Patent box regimes, also known as intellectual property (IP) regimes, are a fascinating aspect of international tax law. These regimes tax business income earned from IP at a rate below the statutory corporate income tax rate, with the aim of encouraging local research and development. However, they also introduce a new level of complexity to a tax system and have been the subject of scrutiny due to concerns about profit shifting.
As of July 2024, 13 of the 27 EU Member States have a patent box regime in place. These include Belgium, Cyprus, France, Hungary, Ireland, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, and Spain. Non-EU countries such as Albania, Serbia, Switzerland, Turkey, and the United Kingdom have also implemented patent box regimes. The reduced tax rates under these regimes range from 1.75 percent in Malta to 12.5 percent in Turkey.
For comparison, the United States applies a preferential tax rate of 13.125 percent on foreign-derived intangible income (FDII), i.e., business income from exports related to intellectual property. This rate is set to increase to 16.4 percent in 2025.
Interestingly, several European countries have recently repealed their patent boxes. Andorra phased out its patent box from 2018 to 2020, and Italy repealed its patent box in 2021, introducing a deduction for 230 percent of costs related to research and development instead. This represents a shift from a benefit based on income (the patent box) to a benefit focused on investment or expenditure (the super-deduction). San Marino is the most recent country in Europe to repeal both of its IP regimes in 2022.
In contrast, Portugal increased its corporate income tax exemption for patent income from 50 to 85 percent in 2022. This move highlights the varying approaches to tax incentives for innovation across Europe.
It’s important to note that in 2015, OECD countries agreed on a Modified Nexus Approach for IP regimes as part of Action 5 of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. This approach requires a geographic link among R&D expenditures, IP assets, and IP income, limiting the scope of qualifying IP assets. To align with this approach, previously noncompliant countries have either abolished or amended their patent box regimes within the last few years.
While patent box regimes can incentivize innovation, they also present potential avenues for tax evasion. As such, they require careful scrutiny and regulation to ensure they serve their intended purpose without undermining tax compliance.
For more detailed information on patent box regimes in Europe, visit here.