UK Budget and IP

Well, we have the shiny brand new patent box proposals coming in April anyway, so there were no big  IP expectations of this Budget – just as well, really!

There was one 'direct' IP announcement – the above the line R&D relief for large companies is increased to 10%, from the originally proposed 9.1%. This doesn't sound much of an increase, but it's a large improvement on the 6% that the current large company relief would be worth when the 20% corporate tax rate comes into effect. (A post on ATL is in the works …)

A 'coming soon' announcement was also hidden in the Budget documents – the Government plans to introduce consultation on tax reliefs for the visual effects industry. Presumably these will be modelled on the film/quality tv/animation/video games reliefs that we already have, but there's no detail yet beyond the announcement of consultation.

There were quite a few indirect announcements – things that will benefit IP companies by benefiting companies and sectors in general, including:

- the 20% corporation tax rate: a bonus for large companies, and fairly predictable
- the NICs allowance of £2,000 per business, reducing the costs of employing people
- the extension of the capital gains tax exemption on investment via SEIS: useful for startups looking for funding
- then the grants etc funding, including £1.6bn for Industrial Strategy, part of which will go into a £2.1bn fund for aerospace; a £15m competition for digital content production; and £8m for the Skills Investment Fund, focussed on the digital content sector
- and finally, various initiatives intended to make it easier to raise finance. In theory.

More R&D tax relief claims needed!

HMRC has published the latest set of details on the number and value of R&D tax relief and R&D tax credit claims, covering claims in 2008-9. There is an increase in the number and value of claims, but it is surprisingly small considering that 2008-9 was the catch-up deadline to get in claims for relief on expenditure over the previous six years (the relief now has to be claimed in the company tax return or amended return, so companies have a much shorter time limit to claim).

The total number of companies claiming the relief was 8,350 in 2008-9, an increase of just 10% in a catch-up year that was well-publicised - that seems a very low number, and it may make the tax relief vulnerable to change/removal in the upcoming consultation on how IP is taxed in the UK.

International: Malta announces tax exemption for patent royalties

The Maltese Government approved a number of changes to their tax laws on 16th April 2010 – of particular interest on IP is the news that, with immediate effect, royalty and similar income derived from qualifying patents in respect of inventions will be exempt from Malta income tax (subject to conditions still to be announced, including a cap on the maximum amount that may be exempted – and the EU may well have some comments on the matter).

Malta has been reasonably tax-efficient for IP income, but this will put the country on a par with Ireland for patents, depending on the level of the cap. Under EU pressure, Ireland extended its exemption on patent royalty income to include royalties received in respect of non-Irish patents granted after 1 January 2008. A similar cut-off date for the Maltese exemption would seem to be likely, if only to appease the EU.

Bioscience 2015 reviewed and refreshed

Anne Fairpo (an intellectual property taxation specialist with Wragge & Co and IP Tax blogmeister) brings news of the BioIndustry Association's Bioscience 2015 Review & Refresh document, which called yesterday for further tax (and other) incentives for biotechnology in the UK, noting that the original Bioscience 2015 vision (published in 2003) "looks somewhat over-optimistic". On tax in particular, the report recommends (Anne writes):

R&D
that R&D tax credits be extended through
* extension of relief to cover benefits in kind;
* relief on payments to self-employed individuals and high quality management talent at CEO and CSO level;
* removing the PAYE/NI limit on repayable credit;
* extension of the relief to rent costs and
* extension of the relief to cover IP costs.

UK R&D tax credits are currently restricted to direct staff costs,and the repayment is limited to the amount that the company has paid through the PAYE system: this discriminates against smaller companies which may only employ a handful of people, spending more on sub-contractors.

EIS/VCTs
The report also recommends extending the applicability of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) by, for example, extending their scope to cover larger SMEs (following the definitions used for R&D tax credits). It also recommends extending the EIS and VCT scope to cover shares acquired through shareholder to shareholder transactions.

Corporate venturing
To pull more pharmaceutical activity to the UK and to facilitate collaboration with SME biotechnology companies, the report recommends:
* allow tax relief on the capital contribution made by a large company investing in an SME biotechnology company (currently, investors will usually only get relief when they finally sell the investment);
* extend group/consortium relief to allow tax losses in the investee SME to be passed to the pharmaceutical development partner to be set against its taxable income reducing the required share ownership requirements (at the moment, the partner needs to own at least 75% to fully benefit from the SME losses) and
* encourage pharmaceutical companies to locate more activity in the UK through introduction of a royalty box tax incentive, similar to those in Benelux countries.

In Belgium, the patent box incentive results in an effective tax rate on royalties of 6.8% [see Tom Swinnen's post, "Tax incentives for R&D in Belgium" on IP Finance here]; this is the lowest rate in Europe, but is only available for royalties on patents resulting from Belgian R&D activities. However, with the Belgian R&D incentive which gives a monthly cashflow boost, this presently makes Belgium very attractive for R&D. The Netherlands, Luxembourg and Spain have all recently introduced similar (albeit less generous) incentives and the UK Treasury is actively considering whether the UK should introduce a royalty box incentive. This report from the BIA should only reinforce that consideration, before the UK's R&D tax relief is substantially used by larger companies to create foreign-owned - and foreign-taxed - patents."

