“Thinking in the Box” — Shaping Corporate Strategies to Benefit From UK Patent Box or Dutch Innovation Box

World Intellectual Property Report™ provides comprehensive, reliable information and analysis on fast-changing global IP developments relating to patents, trademarks, copyrights, and other areas...

By Karen Hughes, Fiona Bantock (London), Anton Louwinger and Alexander Fortuin (Amsterdam), Hogan Lovells; e-mail: karen.hughes@hoganlovells.com ; fiona.bantock@hoganlovells.com ; anton.louwinger@hoganlovells.com ; alexander.fortuin@hoganlovells.com

The UK Patent Box, which came into effect on April 1, 2013, was introduced as part of the UK government's drive to make its corporate tax system more competitive and encourage innovative businesses to invest in the UK (see “The Patent Box: Full of Empty Promises?” [25 WIPR 40, 7/1/11]). In the following, we consider how this new regime measures up to the Netherlands' longstanding “IP box” regime, the Innovation Box, and how businesses should be shaping their strategies to take advantage of the incentives.

Although there are many similarities between the UK and Dutch regimes, there are also a number of key differences which may determine which regime would be most beneficial in any particular case. Therefore, we set out below the main elements of each regime, before going on to consider how businesses may seek to use such elements to greatest effect.

Summary Overview of UK and Dutch Regimes
Qualifying Companies

Both the UK and Dutch regimes are targeted solely at corporate investors.

The UK regime requires companies seeking to benefit from the Patent Box (broadly, UK resident companies or non-resident companies trading in the UK through a UK permanent establishment) to own or hold a licence granting countrywide exclusive rights in respect of certain qualifying IP rights. Where the owner or licensee is a member of a group, there is an additional requirement which will apply, namely that the company satisfies an “active ownership condition”. Companies will be active owners if they perform a significant amount of management activity in relation to the rights (e.g. formulating plans or making decisions in relation to development or exploitation) or have created or developed the patented invention (or a product or process incorporating the patented item). Although the active ownership condition does not require a company to have carried on research and development itself (as it would be enough for it to actively manage the rights), where it is placing reliance on the creation and development condition, it must carry on such activities itself and not outsource them to other group members or third parties.

In the Netherlands, companies will qualify where they own self-developed intangible assets:

• With respect to which a patent has been obtained; or

• Which originate from certain R&D activities (as to which, see below).


Development or further development of the intangible asset by the Dutch company is required, although some or all of these activities may be outsourced as long as these are supervised by, and performed for the risk and account of, the Dutch company.

Scope of Qualifying IP Rights

The Dutch Innovation Box has a wide scope, as it extends to profits derived from:

  (i) All foreign and domestic patented intangibles, regardless of their country of registration;

 (ii) Plant variety rights; and

(iii) Any non-patented intangibles resulting from R&D activities for which an R&D statement has been obtained from the Ministry of Economic Affairs (“R&D intangibles”).


Limb (iii) has the effect that the regime can also apply in circumstances where it is either not possible, as a matter of law, to apply for a patent (e.g. software) or is otherwise unattractive from a commercial perspective (e.g. trade secret).

The scope of the IP rights falling within the UK Patent Box is, in some respects, narrower than in the case of the Dutch Innovation Box, being limited to:

 (i) Patents granted by the UK Intellectual Property Office, the European Patent Office and certain specified EEA states which have similar examination and patentability criteria to the UK; and

(ii) Certain other medicinal or botanic innovation rights (namely supplementary protection certificates, plant breeders and plant variety rights, and plant protection products afforded a period of data protection).


There is also a requirement that the company holding the rights or a group member has created or developed the patented invention (or a product or process incorporating the patented item). Whilst under the UK rules, such development may be carried out by either the company holding the rights or a group member (compare with the self-development test in the Dutch Innovation Box which requires the IP owning company to develop or bear the risk of any outsourced development of the rights), there is no incentive for companies to outsource R&D activities to other group companies, as amounts that have already qualified for R&D tax relief are excluded from profits falling within the regime. That said, the UK test may, in this respect, offer greater flexibility within group structures (see below).

