The UK’s Patent Box came into force in April 2013 and allows companies to reduce the corporation tax payable on profits attributable to a granted UK, or other qualifying, patent.
The UK Patent Box has now been referred, after a request from one of the EU Member States, to the EU commission in relation to the “EU Code of Conduct on Business Taxation” to determine whether the scheme meets the criteria outlined therein; this is not a legally binding code, but it is politically persuasive and most countries tend to follow it. The EU Code of Conduct Group subsequently considered the UK Patent Box at closed-door meeting on 22nd October 2013.
It is reported that the Code of Conduct group found that the UK Patent Box meets three of the five criteria under consideration, but could not reach a majority decision. Those five criteria are:
- Whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents;
- Whether advantages are ring-fenced from the domestic market, so they do not affect the national tax base;
- Whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages;
- Whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD; and
- Whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way.
The code of conduct was developed, in the main, to prevent business taxation measures which affect, or may affect, in a significant way the location of business activity in the European Community.
The two areas in which the Group reportedly raised concerns were criterion 3, and criterion 4. The Group are concerned that the benefit of the UK Patent Box can be obtained without any real activity in the UK, and are concerned that profits not directly linked to the patent (e.g. marketing costs) are being attributed nonetheless.
Given that the Code of Conduct Group could not reach a majority decision, the matter was referred on to the Economic and Financial Affairs Council who raised the issue in a recent meeting on 10th December 2013.
The outcome of that meeting was for the Council simply to refer it back to the Code of Conduct Group. The Group have been invited to assess or consider all patent boxes in the EU, including those already assessed or considered before, by the end of 2014, to ensure consistency with the principle of equal treatment, against the background of international developments, including those in relation to the OECD BEPS (Base Erosion and Profit Shifting) initiative. The BEPS initiative was basically set-up to look into the issue of double non-taxation, think Google, Starbucks and Amazon from earlier this year (how do governments get themselves into a situation where double non-anything can be a thing!?!).
The UK Patent Box was seen by the UK Government as an important part of the UK’s strategy to foster innovation and to create the most competitive tax system among the G-20 nations. Given the initial reaction of HM Treasury, it seems that the UK Government will staunchly defend the Patent Box, and it is very unlikely that substantive changes will be made. Even if changes are made, they will not be retrospective and so any benefits gained until those changes (if any) come into force would not have to be repaid.
In conclusion, it seems that nothing will change anytime soon, and if they do change, those changes will likely be minor. Given that all of Europe’s Patent Boxes are to be considered, the UK will have France, Spain, and the Benelux countries to name a few on their side, as they all have similar, and in some cases more favourable, Patent Boxes.
We will keep you up-to-date on any significant news, but don’t hold your breath. Watch this space…
This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking before any action in reliance on it.