Using Spain to set up a patent box company

Posted on Posted in Publications, Tax

The interest of the tax treatment of royalties received by Spanish companies as consideration for the use of any patents, design, models, plans, or scientific, commercial or industrial know how has been highly overlooked.

The tax incentive consists in an exemption of half of the income of this nature received by the Spanish company. However, the incentive is limited to the cost of development of the intangible property multiplied by six. In other words, once the royalties exceed six times the cost of the intangible property, they would become fully taxable.

This tax incentive, together with the extensive Tax Treaty network of Spain (about 90 Tax Treaties) and its membership of the European Union, which guaranty a very low outbound withholding tax at source, if any, means that the effective tax rate applicable to royalties would be very competitive.

However, there are three important ideas to keep in mind:

  1. The exemption is only applicable to intangible property developed by the Spanish company. Therefore, “second hand” intellectual property, or acquired assets, would not qualify for the exemption. However, the law does not require that the development process takes place in Spain.
  2. Royalties derived from trademarks, copyright of literary, artistic or scientific work, including movies, software and image rights from artists and sportsmen do not qualify, either ,for the exemption.
  3. The licensee must be engaged in an business activity and the licensed intangible property must be used in the course of such business