IRD’s illustrative examples indicate to benefit from the patent box regime eligible R&D expenditures need to be incurred for creating an eligible intellectual property

The 5% concessionary tax rate under the regime only applies to the concessionary portion of the relevant assessable profits derived by an eligible person from an eligible intellectual property (IP). The concessionary portion of the relevant assessable profits for an eligible IP is to be ascertained based on the research and development fraction (R&D fraction) for creating the eligible IP. The R&D fraction is the ratio of the eligible R&D expenditures (EE), subject to an uplift of up to 30%, to the total of the EE and non-eligible R&D expenditure (NE). Taxpayers outsourcing their R&D activities can benefit from the regime where certain conditions are met.

Where different combinations of eligible IPs are embedded in different products sold or services provided, the concessionary portion of the relevant assessable profits in respect of each of the eligible IPs needs to be ascertained on an IP-by-IP rather than on product or service basis.

Where an existing eligible IP is enhanced through further R&D activities, it seems that the enhancements need to be in the form of another new eligible IP before taxpayers can benefit from the regime in respect of income derived from the enhancements.

This alert discusses the updated illustrative examples recently posted by the Inland Revenue Department on its website for the interpretation of various terms employed under the regime, including a key term of what constitutes an “R&D activity” for EE and NE.

Clients who have any questions on whether or how they can benefit from the regime should contact their executives.