Introduction of Patent Box heralds new tax regime

Introduction
The Finance Bill 2012 is to introduce legislation to provide a new tax regime: the Patent Box.

The Patent Box will come into force on 1st April 2013 and is designed to incentivise companies to commercialise their existing patents and expand their patent portfolio, and to develop new products incorporating patented technology.

The Patent Box provides companies with the opportunity to elect to apply a 10% rate of corporation tax (rather than 23%) to worldwide profits attributable to certain IP rights.

The basic criteria which a company must satisfy to benefit from this financial incentive are as follows:

• It must have a qualifying IP right.
• It must "actively hold” that IP right.
• It must have an income related to that right.

Qualifying IP rights
Although its name implies otherwise, the Patent Box also extends to other IP rights similar to patents, including: 

• Supplementary protection certificates, including any paediatric use extensions. 
• Plant breeders' and plant variety rights.
• Medicinal and veterinary products with marketing authorisations and marketing or data protection. 
• Plant protection products with data protection benefits.

The scope of the regime will therefore make it attractive to a large range of companies, particularly those operating in the life sciences sector.

Other key points in relation to the “qualifying IP right” criterion are as follows:

• Patents granted by the UK IP Office, the European Patent Office and a number of other European Economic Area states will qualify for the Patent Box.
• It applies to both new and existing intellectual property.
• A company cannot benefit from the Patent Box until a patent is granted, although tax relief for relevant profits may be backdated for up to six years from the year in which the patent is granted.

Actively holding
The Patent Box will be available to companies holding qualifying IP rights as either owners or exclusive licensees.

In order to “actively hold” a qualifying IP right, a company must be creating, or significantly contributing to, the protected invention, or performing a significant amount of activity to develop the protected invention or any product or process incorporating the protected invention.

If a company is part of a group and satisfies this condition only because of the activity of a fellow group member, the company in question must perform activities such as:

• Deciding whether to maintain protection in particular jurisdictions, grant licences or research alternative applications for the invention.
• Deciding which products incorporating the invention will go to market, what features those products will have and how and where they will be sold.

In this regard, the company qualifying for the Patent Box is not a passive IP holding company, but either has developed the intellectual property or is actively managing it.

Relevant income
The profits to which the reduced tax rate applies are calculated as a proportion of the corporation tax profit of the company’s trade. The relevant IP income that is considered for this calculation is the income derived from the qualifying IP rights. This income is typically derived from: 

• Sales of an item protected by the qualifying IP rights, or a larger item that incorporates the protected item.
• Licence fees or royalties for granting rights over qualifying IP rights.
• Sales or other disposals of qualifying IP rights.
• Income from direct infringement of qualifying IP rights, and other damages, insurance and compensation.

The regime also extends to income from the sale of items designed to be incorporated into a protected item (ie, spare parts for the protected item). Income from licences to use a patented process may also be included in the calculation.

The Patent Box is particularly generous in that it can extend to worldwide income from sales and licensing, including income from territories where a qualifying IP right is not held.

Similarly, if a company has only a UK patent in respect of a process but licenses the use of the process worldwide, income from the worldwide licences will be considered as relevant IP income.

Summary
The Patent Box provides an additional financial incentive to be taken into account when considering IP filing strategy and portfolio management. In view of this, it is worth considering taking steps to expedite the prosecution of relevant pending patent applications so as to benefit from the Patent Box sooner rather than later.