Black box or IP-Box

In our recent interviews, devoted to the issues of managing intangible assets, we have frequently used the term “IP BOX”, which seems something like a mysterious black box to an average businessman, and it is not quite clear how and where to use it.

I agree. The terminology is not quite clear, though people who know English might quite logically conclude that IP-Box is literally an Intellectual Property Box.

And the question of what happens in this box is fundamental here.

IP-Box is a tool for tax planning that involves the use of a legal person, the balance of which has intangibles and the income of which is formed mainly through the use of such intangibles.

Another specificity of IP-Box is that determining the market price of intellectual property for the purposes of tax control (transfer pricing) is much more complicated than that of commodities. This creates additional opportunities for tax planning by transferring some part of profits into a preferential IP-Box.

In other words, if I own a patent or, for example, bought the Gucci brand from some other company, then I can set up a company in the country I like and transfer the assets to this company? And pay minimal taxes on maximal income?

That was a nice summary of the situation. Exactly this thing has been happening in recent years. Thus, for example, Cyprus was extremely popular among business people, since IP-Box regime in Cyprus with the rate of 2.5% included the income from patents and supplementary protection certificates, did not set the upper limits for income, did not require independent development of intellectual property, did not have limitations with regard to the place of origin of costs for the purchase and development of intangible assets. It was this state of affairs that led to tax scandals with Apple, Amazon etc and triggered multibillion fines from states and the EU in particular.

The fact that you use the past tense makes me conclude that the situation has changed?

Preparing for our meeting, I came across a series of publications in Russian that almost univocally were describing the changes in European IP Box regimes as follows:

“Tax abuse has led to developing a new policy and adopting a compromise agreement, the meaning of which is to stop access to European schemes of IP Box regimes for new participants starting as of July 2016. When using Cyprus schemes before the mentioned date, their use will be made possible till the middle of 2021, when the operation of all existing European preferential regimes regarding Intellectual Property is perhaps stopped altogether”.

Such claims made me perplexed. Since none of the countries has cancelled IP Box regime, though they have made significant changes according to the BEPS recommendations.

So what are these changes about?

Up to 2016 we often saw situations when intangibles had been created and used in some jurisdictions (quite often with high level of taxation), but they had been owned through structures located in other jurisdictions that had a preferential regime of taxation for this type of income.

The OECD proposed to modify such tax regimes by limiting their use to only such intangibles that were created by the company that claimed the use of a special tax regime (the so-called Modified Nexus Approach).

At the basis of this approach there is a special formula, which presupposes that costs, directly aimed at the creation of an intangible asset still in use, would include costs that will be qualified as expenditure on R&D. All other costs (for example, interest rate, construction costs and costs of purchasing rights for intangible assets from third parties as well as costs directly not related to a certain Intellectual Property, should not be included in the qualified costs, and in that part the income, obtained from the use or selling this intangible asset, will not be considered preferential.

As to the timeline for the use of this new regime, it is a fact that all, who have been using the old preferential IP Box regimes, will be able to use them till the middle of 2021 at the latest, the moment of a complete shift of all jurisdictions to the new rules of the game. This time is given to the states to introduce the OECD recommendations into their national legislation.

To sum it all up, nowadays it is still possible to use IP Box in any country with the only difference that the company will have to develop its Intellectual Property in it. Is that so?

Absolutely. I will only add that from now on it is impossible to buy somebody else’s intangibles and include them into a preferential regime. As for the assets that get into IP Boх, then here we talk about patents and comparable rights. Defining other acceptable assets is a prerogative of individual states, and can include brands, software etc. Today, the OECD recommends to include only patents and comparable assets, but Italy, an OECD member state, which has already introduced Patent Box regime, adopted by the OECD, has included software and brands, which leaves hope for inclusion of these categories of assets by other countries including Switzerland.