Corporate Income tax amendments to the tax incentives on income from specific intangibles (Patent Box Regime)
Published on 20th Jul 2018
The Spanish 2018 Budget Law (Law 6/2018), published on 4 July, includes an amendment to article 23 of the Spanish Corporate Income Tax Act, relating to the tax reduction on income from certain intangible assets, also known as the Patent Box Regime. This amendment would take effect for tax periods beginning as from 1 January 2018.
This is now the fourth amendment to this regime, since its enactment in 2008. It is worth remembering that the most relevant amendment to the Patent Box Regime took place in 2013, when the rate of the incentive was increased (to 60% of the income deriving from the assignment of the intangibles) allowing moreover for the incentive to apply indefinitely during such assignment. Additionally, the 2013 amendment included a procedure for agreed prior assessments to promote legal certainty in the application of the regime.
According to the Preamble to the 2018 Budget Law, the present modification is needed in order for the Spanish Patent Box to adhere to the principles agreed to within the OECD and the EU. These principles are designed to prevent distortions which such preferential regimes may give rise to, absent the compliance with the OECD BEPS Action 5 standard (the BEPS plan having been developed by the OECD to counter base erosion).
In broad terms, the Patent Box Regime amendment in the 2018 Budget Law is three-fold. First and following BEPS Action 5 recommendations under which the intangible asset must be eligible for legal protection, the Spanish regime will now no longer include know-how and plans as qualifying assets. It will, however, extend to utility models, supplementary protection certificates relating to drugs or to plant-protection products, as well as advanced software, provided such software (i) is registered and (ii) derives from research and development activities.
As regards designs and models (which have been part of the regime since its enactment in Spain), it will now be necessary for such designs and models (i) to be legally protected and (ii) to derive from research and development or technological innovation activities.
Therefore, although the IP rights covered by the regime now encompass software, it could be said that the law is now more restrictive with regard to the type of IP rights eligible for the Patent Box. Attention should be paid to future rulings from Spanish Directorate of Taxes in this respect, especially as regards the definition of "advanced software".
Secondly, the amendment introduces some "technical editing" on the wording referring to the income to which the tax incentive would apply. Such wording now makes it clear that the reduction would only apply to "positive" income. Moreover, the amendment also addresses those cases where prior positive income has benefitted from the 60% reduction, but the taxpayer derives a loss in subsequent tax years. Under the new drafting, the reduction applied would be "reversed", up to the amount effectively exempted, to prevent an unwanted effect in the regime; i.e. to allow the reduction to apply over an amount greater than the overall income generated during the life of the contractual assignment of the intangible rights.
Thirdly and finally, the interim regime applicable to assignments and transfers of intangible assets carried out prior to 1 July 2016 has also been amended. In broad terms, the amendment (i) confirms the possibility of electing prior regimes until the expiry of the contracts and, in all case, until 30 June 2021; and (ii) puts an end to the application of the tax incentive to intangible assets acquired from related entities during the period from 1 January and 30 June 2016, provided the corresponding income had not already benefitted from the reduction. In this last case, the Patent Box Regime will now only apply until 31 December 2017.
It is important to point out that, in accordance with the interim provisions, the Patent Box incentive will no longer apply to those intangibles not included in the list of qualifying assets (namely know-how and plans), unless these assignments had already been carried out before 1 July 2016.
As a conclusion, the amendment to the patent box regime corrects some technical aspects and, more importantly, widens significantly the scope of companies to which the incentive may apply, It may therefore be convenient to review current business models to determine whether the Patent Box may apply.