UK Patent Box: UK Government Publishes Draft Legislation Creating a Preferential Tax Regime for Certain Types of Intellectual Property

Sullivan & Cromwell LLP - January 24, 2012

The UK Government has published draft legislation for a “patent box”.

Effective 1 April 2013, though applying on a phased basis until 2017, the patent box regime will allow companies paying UK corporation tax to elect to apply a preferential 10% rate of corporation tax to worldwide profits attributable to qualifying IP, being:

  • patents granted by the UK Intellectual Property Office or the European Patent Office, together with patents granted by other EU member states designated by HM Revenue & Customs that have comparable patentability criteria to the UK; and
  • certain other forms of IP such as regulatory data exclusivity rights, plant variety rights and supplementary protection certificates.

Companies qualify for the patent box if they own or hold an exclusive licence for the qualifying IP, and are actively involved in developing or managing the qualifying IP. The patent box will apply to existing IP as well as new IP, and will apply to acquired IP so long as the relevant group has further developed the IP or the product which incorporates the IP.

Determining the proportion of profits attributable to qualifying IP, and hence eligible for the 10% rate, will require companies to apply a multi-step formula set out in the draft legislation. The full rate of UK corporation tax (due to decrease to 24% by April 2013 and 23% from April 2014) will continue to be chargeable on profits attributable to non-qualifying IP as well as profits attributable to “routine” activities. The latter are computed as a notional 10% return on certain routine costs (excluding R&D costs).