The Portuguese Patent Box regime
The Portuguese patent box regime (“PPBR”) was introduced in 2014 and was amended in 2016 to incorporate the “Modified Nexus Approach” [1] in the context of intangible property regimes in line with BEPS Action 5.
The PPBR grants a deduction corresponding to 85% [2] of the income derived from the disposal or temporary use of patents, industrial designs and models, and copyright on computer programs and software (“qualifying income”) [3]. Qualifying income also includes compensation for breach and violation of those rights. [4]
Considering that the normal effective corporate income tax (“CIT”) rates in Portugal range between 21% and 29% (including municipal and state surcharges), the 85% deduction on qualifying income under the PPBR corresponds to effective tax rates in 2022 (on such qualifying income) between 3.15% and 4.35%.
The requirements to benefit from the 85% deduction under the PPBR are as follows:
A. General requirements
1) both parties (the transferor and the transferee) must enter into an agreement for the disposal or temporary use of qualifying copyright or industrial property right;
2) only copyright or industrial property rights subject to registration in Portugal are covered by the PPBR.[5] [6]
B. Requirements to be met by the transferor
1) the transferor must be a corporate entity, resident for tax purposes in Portugal and subject to Portuguese CIT[7];
2) the transferor’s accounting records must allow clear identification of the qualifying income, as well as clear identification of the R&D expenses and losses incurred in direct relation with the relevant copyright or industrial property right being transferred or disposed of.[8]
C. Requirements to be met by the transferee
1) the copyright or industrial property right being transferred or disposed of must then be used by the transferee to pursue activities of a commercial, industrial or agricultural nature; [9]
2) the copyright or industrial property right being transferred or disposed of cannot be used by the transferee to supply goods or provide services to the transferor, or to another company closely related to the transferor, that would represent a tax-deductible expense for the transferor or another company closely related to the transferor; [10]
3) the transferee cannot be based or tax resident in a jurisdiction blacklisted in Portugal. [11]
In determining the amount of qualifying income for the purposes of the PPBR, the following rules need to be considered:
qualifying income is deemed to be the positive balance between the income and gains earned in the relevant fiscal year and the expenses or losses incurred in the same fiscal year, by the taxpayer for the R&D activities that resulted in, or benefited from, the industrial property right to which the income is attributable; [12]
the 85% deduction only applies to the part of the qualifying income that exceeds the negative balance accumulated between the income and gains pertaining to each industrial property right and the expenses and losses incurred with the R&D activities for its development, registered in the previous fiscal years; [13]
qualifying income does not include consideration for services considered to be ancillary to a disposal or temporary use of qualifying copyright or industrial property right. [14] Income derived from ancillary services must be segregated from the income derived from the provision of the main service for the purposes of calculating the allowed deduction under the PPBR. [15]
As for the amount to be deducted from the qualifying income (and that corresponds to the 85% deduction), its calculation considers the ratio between qualifying R&D expenses to develop the relevant copyright or industrial property right [16] and total R&D expenses incurred to develop and/or acquire such copyright or industrial property right, as well as all qualifying income derived from said copyright or industrial property right. [17]
[1] https://www.oecd.org/ctp/explanatory-paper-beps-action-5-agreement-on-modified-nexus-approach-for-ip-regimes.pdf
[2] As amended by the 2022 State Budget.
[3] Registered on or after 1 July 2016.
[4] Article 50-A para. 2 of the Portuguese CIT Code.
[5] For software and computer programs: Decree-Law 252/94, of 20 October, as amended.
[6] Software and computer programs of a creative nature may be registered in Portugal with the Portuguese Software Association (ASSOFT) or the General Directorate of Cultural Activities (IGAC).
[7] Companies with their head office in Portugal or with effective management in Portugal, and Portuguese permanent establishments of foreign companies (article 2 para. 3 of the Portuguese CIT Code).
[8] Article 50-A para. 3 e) of the Portuguese CIT Code.
[9] Article 50-A para. 3 b) of the Portuguese CIT Code.
[10] Article 50-A para. 3 c) of the Portuguese CIT Code.
[11] Article 50-A para. 3 d) of the Portuguese CIT Code.
[12] Article 50-A para. 6 of the Portuguese CIT Code.
[13] Article 50-A para. 7 of the Portuguese CIT Code. This means that the amount of qualifying income to which the 85% deduction applies is reduced by the accumulated negative balance of the revenues and gains related to each industrial property right and the corresponding R&D expenses and losses incurred, registered in previous fiscal years.
[14] For example, income derived from the provision of a service comprising a software licence and periodic software updates would be deemed qualifying income. However, if such service also includes software training and online support, the income derived from the latter would not be considered qualifying income. Even though training and online support may be a fundamental part of software licencing, those would be deemed ancillary services to the main service (temporary use of an industrial property right).
[15] Article 50-A para. 4 of the Portuguese CIT Code.
[16] To be marked up by 30% (Article 50-A para. 8 of the Portuguese CIT Code), but capped at the amount of total R&D expenses incurred to develop and/or acquire the right.
[17] Article 50-A para. 8 of the Portuguese CIT Code.