Antonio Matute

The Basque country (or more precisely, the Basque territories of Biscay, Alava and Guipuzcoa) and Navarra are the only Spanish regions which have powers to enact their own particular corporate income tax (CIT) regulations. Basque CIT regulations have many similarities with the CIT regulations applicable in the rest of Spain but also have some differences.

Among those differences include the introduction into the Basque CIT law of a patent box type of incentive that, in certain respects, outmatches the patent box regime in force for the rest of Spain since 2008, as well other patent box schemes applicable in other European countries.

The new incentive is aimed at encouraging the licensing of intellectual property (IP) rights, investment in R&D activities and the internationalisation of innovative companies.

The patent box regime

Under the new regime 60% of revenues arising from the licensing of the right to use self-developed IP rights are tax exempt.

If the IP rights are not self-developed but acquired from a third party (whether related or unrelated), then 30% of revenues from the licensing of the right to use such IP rights are tax exempt.

These IP rights are excluded from the scope of the incentive: copyright of literary, artistic or scientific work including cinematograph films, image rights and software for exclusively commercial use.

Consequently, royalties from other IP sources qualify for the patent box regime, including patents, designs or models, secret formulae or processes, plans, or information concerning industrial, commercial or scientific experience (that is, know-how), and also trade marks and software which is not for exclusive commercial use.

It must be noted that the 60%/30% exemption applies to gross income, so costs incurred in the development or acquisition of the qualifying IP rights are fully deductible, under the general rules, from the general taxable income at the regular rate (28% for 2009).

So, although this update is not the right place for a fully detailed comparison with other similar patent box schemes in other jurisdictions, it must be borne in mind that most of those other incentives are applied to net qualifying IP income. For example, the Dutch and Luxembourg systems may result in an effective tax rate of 10% and 5.7%, respectively, of the net IP income. However, under the Basque scheme the effective tax will depend on the margin of the IP activities. Thus, for instance, if the IP costs are 100 and the IP income is 250, the tax would be (((250 × (1 - 60%) – 100) @ 28%=) 0, so the effective tax rate would be (0/150=) 0% for self-developed IP; or, in the case of acquired IP (((250 × (1 - 30%) – 100) @ 28%=) 21; an effective tax rate of (21/150=) 14%.

Also, other patent box schemes are much narrower than the Basque one with regard to the qualifying IP income (for example, the Belgian regime only applies to income from self-developed or self-improved patents, and the Dutch incentive is limited to self-developed patents and certified R&D).

Requirements and limits of the patent box

For a taxpayer to apply the patent box regime, these anti-abuse requirements must be met:

• The licensee company cannot be a resident of a listed tax haven,
• The licensee company must effectively use the IP for business activities, but with one limit: if the licensee is a related company, the IP cannot be used to create deductible expenses for the licensor.

The incentive is not subject to time or amount constraints.

Available for groups

It is important to note that the incentive is designed to be available not only for licensing IP to third parties, but also for groups of companies, even if they have elected group taxation. This means that the licensing income earned by the licensor will benefit from the tax exemption whereas the expense incurred by the licensee will not be eliminated from the group taxable income. For example, if the IP group company has IP expenses of 40 and invoices the licensing of self-developed IP rights for 120 to another group company, the group taxable income will be:

• Taxable revenues: 120 earned by licensor, minus 60% tax exemption = 48
• Taxable expenses: 40 incurred by licensor, plus 120 by licensee= 160
• Group taxable income: (48-160=) -112, which is taxed with (in this case, is deductible from) the rest of the group taxable income.

More good news is that the incentive is compatible with the R&D tax credit, so in many situations both incentives will apply at the same time. The R&D tax credit consists of a tax credit of between 30% and 50% of the R&D expenditure of the tax year.

To promote IP

This incentive has been designed as a measure to promote IP activities in the Basque country. With adequate tax planning the patent box scheme, together with the R&D tax credits, make the Basque country a highly attractive location for R&D headquarters of multinational groups, as well as for franchisor companies and other trade mark, patent, or other IP licensing companies.

Antonio Matute Nárdiz (antonio.matute@garrigues.com)