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Finance Act 2012

Chapter 2: Qualifying companies

8.New sections 357B(1) to (3) outline the requirements for a company to be a qualifying company in any accounting period for the purposes of an election under new section S357A.  The company must either:

  • hold a qualifying IP right or an exclusive licence in respect of a qualifying IP right at some time during the accounting period; or

  • have previously held a qualifying IP right or an exclusive licence in respect of a qualifying IP right, and be taxable in the accounting period on income in respect of that right. That income must be attributable to events occurring wholly or partly during a period when the company was a qualifying company and had made an election under new section 357A.

9.The second condition allows a company to apply the Patent Box rules to income received when it would not otherwise be a qualifying company.  An example is damages for infringement of patent rights where compensation is received after the expiry of a patent, but where the company had made a Patent Box election at the time of the infringement.

10.In addition, for a company that is a member of a group, new section 357B(5) requires it to also satisfy the active ownership condition of new section 357BE.

11.New section 357B(4) defines a qualifying IP right.   The right must be one of those listed in new section 357BB and the company must also meet the development condition of new section 357BC in respect of that IP right. New section 357GC sets out how the ownership conditions are modified where a company is party to a cost-sharing arrangement in relation to the creation and development of a qualifying IP right, or an exclusive licence.

12.New section 357BA defines the term exclusive licence.

13.New section 357BA(1) states that an exclusive licence is one granted by the proprietor, being someone who holds either the qualifying IP right or an exclusive licence over that right, which gives the person holding the licence exclusive rights over some of the IP rights held by the proprietor.

14.New section 357BA(2) specifies that the rights granted under an exclusive licence must at least:

  • confer one or more rights to the exclusion of any other person, including the proprietor, in relation to the protected item in at least a whole national territory; and

  • either include the right to take legal proceedings for any infringement of the licence-holder’s rights, or receive all or the greater part of any damages that might follow from such an infringement.

15.A licence which grants more limited rights which, for example, do not extend to at least one whole country or territory, or where the licence holder can neither bring proceedings for infringement within its territory nor recover any damages, will not be a qualifying IP right.

16.New section 357BA(3) ensures that where certain rights required under new section 357BA(2) are not specifically granted by the licence, but are nonetheless granted by law to the licensee, for example under section 67 of the Patent Act 1977, these rights are treated as if they were granted by the licence.

17.New Section 357BA is subject to an anti-avoidance rule in new section 357F in chapter 6 to ensure that an exclusive licence does not include one where rights are conferred for a main purpose of securing that the licence qualifies for the regime. This is aimed at ensuring that the grant of commercially spurious exclusive rights does not constitute the grant of an exclusive licence for the purposes of this part.

18.A company can vest the rights it holds in an exclusive licence to another member of its group.  Where that happens then new section 357BA(4) and (5) ensure that the other company is treated as if it holds the exclusive licence, even if the company holding the exclusive rights retains the right to enforce, assign or grant further licences in respect of the licence.  This might be the case where, for example, the original licence holder is a group company whose primary role is the management of the group’s intellectual property portfolio, and any exploitation or development of the rights is carried out elsewhere in the group.

19.It is quite possible for the proprietor to grant exclusive licences to several persons for use in the same country or territory, provided that their use of the rights over the protected item is in substantially distinct fields of use so that there is no effective overlap of the exclusive rights granted.

20.New section 357BB specifies the rights to which part 8A applies. Rights specified here are the only types of right that can be qualifying IP in accordance with new section 357B(4).

21.New section 357BB(1) lists the rights currently specified.  These are:

  • patents granted by the UK Patent Office, under the European Patent Convention or corresponding specified rights granted under the laws of certain specified EEA states;

  • Supplementary protection certificates;

  • Plant breeders rights granted under the Plant Varieties Act 1997; and

  • Community plant variety rights granted under Council Regulation (EC) No 2100/94.

22.New section 357BB(2) allows certain patent applications which are subject to a prohibition on publication on the grounds of national security or safety of the public to be treated as though they had been granted under that Act. This allows the invention which is the subject of such an application to be treated as protected by a right to which part 8A applies.

23.New sections 357BB(3) to (6) specify the circumstances in which a marketing authorisation granted in respect of medicinal, veterinary medicinal or plant protection products is to be regarded as a right to which part 8A applies. The marketing authorisation must benefit from marketing protection or data protection under the various EC regulations specified.

24.New section 357BB(7) gives the meaning of the terms European Patent Convention, specified and supplementary protection certificate used in new section 357BB(1), and rules used in new section 357BB(2).