Opting Into the Regime

The Dutch Innovation Box is applied on a product-by-product basis. Companies are able to make the election to apply the Innovation Box to specific qualifying intangible assets in their Dutch corporate income tax return. For an intangible asset to qualify for these purposes, at least 30% of the income expected to be generated by that asset should be allocable to the patented IP right or R&D intangibles. Elections may apply retrospectively from the time the qualifying intangible asset starts to generate income. This means that there is some flexibility in applying the regime.

By contrast, the UK Patent Box applies to the company as a whole. Qualifying companies are able to make a one-off election, following which they will remain in the regime until such election is revoked. Where an election is revoked, the company will not be entitled to make a new election for the next 5 years. Whilst elections for the UK Patent Box are forward-looking, it is worth noting that where companies apply for patents that have not yet been granted at the time that they elect to apply the Patent Box, Patent Box benefits covering the application period may arise when the patent is granted. This is also true for the Dutch Innovation Box.

Rate of Tax for Qualifying IP Income

The standard rate of UK corporation tax is 23% (reducing to 20% by April 1, 2015). Income qualifying for the UK Patent Box will, however, be taxed at the reduced rate of 10% once the benefits of the regime have been fully phased in (i.e. from April 1, 2017).

Whilst the headline rate of Dutch corporate tax is higher (at 25%), income qualifying for the Dutch Innovation Box will be taxed at the significantly lower effective rate of tax of 5%. This effective tax rate of 5% is achieved by excluding 80% of the qualifying profits from the relevant tax base. This rate only applies once the qualifying profits exceed the “recapture amount” threshold (broadly, production expenses plus losses for the relevant intangible assets). This recapture only occurs if a tax deduction was obtained for such expenses and losses against the headline rate of tax and the taxpayer receives qualifying income in respect of the intangible asset. That is, there will be no recapture to the extent that the intangible asset is unsuccessful.

Qualifying IP Income

In the Netherlands, all income and gains arising in respect of the qualifying intangible assets will fall within the scope of the Innovation Box. The only limitation is that the income must indeed be attributable to the qualifying intangibles and not to other elements (e.g. marketing activities). In practice, methods have been developed to make this allocation efficiently based on the nature of the taxpayer owning the intangible asset.

In the UK, there are four types of “relevant IP income” which will qualify for the UK Patent Box, namely:

(a) Income from the sale by the company of:

(i) any item in respect of which the company has been granted a qualifying IP right (a “qualifying item”);

 (ii) any item which incorporates a qualifying item; or

(iii) spare parts for any such items;

(b) Licence fees or royalties from any agreement granting rights in respect of qualifying IP rights;

(c) Income from the sale or other disposal of a qualifying IP right or any exclusive licence in respect of such a right; and

(d) Infringement income, damages, insurance proceeds and other compensation.


“Notional royalties” calculated on an arm's length basis may also arise in circumstances where patents are used in processes that create non-patented products or in tools used to provide services.

Calculation of IP Profits and Losses

As indicated above, the Dutch Innovation Box requires profits and gains to be allocated to the patented IP rights or the R&D intangibles. It is possible to agree this allocation in advance with the Dutch tax authorities, which in practice is encouraged and done frequently. If, for example, part of the income is allocable to marketing activities, such part will not benefit from the reduced effective rate. IP losses are fully deductible against the headline tax rates (subject to the possible recapture referred to above).

By contrast, the UK Patent Box provides for two separate methods for calculating profits. The standard calculation broadly requires the relevant IP income to be expressed as a percentage (X%) of gross income (excluding finance income), following which the profits will be ascertained by calculating X% of the profits of the trade, less a 10% routine return and actual profits relating to marketing assets (or, if higher, a notional arm's length marketing royalty). The streaming method (which is usually elective but can be mandatory) requires expenses and profits to be allocated on a just and reasonable basis, followed by deduction of routine and marketing returns as before. IP losses can be generated within the Patent Box and companies are required to set such losses off against IP profits.

Structuring Opportunities Within UK and Dutch Regimes

It can be seen from the overview above that “the devil is in the detail” when it comes to ascertaining which regime would be most beneficial in any given case. Whilst a case-by-case review will always be required, highlighted below are a several key benefits of each regime which may have a bearing on how a business decides to structure its IP holdings.

Structuring Within Dutch Innovation Box

A benefit of the Dutch Innovation Box is its wide scope. The fact that it may also extend to non-patented intangible assets resulting from “certified” R&D activities makes the Dutch Innovation Box a regime of choice for situations where obtaining a patent is either not possible or not feasible. This makes the Innovation Box a possible candidate when software and trade secrets are involved.

