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UK Agrees With Germany To Limit Patent Box Regime

by Ulrika Lomas, Tax-News.com, Brussels

13 November 2014


The United Kingdom has agreed to limit the scope of its patent box regime, which provides for a concessionary tax rate of tax on income from intellectual property, in an agreement brokered by Germany.

The UK's patent box regime, which came into operation in April 2013, subjects income from patents to a lower rate of corporate income tax of ten percent.

Germany opposed the regime, with the backing of a number of EU member states. Chancellor Angela Merkel argued that the regime was encouraging companies to artificially shift their profits to the UK, to the detriment of other states' tax collections.

Under the agreement, preferential tax treatment will only be granted in cases where the patent is linked to research and development carried out in the UK. The agreement allows for patent income to continue to be subject to tax benefits under the terms of the current regime until June 2021.

According to a statement from the UK Government, specifically, the agreement "aims to resolve the concerns countries have expressed about some features of the Modified Nexus Approach, and identify what further work is required in order to enable agreement to be reached on this issue during 2015."

"Concerns have been expressed about how to calculate qualifying research and development (R&D) expenditure, transitional arrangements between regimes, and time allowed for this through grandfathering provisions, and the tracking and tracing methodology for R&D expenditure that will determine whether it qualifies."

According to the Government, the proposal seeks to address the concerns raised, whilst reinforcing the nexus approach and providing safeguards against profit shifting. The review will aim to ensure that the approach to implementing new rules is consistent with existing OECD rules on the phasing out of harmful regimes. The agreement will bring about the following changes:

  • Uplift of Qualifying Expenditure – where related party outsourcing or acquisition costs are incurred, which do not constitute qualifying expenditure, companies will be able to obtain a maximum 30 percent uplift of their qualifying expenditure (subject to a cap based on actual expenditure) included within the formula. The 30 percent uplift refers to the overall expenses for both outsourcing and acquisition costs;
  • Closure and Abolition of IP Regimes – to allow time for the legislative process, all existing regimes will be closed to new entrants (products and patents) in June 2016. These schemes will be abolished by June 2021.
  • Grandfathering – to allow time for transition to new regimes based on the Modified Nexus approach, IP within existing regimes will be able to retain the benefits of these until June 2021.

UK Chancellor of the Exchequer George Osborne said: "This is a great deal for Britain – we protect our vital scientific research, while making sure there are international rules that stop aggressive tax avoidance. Our joint proposal balances the need to allow countries that wish to have these regimes to do so, whilst ensuring that they operate by rules that prevent abuse. This demonstrates the strength of our commitment to the [Organisation for Economic Cooperation and Development's] base erosion and profit shifting (BEPS) project that we both helped initiate, and our determination to ensure that we conclude this by the end of 2015."

The Germany-UK deal may deal a blow to Ireland's plans, announced in its recent Budget, to create a regime similar to that of the UK's patent box regime from 2016.

Germany and the UK are to submit this proposal to the Forum on Harmful Tax Practices during its meeting on November 17-19, 2014.

TAGS: tax | patents | Ireland | tax avoidance | intellectual property | corporation tax | United Kingdom | transfer pricing | Germany | research and development

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