PATENT ROYALTIES

The Finance Bill introduces two new provisions in relation to dividends from exempt patent royalty income:

“Bona fide” test

• Where the patent agreement is between connected parties, dividends will only be exempt where the patent was taken out for bona fide commercial reasons and not primarily for the purpose of avoiding tax.

“R & D” test

• This test already applies to patent agreements between connected parties, and now applies for agreements between unconnected parties that consist of a patent agreement and a franchising, licensing or other similar arrangement.  Only distributions up to the level of the company’s R & D expenditure incurred in a three year period will be exempt.  The bona fide test also applies in these circumstances.

The Bill does not affect the availability of tax-free dividends from exempt patent royalty income between unconnected parties where no other arrangements for intellectual property exist.

We strongly recommended that a tax advisor’s advice be taken in this area.