Portuguese Patent Box Regime Extended to Include Registered Software Copyrights

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Tax systems are often oriented to promote investment in a particular area. Patent box regimes are one of the most notable examples of this as they seek to foster a knowledge-based economy by providing reduced tax rates on income from R&D activities that produce patents , designs, models or software rights.

In 2020, 14 of the 27 EU Member States offered a patentability incentive, certainly with the aim of encouraging and attracting investment in innovation and value-added activities.

Portugal introduced this regime in 2014, with the reform of the Corporate Tax Code, which added Article 50-A to this legal instrument. Initially, the favorable tax treatment applied only to income generated by a narrow range of intangible assets, namely industrial property rights (patents and industrial designs) and consisted of deducting 50% of the gross income arising therefrom taxable profits (the regime was subsequently modified to apply to the net income produced by covered intangible assets).

With the 2020 state budget, the scope of the scheme was expanded to include copyrights in registered software, making it much more inclusive and in line with a current trend of software creation. value in the Portuguese economy.

To benefit from the regime, companies must meet certain cumulative requirements which may not be very simple, such as (i) using the covered intangible assets in a commercial, industrial or agricultural activity; (ii) have separate accounting records for the activities performed in relation to the Covered Intangibles; and (ii) the purchaser or user of the rights covered not being domiciled in a tax haven.

In a clear demonstration that it wants to change the paradigm of Portugal as a country of sun and sea, the Portuguese government has introduced in the budget proposal for 2022 a very important boost to the regime by increasing the tax deduction by 50 % to 85% of income from covered intangibles, which means that with corporation tax (and surtaxes) at normal effective rates between 21% and 29%, this type of income can benefit from effective rates between 3.15% and 4.35%.

It should also be noted that Article 50-A of the Corporation Tax Code, the income to which the incentive is applicable is assessed by applying the ratio between (i) the total R&D expenses incurred by the business itself, excluding expenditures with acquisitions to related entities; (ii) and the total R&D expenditure incurred by the firm (i.e. the modified nexus approach), but the value of (i) is increased by 30% to the point where the ratio is 1.

It may be helpful to illustrate how the scheme works with an example (given the change proposed in the above-mentioned proposal):

Suppose a company has total revenue of $10 million, including $5 million from patent box-eligible activities, and has total expenses of $4 million, of which $1 million euros are linked to activities eligible for the patent box. The results of applying the Portuguese patent box regime for this company would be:

Determination of the amount of corporation tax

Patent box scheme

General scheme

Gross revenue

Expenses related to an ineligible activity

5 million euros

5 million euros

– 3 million euros

Expenses related to an eligible activity

– 1 million euro

Net revenue

Taxable income

4 million euros

€600,000

2 million euro

2 million euro

Total taxable income

2.6 million euros

CIT rate – 21%

€546,000

Municipal surcharge – 1.5%

€39,000

State surcharge

€33,000

Assessed tax

€618,000

Effective tax rates

10.3%

If we consider the effective corporate tax rate proposed by the new patent box and the rates provided by other European countries with similar regimes, Portugal will be among those with the best effective rate (given the rates in force in 2020):

Effective tax rates

Portugal, Andorra, Belgium, Cyprus, Hungary, Luxembourg, Malta

≥5% and

Netherlands, Ireland, Lithuania, Poland

≥10%

France, Italy, Turkey, Spain, Slovakia, United Kingdom

Variable

San Marino, Switzerland

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