ZEW Study on Corporate Taxation in Europe - IP Box Regimes – A Double-Edged Sword for the Treasury

In several European countries, income from patents, trademarks or copyrights is taxed at a considerably lower rate than other income. Waiving taxes on intangible assets, governments aim to create incentives for companies to invest in research and development (R&D), and to pay taxes on the resulting profits in their countries. This concept is known as Intellectual Property (IP) Box regimes. This special tax treatment, however, has turned out to be a double-edged sword. A recent study conducted by the Centre for European Economic Research (ZEW) in cooperation with the University of Mannheim found that most European IP Box regimes enable multinationals to save taxes on income from intangible assets (IP income) without actually investing in R&D.

Intangible assets such as patents, trademarks or copyrights are of great importance for companies' competitiveness and thus impact the economic performance of nations. However, companies can easily reduce their effective tax burden by shifting IP income, i.e., R&D results, to low-tax countries. Against this backdrop, tax legislators in the EU are struggling with the question of how to best tax income from intellectual property so as to curtail the shift of IP income to low-tax countries, and, at the same time, to create incentives for firms to make domestic R&D investments.

The most important policy innovation in recent years when it comes to taxation of IP income is IP Box regimes, which provide for a reduced tax rate on IP revenues. Since 2000, twelve European countries have introduced IP Box regimes: Belgium, Cyprus, France, Great Britain, Hungary, Liechtenstein, Luxembourg, Malta, the Netherlands, Portugal, Spain, and, as of early-2015, Italy.  The Swiss Canton of Nidwalden has implemented an IP Box, and the legislative process to introduce a national IP Box regime at the cantonal level in Switzerland has recently been initiated. The tax rates of the thirteen regimes vary significantly. They range from zero per cent in Malta to 16.76 per cent in France.

The ZEW study focuses on the effective tax burden associated with the use of IP Box regimes. The findings indicate that all European IP Box regimes have notably reduced the effective tax burden of investments in self-developed patents. IP Box regimes thus do create investment incentives in the countries that offer them, but they also entail the risk of harmful tax practices.

The problem with most IP Box regimes is due to the fact that, according to the ZEW study, tax concessions are not limited to self-developed intangible assets. With the exception of Belgium, the Netherlands, and Portugal, IP Box regimes also provide for reduced tax burdens on acquired intangible assets. Moreover, companies are not always required to invest in R&D in the country that offers the IP Box regime to benefit from the associated tax concession. Consequently, IP Box regimes might lead to an increase in domestic R&D investment, as intended by policy-makers. But that is in no way necessarily the case. The ZEW study concludes that many IP Boxes have loopholes that allow multinationals to utilise the regimes primarily as strategic tax planning instruments. According to the researchers who conducted the study, IP Box regimes are not an efficient instrument to create tax incentives for R&D investments.

The complete publication can be found at

http://link.springer.com/article/10.1007/s10797-014-9328-x

For more information please contact

Prof. Christoph Spengel, Phone +49(0)621/1235-142, E-mail spengel@zew.de