UK and Germany Reach Compromise on UK Patent Box Tax Regime

The UK and Germany have reached a compromise position in relation to the UK Patent Box tax regime and similar preferential tax regimes relating to patents or other intellectual property. Initial indications are that many of our UK clients, whose business is based wholly or entirely in the UK (and in particular, whose R&D activity is solely in the UK), will continue to be able to gain benefit from the Patent Box regime, meaning that gaining patent protection will remain useful as an element of tax planning. The Patent Box tax regime provides a significant discount on UK Corporation Tax for profits derived from patented inventions. Germany (and others) had expressed concerns about these provisions. These concerns centred around the UK provisions for using a transfer pricing mechanism for calculating profits for UK tax purposes within groups of companies. Transfer pricing has acquired a bad reputation in some respects, because it can be misused to move profits from one company to another related company located in a tax haven, thereby reducing the overall tax burden on the combined business. Germany had taken the view that preferential tax regimes relating to intellectual property (including patents) should be directly linked to the location of the corresponding R&D. In other words, profits should only benefit from preferential IP tax rates if those profits are taxed in the same country as the R&D activity took place. The UK and Germany have now reached a compromise position in which the location of R&D activity will be the principal factor, but a limited adjustment will be allowed within the tax calculation, if there are transactions with related parties in other tax jurisdictions. This compromise position has been discussed by the OECD and may result in changes being made to the UK Patent Box provisions. If so, transitional provisions will be needed in order to move across to the new arrangements. However, as noted above, we believe that many of our UK clients have their entire R&D activity within the UK and it therefore seems that they will still be able to benefit from the Patent Box regime for the foreseeable future, although some of the details may change in due course. Swindell & Pearson Ltd are not financial advisers or accountants and we are therefore not in a position to provide tax advice or other financial advice. However, we take the view that these latest developments will maintain the UK as a good place to undertake R&D and in which patent protection remains desirable from a tax position as well as from the traditional viewpoint of controlling competitor activity.

If you have any questions regarding the above, please contact your usual contact at Swindell & Pearson or at [email protected].