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Patent Box - UK releases draft law

14th December, 2011 

Recently, the United Kingdom released the draft of the proposed legislation on ‘Patent box’ – a scheme of tax incentives to corporates to domicile in UK and exploit their patents in UK. The objective is to encourage setting up of manufacturing facilities in UK and creation of jobs.  Set to come into effect in 2013 on passage, the Bill provides for taxation of profits attributable to intellectual property at a rate of 10% which is nearly half of the applicable rate of tax on corporate income. Belgium, Netherlands, Luxemburg and Spain already have similar incentive systems in place.

The UK draft has tried to incorporate suggestions and comments from the industry and other stakeholders since the consultations began in 2010. The benefits proposed would extend to research and development activities as well as qualifying IP income. In keeping with the modest targets set out in the earlier consultation paper, the rate has been kept at 10% rather than trying to match Netherlands which has an effective tax rate of 5% or the overly generous Luxembourg exemption to 80% of patent income.
Even though the patent box regime has not been in force long enough to have unassailable proof of its effectiveness in augmenting revenue or incentivising commercialisation, its popularity is on the rise. A discussion paper released in October, 2011 by the Information Technology and Innovation Foundation stresses that America should too adopt similar measures to improve competitiveness of its tax regime at the global level.
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