25.New section 357BB(8) allows the Treasury, by order, to make further provisions in relation to marketing protection or to amend references to EU legislation in new section 357BB in consequence of EU legislation making amendments to or replacing that EU legislation.

26.New section 357BB(9) gives the Treasury power to make any additional changes that are necessary in connection with an order amending the rights to which part 8A applies.

27.New section 357BC sets out four ways (see conditions A to D below) that a company can meet the development condition in respect of an IP right it holds.  Where the development condition is met, and provided that the right concerned is also of a type specified by new section 357BB, the right will be a qualifying IP right for that company.

28.New sections 357BC(2) and (3) ensure that a company meets the development condition in respect of an IP right if it carried out qualifying development in respect of the right in question (see new sections 357BD(1) below).  Condition A applies where the company has not become or ceased to be a controlled member of a group since carrying out the qualifying development.  Where it has, condition B applies if it continues to carry on activities of the same nature as those that amounted to the qualifying development for 12 months after becoming or ceasing to be a controlled member of the group, provided that during those 12 months it does not cease to be a member of that group or become a controlled member of any other group.  These activities need not necessarily be in respect of the same protected item or right.  When a company is treated as becoming or ceasing to be a controlled  member of  a  group is  defined in new sections 357BC(6) and (7).

29.New section 357BC(4) provides for condition C which allows a company within a group that holds either a qualifying IP right or an exclusive licence in respect of such rights to meet the development condition under condition C by virtue of the qualifying development undertaken by another group company.  The company undertaking the qualifying development must have been a member of the relevant group when the qualifying development was carried out (even if the company that holds the right was not).  However it is not necessary that the company holding the rights was a member of the group at the time the development occurred; it is only necessary that it is currently a member of the group.

30.New section 357BC(5) stipulates condition D to deal with the situation where a company (T), holding IP rights in respect of which it meets the development condition (as in condition B), joins a new group and then transfers the IP rights to another company in the new group.  Condition D allows the company to which those rights have been transferred to satisfy the development condition where the transferee either:

  • remains a member of the group; or

  • transfers its trade to another member of the group; and

taken together (T) and/or the transferee company continue to undertake activities of the same nature as those that amounted to the qualifying development for 12 months after (T) joined the group.

31.New section 357BC(6) sets out when a company is treated as becoming a controlled member of a group. This will happen where a company that was not previously associated with the company acquires control of the company or acquires a major interest in the company.

32.New sections 357BC(7) and (8) set out when a company is treated as ceasing to be a controlled member of a group.  This will happen where each company which previously controlled or held a major interest in a company ceases to do so, and the company is no longer associated with those companies.  Where a company ceases to be a controlled member of the group, any company that it controls, and any company in which it holds a major interest is also treated as ceasing to be a controlled member of the original group.

33.New sections 357BC(9) and (10) define ‘associated’, control and ‘major interest’ for the purposes of this section.

34.New section 357BC(11) ensures that where a group company meets the development condition under either condition B or D of new section 357BC, it is regarded as meeting that condition from the date that either it or the other company respectively joined the group, rather than on the expiry of the 12 month period.

35.New sections 357BD(1) and (2) define qualifying development of an IP right as the creation or development (including a significant contribution to these activities) of an invention.  Developing an invention includes developing ways to use or apply the item.  Invention is defined by new section 357GE to mean the item or process in respect of which the right is granted.

36.New section 357BD(3) confirms that for the purpose of new section 357BC, qualifying development undertaken before the IP right was acquired, whether by the company which holds the IP right or another member of the group, is taken into account in considering whether the development condition is satisfied.

37.New section 357BE sets out when a company is regarded as satisfying the active ownership condition.  Companies that are not part of a group do not need to meet the active ownership condition, by virtue of new section 357B(1).

38.New section 357BE(1) states that a company meets the active ownership condition if substantially all of its qualifying IP rights satisfy either of two conditions.

39.New sections 357BE(2) and (3) set out the first condition, which is met where the company performs significant management of its qualifying IP rights portfolio during the accounting period.  In this context management activity includes the formulation of plans and decision-making in relation to the development or exploitation of the IP rights.

40.New section 357BE(4) sets out the second condition, which is met where the company carries out development activity in relation to the particular IP rights during the accounting period, meeting either of the development conditions set out in new sections 357BC(2) or (3).  These require the development activity to be carried out by the company that has the IP rights rather than by any other member of the group.

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