box Regimes
STEPHEN HOLMES
POLYCON
LENS COMPANY
(manufacturing)
INT. LICENSING
HIGH-TAX STATE
Third Party Licensing & Franchise Agreements
SESSION 2
RESEARCH & DEVELOPMENT TAX CREDITS & PATENT BOX REGIMES
POLYCON IPR LOW-TAX STATE (Brand & Product Owner)

14. Patent Box Regimes
France: Patents and Royalties Regime (since 2000, amended…?)
Tax rate:
Reduced corporate tax rate = 15%
Qualifying income includes:
Income from licenses, sub-licenses, royalties; and
Long term capital gains from transfer & sale of IP
Qualifying taxpayers:
French companies holding (or held):
Qualifying IP rights + exclusive licence in respect of qualifying IP rights
Qualifying IP assets:
French (and French registrable) patents only
Qualifying expenditures:
Requirement is ownership (if acquired, for minimum of 2 years) of IP rights
No requirement for claimant to have incurred expense – nexus approach failed…
“France is in contravention” of obligation to make necessary changes to regime
France
France in contravention:
“In the meeting of 2 June 2016 France declared that no rollback would be necessary since it considered that its regime would not be harmful. The Group asked France to demonstrate the compatibility of its Patent Box regime with the modified nexus approach.”
“France claims that a significantly lower level of taxation must be defined by reference to the overall corporate tax environment in the single market and that the absolute level also matters.”
Code of Conduct Group disagrees; will assess French regime by reference to all normal criteria of ‘harmfulness’.
(Report by the Code of Conduct Group (Business Taxation) to ECOFIN − Patent boxes: state of play and the way forward ( ))

15. POLYCON IPR LOW-TAX STATE (Brand & Product Owner)
Patent Box Regimes
STEPHEN HOLMES
POLYCON
LENS COMPANY
(manufacturing)
INT. LICENSING
HIGH-TAX STATE
Third Party Licensing & Franchise Agreements
SESSION 2
RESEARCH & DEVELOPMENT TAX CREDITS & PATENT BOX REGIMES
POLYCON IPR LOW-TAX STATE (Brand & Product Owner)

16. Patent Box Regimes Ireland: Knowledge Development Box (new for 2016)
Tax rate:
Reduced corporate tax rate = 6.25%
Income profits from qualifying IP assets
Qualifying taxpayers:
Companies holding (or held):
Qualifying IP rights
Exclusive licence in respect of qualifying IP rights
Qualifying IP assets:
Patents (and similar); and
Computer software copyright (broader than UK – although of no use to PLC)
Qualifying expenditures:
Incurred by claimant – linked to R&D in Ireland
First fully compliant modified nexus approach IP regime
Other: existing infrastructure already exists
Ireland
Irish response to attack on the ‘double-Irish’ structure

17. Patent Box Regimes Other future possibilities Belgium: Luxembourg:
Proposed replacement ‘innovation income deduction’ (IID) scheme
Patents (and similar) plus extended to cover software copyright
90% of net innovation income (royalties & license fees) deducted from taxable income
IID restricted in-line with modified nexus approach
Luxembourg:
Abolished preferential regime July 2016
A main BEPS target
A replacement, nexus approach compliant, IP regime is very likely
United States:
A new, widely drawn, IP regime much discussed
Much needed as IP regimes proliferate globally
Likely form part of US Tax Reform program… such as it is…
International pressure to make BEPS-compliant to be balanced with domestic need
Future regimes
Belgium – abolished popular regime July 2016 – replacement will be broader based but with copper-bottomed nexus approach
Luxembourg - abolished existing regime July 2016 – expect competitive replacement soon
Cyprus – rewriting to conform with OECD modified nexus approach
US – much talk; little action – balance need against priority and ‘deadlock’

18. Patent Box Regimes Closing remarks EU – Corporate Tax Reform Package
CC[C]TB
‘R&D’ super-deduction
Formulary apportionment proposals
BREXIT:
Opportunity for UK?
Extend
Within BEPS framework

19. Contact Info Slide
Bernhard Gilbey Partner +44 (0)
Thanks

20. Worldwide Locations (including independent network firms)

21. Worldwide Locations