- Intellectual property (IP) can be a great source of passive income, i.e., income that does not require daily effort to maintain.
However, such income attracts not only entrepreneurs but also tax authorities. Most countries impose high taxes on revenues generated from IP assets, thus de incentivizing their citizens to develop such assets. To illustrate, the United States levies a withholding tax of 30% on certain US-source IP royalties paid to foreign persons.
In the field of tax law, the term “patent boxes” refers to special tax regimes that provide lower effective tax rates on income derived from intellectual property. The aim of the patent boxes is to encourage research and development activities that lead to the creation of new IP assets. Patent boxes usually apply to specific types of intellectual property only. Furthermore, not all countries have such boxes. For example, Germany, Norway, Greece, and Sweden lack patent boxes.
From the countries having patent boxes, it is sufficient to note Cyprus (the effective tax rate on qualifying IP assets is 2,5%), Luxembourg (5,2%), Hungary (4,5%), Poland (5,0%), Ireland (6,25%), and the United Kingdom (10%).
It should be noted that patent boxes are heavily criticized by the European Union and the Organisation for Economic Co-operation and Development (OECD). Also, some EU countries consider those boxes to be a “form of harmful tax competition”. Wolfgang Schäuble, a former finance minister and currently the president of the Bundestag, said that the patent boxes are contrary to the European spirit. Therefore, some or all patent boxes in the EU may disappear soon as a result of the pressure by the EU, individual EU countries, the OECD, and other international organizations.
Relocation to low-tax jurisdictions
Entrepreneurs who, for one or another reason, are not interested in using patent boxes can benefit from relocating to low-tax countries. By relocating to such a country, one can substantially reduce or completely avoid all taxes on his or her intellectual property assets. For example Bulgaria, Malaysia, Romania, Hungary….