As Parker Alex from Bloomberg BNA states,

“First there were patent trolls and now there are patent boxes.”

One of the major highlights of the Financial Budget of 2016 has undoubtedly been patent boxes. Ideally called the IP box or The Intellectually Property box, the term “patent box” is kind of a misnomer, simply because the concept includes other types of intellectual property- trademarks, copyrighted material and other intangible assets a company can own, and is not limited to just patents.

Now, what is meant by the term “Patent box”?

Simply put, the “Patent box” is a special tax regime for patents, rather for any intangible asset. It is meant to incentivize the research and development by providing them with a different, albeit more favourable tax regime. It is arguably synonymous with the idea of tax holidays.

A patent box is more of a tax break — usually a deduction — for a slice of income. In some cases, the slice of income is relatively easy to identify, like, when there is a sale of a patent or some broader class of intellectual property, or a royalty is paid by a third party for use of qualified IP.

Where did it originate?

The UK. It is a comparatively older concept in the UK but even though it has just been adopted in India, it is gaining acceptance for the sheer benefits it’s bestowing upon R&D.

Where else does this regime exist?

Ireland first began thinking about this, probably in the 1970s, as part of its extremely successful strategy to use a business-friendly tax environment to invite high profile businesses to the Emerald Isle. Now, quite many European countries have adopted some form of the policy, with tax rates ranging from 5 percent to 15 percent.

Why did they come into existence?

The regime was allegedly created in response to high-tech company departures from the United Kingdom and  Government announced an initiative in 2009 called the ‘Patent Box’ which is necessarily an effective reduction of corporation tax to 10% for income from patents.

On being tagged a harmful tax practice:

It was argued that this regime challenges tax justice and OECD tagged patent boxes as a harmful tax practice. Needless to add, it had quite a bumpy ride in India.

How can this regime help?

However, it is hoped that this regime, despite its limited scope and its nascent stage, will hopefully address the multiple issues on market failures, inclusive of spillovers of the benefits to firms not making the investments in innovation. The tax incentive will help correct these errors.


It has also been questioned if the regime was necessary at all. True, this will promote research and Development activities like never before, but don’t most countries already offer relaxations to research activities, activities which are inherently R&D?

Controversial or not, patent boxes remain of the most widely spoken about regimes of this decade and a more independent approach towards intellectual property taxes, which might just prove to be an feasible idea.


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