Tax incentives for Belgian R&D

IP Finance is pleased to host this short article by Tom Swinnen (Thompson Hine LLP, Brussels) on tax incentives for research and development in Belgium:

TAX INCENTIVES FOR R&D IN BELGIUM

Over 170 biotech companies operate in Belgium, generating more than 16% of the European turnover in the sector, making Belgium one of the most important countries for R&D in the European Union. Belgium has taken several measures to promote investments in Belgium and to create a favourable environment for R&D activities. For the 2008 tax year, a new tax incentive for patents has been introduced which leads to a maximum effective tax rate of 6.8% on patent income. The newly adopted Patent Income Deduction (PID) results in the lowest effective European tax rate on income derived from the licensing of patents or the use of patented products, making Belgium a highly favoured location for foreign investment.

The PID allows Belgian companies as well as Belgian branches of foreign companies to deduct from their Belgian taxable basis 80% of the royalties received from patents resulting from R&D activities. This is intended to encourage all R&D activities in relation to the development or improvement of patents. The main characteristics of the PID and other R&D tax incentives are as follows.

PATENT INCOME DEDUCTION

Eligible taxpayers

The PID is available to all corporate taxpayers in Belgium, in essence all Belgian resident companies and Belgian permanent establishments of non-resident companies. No tax ruling is necessary and the PID applies automatically. The compliance formalities are minor and consist of fulfilling a specific form enclosed with the tax return.

Qualifying patents

The PID only covers patents and supplementary protection certificates, but not any other intellectual property rights. The company must hold a patent right; the PID does not apply before the grant of the patent and is no longer available after the patent's expiry. The patent may be (i) self-developed or (ii) acquired and further developed.

 Self-developed: the patent is totally or partially developed in its research centre(s) in Belgium or abroad.

 Acquired and further developed: the company either acquires the patent from or is granted a licence to the patent by a third party, provided the company further develops the patent in the company's research centre(s) in Belgium or abroad. However, it is not required that the further development results in an additional patent.

The research centre that developed or improved the patent must constitute a branch of activity of the company, i.e. a division of an enterprise that constitutes an independent business unit, and can be located in Belgium or abroad.

The PID is not restricted to Belgian patents but extends to patents valid in other jurisdictions (e.g. U.S., Japanese or German patents). Also, the company does not need to be the sole and full owner of the patent rights -- it can hold a patent together with other companies and the patent can be held on the basis of other property rights, such as usufruct rights.

For the PID to apply, it is essential that the patent has not been commercialized anywhere in the world before 1 January 2007.

Qualifying income

The patent can be licensed to one or more third parties or can be used in the manufacturing process by or on behalf of the company.

 If the patent is licensed, the income consists of licence payments such as royalties, milestone payments and upfront fees. When the parties are related, the royalties must comply with the arm's length principle in order to avoid abuse. To the extent that the remuneration also relates to non-patent intellectual property, only the portion that relates to patents qualifies for the PID.

 If the patent is used in the manufacturing process by or on behalf of the company, it is important to determine how much of the turnover income can qualify for the PID. This will typically be calculated as that portion of the derived income that the company would have received for licensing the patent to an unrelated third party in an arm's-length transaction.

In order to avoid abuse and double deductions, remuneration paid to third parties on acquired patents and the deprecation on these patents must be deducted from the basis of the PID if these costs are already deducted from the taxable result in Belgium. This anti-abuse provision is not applicable to self-developed patents. The R&D expenses associated with self-developed patents should not therefore be deducted from the basis for the PID.

The Belgian PID is not capped.

OTHER TAX INCENTIVES

The PID can be claimed in addition to other already existing tax incentives, such as:

Notional interest deduction

Together with the PID, Belgian resident companies as well as permanent establishments of foreign companies paying taxes in Belgium, can benefit from the Notional Interest Deduction. The deduction equals a percentage fixed on a yearly basis (e.g. 4.307% for tax year 2009) of the equity shown in the balance sheet of the annual account.

Investment deduction and R&D tax credit

Investments in patents and fixed assets used in Belgium to promote R&D are eligible for an increased investment deduction of either 13.5% on the acquisition value or 20.5% of annual depreciations permitted for tax purposes

As an alternative to the investment deduction, a R&D tax credit is granted on qualifying R&D-related investments. The taxpayer must opt for one of the two methods (Investment deduction or R&D tax credit).

Partial payroll withholding tax exemptions

Companies active in R&D can benefit an exemption from payroll withholding tax for researchers (PhD, engineers and master degrees). Recently, the maximum exemption has been increased from 50% to 65%.