“Patent box” tax reduction proposals

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The UK government is continuing to press ahead with its proposed “patent box”
tax regime, under which businesses paying corporation tax could claim a reduced 10% tax rate for profits attributable to patented products. The latest consultation finished in February 2012 and, at present, the regime is due to enter into force from 1 April 2013.

The relevant profits would be those derived worldwide by a UK business from
inventions covered by a UK or European patent, supplementary protection
certificate or plant variety right. Certain data exclusivity rights will also be eligible.

The profits may derive from the sale of patents, from the sale of any patented
products or spare parts for a patented product, from damages paid by third
parties for infringing the patent rights, or from sales of mixed patented and non patented items. For patents protecting processes and services a notional royalty will be calculated.

In order to benefit the business must hold the qualifying intellectual property
right or an exclusive licence to it, must be actively involved in the patent
development cycle, rather than being a passive recipient of income from holding patents, and must remain actively involved in exploiting the patent. The definition of a qualifying exclusive licence has been relaxed to cover certain intra-group arrangements; however, in general, there will need to be an actual exclusive licence, or evidence thereof, in order for an entity other than the intellectual property right holder to benefit from the tax reduction.

The proposed legislation will allow a patent applicant to store up benefits until a
patent is granted and there is currently no proposed claw-back of the claimed
benefit if the patent is ultimately revoked following an opposition or revocation
proceeding.

Legislation based on the proposals is intended to be put before Parliament in the Finance Bill 2012, with draft guidance due to be published by summer 2012. We will provide updates in relation to this proposal as it develops further.