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Concept
Patent box
Summary
A patent box is a special very low corporate tax regime used by several countries to incentivise research and development by taxing patent revenues differently from other commercial revenues. It is also known as intellectual property box regime, innovation box or IP box. Patent boxes have also been used as base erosion and profit shifting (BEPS) tools, to avoid corporate taxes.
In the early 1970s Ireland introduced the first scheme in its Corporation Tax. Section 34 of the 1973 Finance Act allowed total tax relief in respect of royalties and other income from licenses patented in Ireland.
The concept was applied in 2001 by the French Tax Authorities as a reduced rate of tax on revenue from IP licensing or the transfer of qualified IP. Within Europe, Belgium, Hungary, Luxembourg, Netherlands, Spain and the United Kingdom have also introduced similar schemes.
The Irish Patent Box system is one of the key benefits for companies paying Irish corporation tax. The system was criticised by Lionel Jospin in the early 2000s and more recently by both the EU (Ecofin assessment 2014) and the OECD under its Base Erosion and Profit-Shifting (BEPS) project. The system has been key to attracting international IT companies to Ireland. The economic benefits of beneficial tax regimes for revenues from patents led to similar schemes being introduced in France in 2000 and amended there in 2005 and 2010.
IP box rules were changed in October 2016, valid since July 2016 - reduced the list of the qualified IP incomes, no copyrights nor trademarks anymore. 80% of income is exempted after deducting the real expenses, giving an effective tax rate of 2.5% or less. On 17 July 2020, the Cypriot House of Representatives approved a bill amending Section 9(1)(l) of the Income Tax Law which introduced a number of changes with respect to the tax treatment of intangible assets. Specifically, if disposal of intangible assets is a capital nature transaction then the resulting capital gain should not be taxable.
Official source
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Related concepts (3)
Base erosion and profit shifting
Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations where there is little or no economic activity, thus "eroding" the "tax-base" of the higher-tax jurisdictions using deductible payments such as interest or royalties. For the government, the tax base is a company's income or profit. Tax is levied as a percentage on this income/profit.
Tax inversion
A tax inversion or corporate tax inversion is a form of tax avoidance where a corporation restructures so that the current parent is replaced by a foreign parent, and the original parent company becomes a subsidiary of the foreign parent, thus moving its tax residence to the foreign country. Executives and operational headquarters can stay in the original country. The US definition requires that the original shareholders remain a majority control of the post-inverted company.
Corporate haven
Corporate haven, corporate tax haven, or multinational tax haven is used to describe a jurisdiction that multinational corporations find attractive for establishing subsidiaries or incorporation of regional or main company headquarters, mostly due to favourable tax regimes (not just the headline tax rate), and/or favourable secrecy laws (such as the avoidance of regulations or disclosure of tax schemes), and/or favourable regulatory regimes (such as weak data-protection or employment laws).