Patent Box and Optimization for Technology Companies

What is a Patent Box

Thanks to the Patent Box, IT companies that develop software and other R&D companies that develop various inventions and technical solutions can pay income taxes in Slovakia even at a rate of 10.5%. For example, if Slovak IT companies want to pay lower taxes, they do not have to come up with complex and administratively demanding cross-border solutions.
Peter Varga in his article “Slovakia can be a tax haven too!” commented positively on Slovakia’s efforts to compete with other favourable tax regimes in Europe thanks to the Patent Box. But it is the Patent Box that has brought an important tool for legal and legitimate tax optimization, especially for Slovak IT companies. Although relatively late, Slovakia has been inspired by other IP Box regimes with which other countries in Europe have been attracting added value to their territory for a relatively long time.

The Patent Box exempts from income tax up to 50% of the profits that the taxpayer makes from royalties for the grant of a right to use or for use:

• an invention protected by a patent or a technical solution protected by a utility model which results from research and development carried out by the taxpayer;
• a computer program that is the result of development by the taxpayer;

The Patent Box also allows taxpayers to benefit from this exemption from income tax if they derive income from the sale of products which are the result of research and development carried out by the taxpayer and which are wholly or partly based on an invention protected by a patent or a technical solution protected by a utility model.

Patent Box at a glance

The patent box is a new instrument to support research and development in Slovakia, which makes it possible to exempt revenues from the provision of intangible assets (the so-called licensing revenues) and revenues from the sale of products for the production of which a patent or utility model is used from corporate income tax, up to 50% of these revenues. In other words, if a Slovak company accounts correctly and meets other conditions, it can qualify for the benefit of taxing profits at 10.5% instead of the standard 21%.

The Patent Box thus exempts from income tax up to 50% of the profits that the taxpayer earns from royalties for the grant of a right to use or for use:

• an invention protected by a patent or a technical solution protected by a utility model which results from research and development carried out by the taxpayer;
• a computer program which is the result of development by the taxpayer;

The Patent Box also allows taxpayers to benefit from this exemption from income tax if they derive income from the sale of products which are the result of research and development carried out by the taxpayer and which are wholly or partly based on an invention protected by a patent or a technical solution protected by a utility model.

How much will the Patent Box save

The taxpayer can achieve an effective tax rate of 10.5% through the Patent Box. As we often combine the Patent Box with theR&D Super Deduction for our clients, the effective tax rate can be 0% for several years.

Let us imagine a situation where an IT firm carries out an experimental development after completion of which it has licensing revenue. Assume that the company will record revenues and expenses as shown in the table below (amounts are in EUR):

Basic Conditions for Patent Box Application

The basic prerequisite is to carry out R&D activities and to account for them correctly. Based on our experience, mainly from audits of the accounts of young IT companies, we have observed a number of cases where such companies have incorrectly accounted for software development. Not only does this commit an offence under the Accountancy Act for which they are liable to a fine of up to 2% of the value of their assets, incorrect accounting can also unjustifiably reduce a business’s tax liability and disqualify them from using the Patent Box.
It is therefore essential to account for the Patent Box correctly and to anticipate its use in advance. Moreover, the relevant Patent Box provisions indicate in several places a requirement for the taxpayer to use its own research and/or development result. In other words, the Patent Box requires that only employees of the taxpayer be part of the personnel apparatus that produces the relevant intangible R&D results.
Given the high tax-tax burden on labor, it is naturally more economically advantageous for taxpayers to reach for so called. contractors (i.e. self-employed, sole proprietorships)where the tax and levy burden is significantly lower. In certain circumstances and with well-drafted contracts covering the creation of works and other intangible results, the requirement for employees may be waived. Therefore, if a taxpayer does not work with an attorney who is knowledgeable about Patent Box issues, it may have a negative impact on the use of Patent Box.
The Patent Box should therefore be seen as an instrument whose statutory application affects not only tax law but also accounting and intellectual property law.

Does a company only need to have employees when applying Patent Box?

This is a very complex topic from both a legal and tax and accounting point of view. It was discussed in detail by Peter Varga at the recent methodological days of the Slovak Chamber of Tax Advisors, where he also lectured on the topic of the Patent Box together with a representative from the Ministry of Finance of the Slovak Republic and where the topic of the use of the so-called “patent box” was also outlined. freelancers(sole traders or trading companies). In certain circumstances, a company may use such outsourcers without reducing its Patent Box tax benefit. However, it needs to adjust its factual and legal position accordingly.

More about Patent Box

We deal with the topic of Patent Box relatively frequently. We write articles on the subject and give commercial or methodological lectures. You can find more information in our articles and media releases or videos and conferences.

Our services for patent box application

Working with our lawyers, we provide the following Patent Box services to our clients:

• bookkeeping and accounting consultancy;
• analysis of the tax calculation and preparation of the relevant accounting documentation for the Patent Box;
• drafting contracts/implementing elements into existing contracts to take advantage of Patent Box and IP protection;
• transactional advice related to Patent Box;
• representation of the client before the tax authorities and courts;
• in cooperation with the Czech technical company RESEA, we also provide a technical audit of the taxpayer’s research and development activities in order to identify whether these activities can be considered research and development activities.

History of the Patent Box and Patent Boxes in Europe

The origins of the Patent Box can be traced back to the 1970s in Ireland. years of the last century. Legislation at the time allowed companies licensing certain forms of intellectual property to reduce their income tax. The concept has been gradually applied by other countries, including France, Luxembourg, Cyprus and the UK. Recently, it was quite common to set up an offshore company in Cyprus, for example, and benefit from a reduced tax rate of 2.5% on income from the use of intellectual property when invoicing within the group.
The Patent Box concept is very popular today legislatively. Everywhere, however, the so-called. nexus principle, which prevents tax abusive practices. As can be seen from the figure below, Slovakia ranks among the progressive countries in this respect.

Blockchain and taxes

We have worked on a number of “blochchain based” projects. For example, the following projects:

• the creation of investment funds investing in cryptocurrencies;
• the creation of a decentralised stock exchange;
• regular savings through cryptocurrencies;
• preparation of documentation for the cryptocurrency management service;
• tax advice and tax optimization in the taxation of cryptocurrencies;
• security token offering;
• utility token offering;
• accounting

For more information about our cryptocurrency practice, please visit the Highgate Group website. Anyway, even R&D activities of programmers in the field of blochchain can qualify in principle for the Patent Box regime.
Indeed, the field of crypto cannot be viewed in isolation. Even though it is often outside the standard knowable world, the corresponding legal and tax frameworks have to be attributed to it.
One of these frameworks is the Patent Box or Supercomputation (R&D Super Deduction).