UK: Intellectual Property And The Patent Box

Background to the Patent Box regime

The UK Government has been keen to improve the UK's competitiveness in the high-tech arena.

Companies have been able to elect to enter the Patent Box regime since 1 April 2013. Any company within the charge to UK corporation tax with income from patents (and other specified intellectual property) will, subject to phasing-in rules, potentially be able to benefit from a 10% effective rate of corporation tax.

The regime is intended to apply to the worldwide income arising from the exploitation of inventions which benefit from a qualifying patent.

The phasing-in rules mean that the full benefit of the 10% effective rate will be phased in over 5 years, with 90% of the full benefit being available in 2016. The proportion of the full benefit will then increase such that the full benefit of an effective 10% corporation tax rate on Patent Box profits will be applicable from 1 April 2017.

The UK's Patent Box regime is attractive to high tech and life sciences corporates and groups, particularly where such corporates and groups can also benefit from enhanced UK research and development ("R&D") credits and are able to manage the complexities of applying the regime.

The main concepts of the regime are summarised below:

Qualifying companies

As it is an optional regime, a company can only benefit from the Patent Box if, for an accounting period, it elects into the Patent Box regime. The election must be made in writing within two years of the end of the accounting period to which the election is intended to apply.

Once a company has made a Patent Box election, the Patent Box regime will continue to apply to the company until the election is revoked. If a company revokes a Patent Box election, it will not be able to re-enter the Patent Box regime for five years.

A company must meet one of the following conditions for the regime to apply:

• the company (at any time in the relevant accounting period) owns or licenses-in qualifying intellectual property ("IP") rights. Where IP rights are licensed, the licensing rights must be exclusive (at least as regards one or more countries) and must exclude all other persons (including the person granting the licence); or
• the company previously owned or licensed-in qualifying IP rights, it has received income in respect of an event (in relation to the IP right or licence) which occurred both when the company was a qualifying company and had elected into the Patent Box regime and that income falls to be taxed in the relevant accounting period.

For group companies, the regime will only apply where, in addition to satisfying one of the above conditions, the company applying the Patent Box regime satisfies the 'active ownership' condition. The aim of the 'active ownership' condition is to ensure that passive IP holding companies within a group do not benefit from the Patent Box. To satisfy the 'active ownership' condition, the company must have either:

• carried out 'qualifying development' itself; or
• performed a 'significant amount of management activity',

in either case, in respect of all or almost all of the qualifying IP rights held by the company in the relevant accounting period. Management activity includes formulating plans and making decisions in relation to the development or exploitation of the IP rights.

There are also rules allowing certain partnerships and cost sharing arrangements to qualify for the Patent Box.

Qualifying IP rights

The Patent Box applies to:

• patents granted by either the UK Intellectual Property Office or the European Patent Office, or corresponding patent rights granted under the laws of the following EEA States: Austria, Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden;
• supplementary protection certificates which are granted by the UK Intellectual Property Office or the European Patent Office, including paediatric extensions;
• UK and European Community Plant Variety rights; and
• certain UK and European medicinal and veterinary products with marketing authorisations and marketing or data protection and plant protection products with data protection benefits.

It is noted that the Government will not, at this stage, extend qualifying IP rights to copyrighted software which is novel, non-obvious and useful.

Qualifying development

For an IP right to be a "qualifying IP right", the company must also meet the development condition in relation to the IP right. This means that the company must carry out 'qualifying development' in relation to the IP right (before or after its acquisition) by either:

• creating or significantly contributing to the creation of the patented invention; or
• performing a significant amount of activity to either develop the patented invention or any item or process which incorporates the patented invention or to develop the way in which the patented invention may be used or applied.

The development condition will only be met if either:

• the company itself carried out the qualifying development and has not left nor joined a group since it did so; or
• the company itself carried out the qualifying development, it has left or joined a group since it did so, but has performed the same type of development activities for at least 12 months since the change in ownership; or
• another group company has carried out qualifying development in relation to the IP right and the qualifying development was performed within the group of which the Patent Box company is currently a member; or
• another company (the acquired company) which has developed the patent is acquired by a group and the qualifying IP is then transferred to a different company in the group, provided that the acquired company (or another group company) continues with the same qualifying development carried on by the acquired company for at least 12 months after the acquisition by the group of the acquired company.

The implication of this requirement is that a buyer can acquire either the qualifying IP or a company holding the qualifying IP and continue to benefit from the Patent Box provided that the development condition is met.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.