The new Portuguese Patent Box regime and R&D tax incentives

published on 22 July 2022 | reading time approx. 4 minutes

Over the past few years, Portugal has been increasing tax benefits for the creation of intellectual property (IP), which have recently been extended as to also include copyrights on registered computer programs (tax benefits under the so-called patent box regime) as well as for Research & Development (R&D) activities.

A good example is the recently approved State Budget for 2022, which has increased from 50 percent to 85 percent the Corporate Income Tax (CIT) exemption on income deriving from contracts having as object the assignment or temporary use of patents, industrial models and drawings (industrial property rights subject to registration) and copyrights on registered computer programs (software). This regime has been introduced in 2014 and was amended in 2016, incorporating the “Modified Nexus Approach for IT Regimes” approved in BEPS Action 5.

In addition to the patent box regime, the R&D tax benefit, in force until 2025 and aimed at increasing competitiveness among companies, allows the deduction to the taxable income of certain R&D expenses.

From the outset, it should be taken into consideration that these two regimes – patent box and R&D incentives – apply at different times of the innovation and production process. While R&D incentives are provided at the front end of the innovation lifecycle, in the years when R&D expenditures are incurred, the tax benefits resulting from the patent box regime are provided at a later stage, when income is generated from exploiting IP.

Therefore, companies that carry out their activity in the R&D field and in the development of intellectual property, as is the case of technology and software development companies, may benefit from tax incentives when developing IP in Portugal (R&D incentives) and at a later stage when it generates income from this developed IP (Patent Box regime).

A brief description of each regime is summarized below:

Patent Box regime

Beneficiaries

The patent box regime applies to CIT taxpayers resident in Portugal and to non-resident entities with a permanent establishment (PE) in Portugal

Tax Benefit

The patent box regime determines the taxation of only 15 percent of the income deriving from contracts having as object the assignment or temporary use of:

Patents, industrial models and drawings (industrial property rights subject to registration); and
Copyrights on registered computer programs (software).

As mentioned above, in State Budget for 2022 the deduction for CIT purposes has been increased from 50 percent to 85 percent, which may lead to an effective taxation of the respective income of approximately 3 percent (the CIT general rate in Portugal is currently 21 percent, Municipal and State Surcharges may apply).

Limits and requirements

The following requirements must be met, for the application of the regime:

Registration of the intellectual property;
Correct identification by the licensor in its accountancy (i) of the income deriving from its assignment or temporary use; and (ii) of the expenses or losses incurred for the execution of R&D activities directly imputable to the right subject to assignment or temporary use.
The licensee must use the assigned right in the pursuit of activities of a commercial, industrial or agricultural nature.
The results of the use of the rights cannot be materialized in the delivery of goods or services that originate tax deductible expenses in the licensor entity (this is an anti-abuse rule that is particularly relevant in the case of special relations between the companies, as well as on the issue of transfer pricing arm's length principle).
The patent box regime does not apply to licensees which are resident in a blacklisted jurisdiction.

Formula

The deductible amount must not exceed that resulting from the application of the following formula:

EE/TE x TI x 85 percent

(i) Division of the amount of eligible R&D expenses by the amount of the company's total expenses incurred to develop the protected asset (ii) the result obtained is multiplied by the total income obtained with the assignment of the IP (iii) the result obtained is multiplied by 0.85.

The total amount of eligible R&D expenses is increased by 30 percent, up to the amount of the company's total expenses incurred to develop the protected asset.

R&D Tax incentives

Beneficiaries

R&D tax incentives are applicable to CIT taxpayers that are (i) resident in Portugal and practicing mainly agricultural, industrial, commercial or services-related activities and (ii) non-resident entities with a PE in Portugal incurring in R&D expenses.

Eligible Expenses

Eligible expenses are those incurred by the CIT taxpayers with the objective of acquiring new scientific or technical knowledge (“Research expenses”) and those incurred through the exploitation of the results of research work or other scientific or technical knowledge for the discovery or substantial improvement of raw materials, products, services or manufacturing processes (“Development expenses”).

The following specific expenses are eligible for this tax incentive:

Acquisitions of tangible fixed assets, with the exception of buildings and land, provided they are created or acquired in new condition and directly allocated to the performance of R&D activities;
Expenses with personnel, with minimum academic qualifications of level 4 of the National Qualifications Framework, directly involved in R&D tasks (Expenses with personnel with minimum academic qualifications of level 8 of the National Qualifications Framework are considered at 120 percent of their amount);
Expenses with the participation of managers and executives in the management of R&D institutions;
Operating expenses, up to a maximum of 55 percent of the expenses with staff with minimum academic qualifications of level 4 of the National Qualifications Framework, directly involved in R&D tasks, accounted for as remuneration, wages or salaries for the year;
Expenses related to contracting R&D activities with public entities or entities benefiting from the status of public utility or entities whose competence in research and development is recognized by joint order of the Ministers for the Economy and Innovation and for Science, Technology and Higher Education;
Equity stakes in R&D institutions and contributions to investment funds, public or private, aimed at financing companies dedicated mainly to R&D;
Patent registration and maintenance costs;
Expenses with the acquisition of patents that are predominantly for R&D activities (Small and Medium Enterprises (SMEs) only);
Expenses with R&D audits;
Expenses with demonstration actions arising from supported R&D projects.

Tax Benefit

This tax incentive allows for the recovery of up to 82.5 percent of the R&D investment, in the part that has not been financially co-participated by the State, made during the tax periods from 1st January 2013 to 31st December 2025.

This benefit consists in the deduction, up to the concurrence of the taxable income, of the value corresponding to R&D expenses, in a double percentage:

Base Rate: Tax deduction on the total R&D expenditure in the current year – 32.5 percent;
Incremental Rate: 50 percent of the increase in expenditure over the average of the previous two years (maximum of EUR 1.5M).

Regarding CIT taxpayers with the status of SMEs, that have not yet completed two fiscal years and have not benefited from the Incremental Rate, a 15 percent surcharge on the Base Rate (47.5 ) applies.