Patent and intangible asset tax regime ("IP box")

The tax regime for patents and intangible assets, often referred to by the English term IP box, is the scheme under Article 238 of the French General Tax Code that applies a reduced rate of corporate income tax or personal income tax to the net income derived from the licensing, sub-licensing or assignment of certain industrial property assets. Introduced by the Finance Act for 2019, it replaced the former long-term capital gains regime in order to bring it into line with the approach known as the nexus approach, defined by the OECD.

Eligible assets

The regime applies to patents, utility certificates, supplementary protection certificates, plant variety certificates, industrial manufacturing processes that result from research and are an essential adjunct to a patent, and software protected by copyright. Small and medium-sized enterprises may also bring patentable but unpatented inventions within the regime, subject to certification of patentability. Trade marks, designs and know-how are excluded. The regime is optional and is elected asset by asset, or by product or product family where tracking by asset is impossible.

Calculating the income taxed at the reduced rate

Net income is the difference between the revenue derived from the asset, whether licence royalties or sale price, and the related research and development expenditure incurred during the financial year. That income is then multiplied by a ratio, known as the nexus ratio, equal to the research expenditure incurred by the company itself or subcontracted to unrelated third parties divided by total expenditure, including that outsourced to related companies and the costs of acquiring the asset. This ratio, capped at one, is designed to confine the benefit to income arising from research genuinely carried out by the taxpayer. The rate applicable to the income so determined is ten per cent. Transfers between related companies are excluded from the regime.

Obligations and points of attention

The company must keep documentation detailing how the net income and the ratio were determined for each asset, and produce it to the tax authorities on request, failing which a fine is incurred. Analytical tracking of research expenditure by asset, from the moment it is incurred, is therefore decisive. The regime may be combined with the research tax credit, but the two schemes have neither the same base nor the same conditions. The characterisation of the royalty, the allocation of the price in a global sale and the treatment of sub-licences are the usual sources of tax reassessment.

Key points

Article 238 of the General Tax Code taxes at ten per cent the net income from licences and assignments of patents, certificates, protected software and similar assets, after applying a ratio that measures the share of research carried out by the company. The regime is optional, excludes trade marks and requires documentation for each asset. Set up analytical tracking of research expenditure before the first income is received, and check each year for changes made by the Finance Act.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats litigates patent disputes before the Paris Judicial Court, the Paris Court of Appeal and the Unified Patent Court. When the question arises in a real case, the right moment is almost always before proceedings are issued.

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