Patent box

What it means

A patent box is a tax regime that lowers the taxation of income from intellectual property created in the company. In Slovakia it is set out in the Income Tax Act and consists of exempting part of the income from royalties for the use of the company's own patents, utility models and computer programs, or from selling products that use these results.

The condition is that the company created the result through its own research and development. The exemption is calculated proportionally under the OECD nexus approach: the larger the share of development costs the company incurred itself, the larger the part of income that can be exempt. Results bought from others or developed by related parties abroad generally do not qualify.

The patent box does not cover all intellectual property. Trademarks, designs or unprotected know-how usually fall outside it. The regime complements the R&D super-deduction: the super-deduction favours development costs, the patent box the income from the results.

How it works in practice

The patent box is most often used by software companies licensing their own software to customers and by manufacturers with patented technologies. With software licences it is important to separate licence income from income for implementation, support or custom development, which do not qualify.

The company must keep separate records of development costs and income from the specific result. In practice this means project accounting, developer timesheets, research documentation and proof of protection, such as a granted patent. Without these records the tax office will not accept the exemption even if the result objectively exists.

When setting up licence agreements within a group, transfer pricing must be respected. A royalty between related parties must be at arm's length. Before using the patent box we recommend assessing whether it pays off given the administration, and setting up the records in advance.

What to watch out for

Patent box rules have changed in the past and may change again, including the scope of exempt income. Check the current wording of the law before each tax period. Applying outdated rules is a common reason for additional tax being assessed in an audit.

The patent box is not a tool for shifting profits. If a company artificially reallocates income to make it look like royalties, or claims development that someone else actually did, it risks not just back tax but penalties too. Tax planning has to rest on real activity.