The Netherlands allow for losses in respect of qualifying intangibles to be deducted against the headline tax rate. This may be attractive if there is, upfront, a substantial risk that an intangible asset will not be successful.

In addition to the Innovation Box, there are further tax benefits that can be obtained in respect of R&D activities. These benefits can be obtained in addition to the Innovation Box. Subject to certain statements being obtained from the Ministry of Economic Affairs, the taxpayer can qualify for a reduction of wage taxes (equal to 14% of the qualifying R&D hours times the average hourly salary) as well as an additional notional deduction in respect of R&D expenses (154% in 2013). These benefits are capped.

Structuring Within UK Patent Box

One of the key differences between the UK Patent Box and the Dutch Innovation Box arises in respect of the treatment of income arising from the sale of items incorporating qualifying items. This is because, under the Dutch regime, only the income attributable to the intangible stemming from the patented IP right or R&D activities would qualify for the 5% effective rate. By contrast, under the UK regime, the relative value of any qualifying item incorporated is irrelevant, which means that a substantial amount of income which is not attributable to the qualifying IP right may fall within scope (the “golden screw” principle).

For example, in the UK, if a patented printer cartridge, designed to be installed in a printer and not removed until empty, were to be sold with the printer, the whole income from sale of the printer and cartridge could qualify as relevant IP income, even if there were no patent over the printer. Anti-avoidance rules apply where a choice to incorporate a patented item is made for tax purposes, but only to the extent that there is no, or insignificant, commercial rationale for including the patented item. The golden screw principle may, therefore, make the UK Patent Box regime particularly attractive for corporations whose patents (or patentable technology) are of a relatively low value compared with the item into which the patented technology is incorporated.

Another key difference between the two regimes arises out of the requirement for qualifying development of the patented invention, where the rules, whilst similar, are not congruent. This is on the basis that, under the UK rules, such development may be carried out by either the company holding the rights or a group member, whereas under the Dutch regime, the company holding the rights must either have carried out the development or, if outsourced, have borne the risk and cost of development. As such, the UK regime enables a company to benefit where R&D has been carried out by and at the risk and expense of another group member, including, in certain circumstances, where the patent has been developed prior to the group member joining the group. This may result in greater flexibility where patents are moved around the group.

As is the case in the Netherlands, the UK also offers additional incentives for companies to locate high value jobs associated with R&D in the UK (e.g. R&D tax credits).

Questions Businesses Should Consider

Both the UK Patent Box and Dutch Innovation Box regimes are of potentially wide application, having relevance not only for companies which may historically have considered IP to be a central part of their business, but also to any company which:

• Provides a service or carries out a process using a patentable invention (or any R&D intangible); or

• Produces a product which is patentable or incorporates a patentable invention (or any R&D intangible).


Companies should, therefore, consider whether there is a business case to revisit their existing IP strategies to optimise their tax position. To begin, a business may wish to examine the following questions:

(a) What patents or patentable technologies does the business currently hold (including any technologies which up to now have not been patented for good commercial reasons)? What patents or R&D intangibles does it anticipate developing in the future?

(b) What countrywide exclusive licences in respect of qualifying IP rights does it currently hold?

(c) Which entity currently holds such patents/licences and where? Are there any tax ramifications for transferring ownership of the patents?

(d) Are there any (or expected to be any) identifiable profitable revenue streams linked to the qualifying IP rights? If so, where is the bulk of the profits linked with the qualifying IP likely to arise and to what extent do such revenue streams relate to the qualifying IP right or to items incorporating a qualifying item?

(e) From where are the qualifying IP rights managed?

(f) By whom were the qualifying IP rights developed?

(g) Are any non-patentable intangible assets being developed?

(h) Based on a risk assessment, what are the chances of the future intangible assets being a success?


Both the UK Patent Box and the Dutch Innovation Box regimes may offer significant tax savings, with the UK regime being particularly beneficial where companies are able to benefit from the “golden screw” principle and the Dutch regime offering a wider scope and a significantly lower effective tax rate, combined with loss deduction at the headline tax rate. A case-by-case review would, however, be required to determine which regime would be most beneficial in any particular circumstance.