The reduction of income from intangible assets.
The Patent Box is a tax incentive regulated by Article 23 of Law 27/2014, of November 27, on Corporate Income Tax, which aims to encourage companies to develop technological or R&D activities and promote the internationalization of innovative Spanish companies. The Patent Box allows these innovative companies to reduce the corporate income tax rate on income generated by certain intangible assets by up to 60%.
What types of intangible assets can be eligible for this reduction?
For the purposes of applying this tax regime, the income eligible for reduction is only that which comes from the transfer of the right of use or exploitation, as well as from the transfer, of the following intangible assets: patents, utility models, supplementary certificates of protection of medicines and plant protection products, legally protected designs and models that derive from research and development and technological innovation activities, and registered advanced software that derives from research and development activities.
The regulations expressly exclude from the application of this tax incentive trademarks, literary, artistic or scientific works, including cinematographic films, personal rights that can be assigned, such as image rights, computer programs, industrial, commercial or scientific equipment (which are not intangible assets), income from technical assistance (which are considered services with a technological component and the use of any intangible asset is not assigned), and any other intangible asset other than those eligible for this tax incentive.
What is the amount of the reduction?
The amount of the reduction in the taxable income base derived from both the transfer of these intangibles and their transmission is the percentage resulting from multiplying by 60% by the result of the following quotient:
- 1. In the numerator, the expenses incurred by the transferor entity directly related to the creation of the intangible asset, including expenses arising from subcontracting with third parties not related to the transferor entity. These expenses are increased by 30%, without the numerator exceeding the amount of the denominator.
- 2nd In the denominator, the expenses incurred by the transferor entity directly related to the creation of the intangible asset, including expenses derived from subcontracting with third parties, whether or not linked to the transferor entity and, where applicable, those derived from the acquisition of the asset.
Financial expenses, amortization of real estate, or other expenses directly related to the creation of the asset will not be included under any circumstances.
To qualify for the reduction, the transferor entity must have created the transferred asset, either wholly or partially, and there is no minimum percentage of creation required. However, we note that the lower the entity's participation in the creation, the lower the percentage of income tax reduction.
What are the advantages of this tax incentive?
The main advantage is a reduction of up to 60% in income derived from the transfer of the right to use or exploit intangible assets eligible for this tax incentive. The reduction also applies to income generated from the transfer of intangible assets when the acquiring entity is not related to the transferor.
This reduction of up to 60% can considerably reduce the average corporate tax rate on income from these intangible assets to as low as 10% (currently the general average corporate tax rate is 25%)
The application period for this reduction is indefinite, and it is compatible with other tax deductions for Research and Development (R&D)
Requirements for applying for the Patent Box
It is essential that the assignee uses the rights of use or exploitation in the development of an economic activity, and in the case that the assignor and the assignee are related, the results of the use of these rights of use or exploitation must not materialize in the delivery of goods or provision of services by the assignee that generate tax-deductible expenses in the assignor entity.
Furthermore, it is essential that the assignee does not reside in a country with zero taxation or a tax haven, unless it is located in a Member State of the European Union and the taxpayer proves that the operation responds to valid economic reasons and that it carries out economic activities.
Another equally important requirement is the obligation to expressly differentiate the ancillary services in the contracts for the transfer of the rights of use or exploitation.
Finally, the transferring entity must prepare accounting records that allow the determination of the corresponding income and expenses of these intangible assets subject to transfer or conveyance.
Recommendations
Taxpayers wishing to apply this reduction can request the Tax Agency to adopt a prior valuation agreement regarding the income from the transfer of the assets, the associated expenses, and the income generated from the transfer. They can also request a prior agreement classifying the assets as belonging to one of the categories of intangible assets eligible for the reduction.
In this way, taxpayers who wish to apply this tax incentive ensure that they have prior approval from the Tax Agency to apply the reduction in corporate tax, thus avoiding subsequent tax audits.
If you require further information or have any questions, please contact us via email at ambit@ambitassessor.com or at our offices.
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A graduate in Business Administration from the University of Barcelona, she continued her education with a Postgraduate Diploma in Accounting and Management Control from Pompeu Fabra University, and completed various courses in tax and fiscal matters offered by the Terrassa Chamber of Commerce, the Barcelona Bar Association, and the Center for Financial Studies. Before joining Àmbit Assessor in 2001 as a tax and accounting consultant, she worked as an administrative assistant at Caixa Manresa and Banc Sabadell and as a tax information call center operator at the Spanish Tax Agency. For three years, she served as treasurer of the L'Alzinar Recreational and Cultural Society, a position she held concurrently with her work at Àmbit Assessor.
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