Patent Boxes provide a valuable impetus to Research and Development (R&D) and innovation across the globe, however, the onset of the OECD’s BEPS initiative and other legislation has meant that a number of countries are having to reassess the structure of these vehicles and how they are provided to multinationals.  This topic was discussed today at Taxand’s Global Conference 2016 in Dublin.


The concept of a favourable tax regime for Intellectual Property has permeated a number of countries since the idea was first approached by Ireland in the 1970s.  The creation of a lower effective tax rate for IP income, known as a Patent Box, has particularly been seen across the EU and whilst the calculation and implementation varies across different regions, they all share the same over-arching goal of creating an advantageous environment for R&D.


In recent times, Patent Boxes have been under increasing scrutiny from the OECD given the view that the existing regime is potentially harmful for competition. As such, new requirements are being demanded through the BEPS initiative, which aim to establish a set of common rules for countries who offer a Patent Box regime. Most countries have made a commitment to cover the modified rules and ensure that companies demonstrate genuine IP substance in the country itself so as to qualify for the beneficial rate.


However, countries are at varying stages in compliance with the new recommendations. Ireland is at the forefront of changes in this arena and has led the way with the introduction of a Knowledge Development Box, with a headline rate of 6.25%, which became active from the beginning of 2016. In fact, changes to the country’s IP taxation were deferred in order to comply with the incoming OECD regime.


Other countries are working out their next move. The UK is in transition mode, looking to move from its current Patent Box regime which is due to close to new entrants in June 2016 and be abolished altogether in 2021. As in Ireland, the focus will be on ensuring that the development and functions of IP are situated in the UK to satisfy the new substance rules. It’s unlikely that the EU referendum, whatever the outcome, will cause the UK to stray from this path as the commitment to follow the OECD’s guidelines has been made.


Luxembourg was one of the first in Europe to adopt an IP regime, which resulted in a 5.8% effective rate on qualifying assets, and has led to the country becoming a world IP hub. However, the country is now entering a new era of uncertainty following the abolishment of the IP regime in 2016, with the hope that the current government will show a willingness to introduce a new incentive over the next year or so.


The US doesn’t currently have an IP regime but is an area that has drawn significant interest in the last couple of years, as foreign investors enter the US with the expectation of a more advantageous environment for R&D. As a result of the Innovation Promotion Act of 2015, the concept of an Innovation Box is in progress, amidst debate around the overall US tax regime.

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Taxand's Take

What’s clear is that there is no ‘one size fits all’ approach to Patent Boxes and countries are adapting their regimes to ensure both they are competitive while also  complying with new OECD guidance, but also that the cost versus jobs analysis makes sense. Fair competition is key to the future of the Patent Box but it also needs to make sense in the context of the overall tax regime.

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International Tax

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