Corporation Tax Act 2010 section 357BHA

Notional royalty

Section 357BHA allows a company to treat a proportion of its IP-derived income as relevant IP income for Patent Box purposes, by calculating what it would notionally pay as a royalty to license the qualifying IP right from an independent third party.

• Where a company holds a qualifying IP right (a patent, supplementary protection certificate or plant variety right) and earns trade income from exploiting it that is not already relevant IP income, finance income or excluded income, that income is termed "IP-derived income"
• The company may elect that an "appropriate percentage" of this IP-derived income is treated as relevant IP income, thereby bringing it within the Patent Box regime
• The appropriate percentage is the proportion of the IP-derived income that the company would hypothetically pay as a royalty to an unrelated party for the right to exploit the qualifying IP right during the accounting period, determined on arm's length principles in accordance with the OECD Model Tax Convention (Article 9) and OECD transfer pricing guidelines
• The notional royalty calculation assumes that the company has exclusive exploitation rights, that the licence is granted on the first day of the accounting period (or the day the company first held the right, if later), and that the percentage is fixed from the start of the period and applies for all subsequent periods in which the company holds the right