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CMS Expert Guide to intellectual property taxation

Comparison between the different IP boxes

For years, many countries have adopted tax-related policies specifically targeted to encourage research and innovation. These are commonly subdivided into two categories: (1) policies that provide incentives in relation to certain business costs, such as specific tax credits or deductions for R&D expenditure, and (2) policies that provide favorable taxation of income derived from certain types of intellectual property, such as so-called IP Box (or Patent Box) regimes. 

Following BEPS, certain minimum standards have been set for such IP Box regimes, in particular relating to economic substance requirements. Please find below the outline of the BEPS regulation in this regard, and select the different jurisdiction pages to see how the different countries have implemented said standards, as well as the description of the main features of their IP Box regime. 

Qualifying taxpayers

  • Resident companies
  • Domestic permanent establishments (“PEs”) of foreign companies
  • Foreign PEs of resident companies subject to tax in the jurisdiction providing benefits
  • Individuals operating enterprises

Qualifying IP

  • Patents;
  • Equivalent rights: utility models (e.g. “petty patents”, “innovation patents”, “short term patents”), IP assets that grant protection to plants and genetic material, orphan drug designations, and extensions of patent protection ;
  • Software protected by copyright;
  • Non-patented assets owned by SMEs- certified as obvious, useful and novel such by a competent government agency independent from the tax administration, for taxpayers that have no more than EUR 50 in global group-wide turnover and that do not earn more than EUR 7.5 million per year in gross revenues from all IP assets, on average over a five-year period (SMEs)

Modified nexus approach (or other approach)

  • Qualifying income = [(qualifying expenditure + up-lift) / Overall expenditure] x IP income
  • Jurisdictions could treat the nexus ratio as a rebuttable presumption 

Determination of the uplift

  • 30% of qualifying expenditure, capped at  the sum of (i) acquisition costs and (ii) expenditure for related-party outsourcing i.e. nexus ratio cannot exceed 100%

Qualifying expenditure

  • Expenditure directly connected to the IP asset; exclusion of interest payments, building costs, acquisition costs.
  • Expenditure for general and speculative R&D taken into account on a pro rata basis
  • Expenditure included in the nexus calculation at the time they are incurred (irrespective of the accounting and tax treatment)
  • Cumulative approach i.e. expenditure incurred all over the life of the IP asset

Person carrying on the R&D and the place where the R&D is carried on

R&D carried out by:

  • the IP owner (including by a foreign PE provided that it is operating at the time the IP income is earned)
  • unrelated parties (outsourcing) irrespective of their location; jurisdictions may narrow the scope scope to certain types of unrelated parties and provide for a cap of unrelated party outsourcing expenditure; jurisdictions outside the EU could include R&D activities undertaken by resident related parties

Overall expenditure

  • Qualifying expenditure
  • + IP asset acquisition costs : include expenditure incurred to obtain rights to research and, in the case of licensing: royalties and license fees (cumulative approach); jurisdictions outside the EU could include R&D expenditure incurred prior to acquisition in case of acquisition of a taxpayer that incurred R&D expenditure in the jurisdiction
  • + expenditure for related-party outsourcing (cumulative approach)

Eligible income

  • May include royalties, capital gains and other income from the sale of an IP asset, and embedded IP income from the sale of products and the use of processes directly related to the IP asset

Overall income

  • Net income from the IP asset i.e. gross IP income – IP expenditure allocable to IP income for a given tax year
  • Allocable IP expenditure: determined based on ordinary domestic tax law provisions, on a yearly basis 

 Relief mechanism

  • Exemption (implicit), or
  • preferential tax rate
  • Tracking of expenditure, IP assets and income; jurisdictions may allow tracking by products or families of products arising from IP assets if in line with business model
  • Jurisdictions may as a transitional measure allow taxpayers to calculate the nexus ratio based on a 3 or 5-year rolling average
  • Jurisdictions may provide for grandfathering rules