Budget 2020: Malaysia to Introduce Patent Box Regime

In Budget 2020, the government aims to increase innovation level and diversify the economy of the country.

Research & development expenditure receive an allocation of RM524 million to ministries and public agencies. A separate RM43 million is allocated for development of new plant varieties. This is good news to the research community.

An incentive caught the attention of IP community.

"IP-generated income based on the Modified Nexus Approach (MNA) derived from patents and software copyright will be given tax exemption (of 100%) for a period of up to 10 years," - Lim Guan Eng

What is Modified Nexus Approach

Patent is a form of movable asset. In 1973, Ireland introduced an incentive which provides total tax relief in respect of income from licenses patented in Ireland. Several firms moved their patents to Ireland to enjoy the tax incentive. This regime which provides a lower tax rate on income derived from patents is called a patent box.

Customised patent box regime was then introduced in France in 2000, Belgium in 2007, Netherlands in 2007, Luxembourg in 2008, Spain in 2008, China in 2008 and the UK in 2013. A European Commission paper in 2015 found that patent registration is responsive to lower tax rates provided through patent boxes.

The UK reduced the corporate tax of 20% to 10% for patent owners and exclusive licensees. When the UK introduced the patent box, patent applicants rose by 29% and GlaxoSmithKline built a new factory which would create 500 jobs. According to the UK treasury, the UK would have the lowest corporate tax in the G7 and the fourth lowest in the G20 assuming that other countries did not cut their rates.

Germany was concerned over misuse of patent box as a tool for profit shifting. In 2015, OECD countries agreed on a Modified Nexus Approach (MNA) for IP regimes.

MNA requires a link between R&D expenditures, IP assets and IP income. The tax benefit for income derived from IP should be proportional to IP owner's own R&D expenditures.

Effect of Modified Nexus Approach in UK and Ireland

On 1 July 2016, the UK tax relief was updated to consider R&D expenditures based on OECD MNA. To enjoy reduced tax rate of 10%, the patent owner or exclusive licensee shall derive income from patent granted by UKIPO, EPO, or selected European countries. Qualifying development expenditure was defined as (1) development of the patented invention and (2) development of a product incorporating the patented invention

In 2016, Ireland adapted the MNA and included software copyright into the tax incentive. Similar as UK, a granted patent is required to enjoy the incentive. Ireland provides a reduced rate of 6.25% rather than nominal corporate rate of 12.5%.

Singapore IP Development Incentive

Singapore introduced a patent box regime called IP Development Incentive (IDI) based on MNA in 2017. Reduced tax rate of 5% or 10% is provided for patent or patent application, and any copyright subsisting in software. The tax rate of 5% need investment of S$10 million and 20 new skilled jobs to be created. The tax rate of 10% applies if there is an investment of S$6 million and 15 new skilled jobs created. Singapore provides allowance to pending patent applications while stating clear investment requirement.

Malaysia Patent Box to be Administered by MIDA

According to Ministry of Finance, Malaysian Investment Development Authority (MIDA) would administer Malaysia patent box. Tax incentive for biotechnology industry, MSC Malaysia, pioneer status and principal hub would be repealed.

We await with breath MIDA's requirement for patent box. Would pending patents be included in the incentive? Is there an investment requirement? Stay tuned until MIDA's announcement.

Benefits of Patent Box

We anticipate that patent box would encourage patent activity in the country. Patent box would increase the valuation of patents and software in the long term. We don't see a short term increase in the value of patents or software as Malaysia is not seen as a preferred research hub. We believe that increase in research investment should precede the licensing value of patents and software to improve the confidence of investors over Malaysia research. Universities and research institutions should be prepared for increased commercialization activities.