Demystifying the Patent Box Scheme: Benefits, Functioning, and Eligibility Criteria

In today’s competitive business landscape, innovation is the driving force behind success. To encourage and reward companies that invest in research and development (R&D), many countries have implemented the patent box scheme. It’s important to understand what the patent box scheme entails, how it works, and the eligibility criteria that businesses must meet to take advantage of this beneficial tax incentive.

What is the Patent Box Scheme? 

The patent box scheme is a tax incentive program designed to promote innovation and stimulate economic growth. It allows companies to apply a reduced tax rate to income derived from qualifying intellectual property (IP) assets, such as patents, copyrights, and certain software rights. By providing a favourable tax regime for income generated from IP, countries aim to attract and retain innovative businesses, encourage R&D investment, and foster technological advancement. 

How Does the Patent Box Scheme Work? 

The patent box scheme operates in the following manner:

• Identification of Qualifying IP:  

To benefit from the scheme, a company must possess or hold IP assets that are eligible under the program. These assets are often patents or exclusive licenses related to patented technology. The IP should be linked to products or processes that generate income, either through sales or licensing agreements.

• Calculation of Relevant Income:  

The income eligible for the patent box scheme is determined by identifying the portion of revenue derived from the exploitation of qualifying IP assets. This income can include sales of patented products, licensing fees, or royalties received from IP usage. A proportionate approach is used to calculate the eligible income, taking into account factors such as direct costs and apportionment methods.

• Applying the Reduced Tax Rate:  

Once the relevant income has been established, it is subjected to a lower tax rate compared to the standard corporate tax rate. The reduced rate varies between jurisdictions but is typically lower to incentivize companies to commercialize and benefit from their IP. This reduced tax rate is applied to the portion of income directly attributable to the qualifying IP. 

Eligibility Criteria for the Patent Box Scheme 

While specific criteria can vary among countries, certain common requirements typically exist for a company to qualify for the patent box scheme. These can include:

• Ownership or Exclusive Licensing:  

The company must own or hold an exclusive license for the qualifying IP assets. The IP must be legally protected, such as through patents, copyrights, or certain software rights. Non-exclusive licenses or IP acquired from unrelated parties may not be eligible.

• Active Development and Substantial Innovation:  

The IP assets should be the result of substantial research, development, or innovation efforts. It is often required to demonstrate that the IP has been actively developed and holds a technical advantage or innovation compared to existing products or processes.

• Commercialisation and Exploitation:  

The IP assets must be actively used or exploited commercially, either through the sale of patented products or licensing agreements. Companies seeking to benefit from the patent box scheme should demonstrate the direct link between the IP assets and the income generated from their commercialisation

• Meeting Local Substance Requirements:  

Some jurisdictions may have additional substance requirements, necessitating a sufficient level of R&D activities or operational presence within the country. This ensures that the benefits of the patent box scheme are directed to companies actively contributing to the local economy.

The patent box scheme serves as a powerful incentive for companies engaged in research, development, and innovation. By providing a reduced tax rate on income derived from qualifying IP assets, governments encourage businesses to invest in R&D and leverage their intellectual property for economic growth. However, it’s important to note that eligibility criteria and specific regulations may differ across jurisdictions, and professional advice should be sought to ensure compliance and optimal utilisation of the patent box scheme.