Individual questions on the patent box

Case 1: Transfer of registered office - Case A

1. facts of the case

Quadro AG has its registered office in Canton A. For the registered patent Q, it applies for taxation according to Art. 24b StHG as of 1 January 2021. Canton A primarily applies the offsetting solution based on Art. 24b para. 3 StHG. The R&D expenses to date amount to CHF 10 million. The net profit generated in the patent box in the 2021 financial year amounts to CHF 1.5 million.

Since Canton A applies the offsetting solution, the net profit from the patent box will still be taxed properly in 2021.
As of 1 January 2022, Quadro AG moves its registered office to Canton B. Canton B taxes the previous R&D expenses at the time of entry into the patent box in accordance with Art. 24b para. 3 StHG. There is no longer a tax connection point in canton A.

Questions

• Can Canton A tax the R&D expenses of CHF 8.5 million (CHF 10 million - CHF 1.5 million) that have not yet been taxed at the time of departure in the 2021 tax period?
• Can Canton B still tax the difference of CHF 8.5 million (difference between the CHF 10 million and the CHF 1.5 million properly taxed by Canton A)?

2. facts variant

Quadro AG has its registered office in Canton C. For the registered patent Q, it applies for taxation according to Art. 24b StHG as of 1 January 2021. Canton C taxed the previous R&D expenditure of CHF 10 million when entering the patent box, and Quadro AG claimed a corresponding taxed hidden reserve in the tax return (corresponds to the assessment).

As of 1 January 2022, Quadro AG will move its registered office to Canton A, which primarily knows the settlement solution for box entry.

Question Variant

• Due to the system, the offsetting solution does not recognise a taxed hidden reserve. Does Canton A nevertheless have to take the amortisation of the taxed hidden reserve into account as a business-related expense?

Case 2: Transfer of registered office - Case B

1. facts of the case

Bern AG, which is domiciled in Canton B, applied for entry into the patent box as of 1 January 2020. In Canton B, the R&D expenses of CHF 20 million already taken into account were then taxed with the special tax according to cantonal law in 2020, and for profit tax purposes the patent box deduction of 90% was claimed on the profit of the patented products. The profit tax value of the entry taxation according to Art. 24b para. 3 StHG is therefore 0 and there is no taxed hidden reserve.

Due to limited space at the location in B, Bern AG found a larger property for its activities in Canton Z and moved its employees and operational activities to Canton Z as of June 2021. As of 15 July 2021, the registered office was also transferred from B to Z in the commercial register.

Questions

• How will the application for a patent box deduction by Bern AG, following its relocation of its registered office in summer 2021, be treated for the purposes of state and municipal taxes in Canton Z?
• Does Canton Z recognise that Bern AG has already "settled" the entry into the patent box in Canton B to the full extent or how must the rules on entry into the patent box be applied after the move into Canton Z has taken place?
• Does anything change if the transfer of the registered office already took place on 15 July 2021?

Case 3: Division

1. facts of the case

Warm-up AG will be split into the two companies Warmer AG and Upper AG as of 1 January 2021, with a spin-off of the Upper business division. This is a tax-neutral restructuring pursuant to Art. 24 para. 3 lit. b StHG. The financial year corresponds to the calendar year from 1 January to 31 December.

On 1 April 2022, patent U will be registered as a patent in the Swiss patent register by Upper AG in Switzerland; the application was already filed on 15 November 2021. In the tax period 2021, Upper AG recorded R&D expenses of CHF 1 million for patent U. The R&D expenses recorded at the former Warm-up AG for patent U amounted to CHF 6 million.

Questions

• Can Upper AG apply for taxation under Art. 24b StHG even if it did not bear the full expenses for the development of the patent?
• From which point in time does the taxation according to Art. 24b StHG apply?
• How high are the previous R&D expenses to be taxed when entering the patent box?

Case 4: Transfer of assets

1. facts of the case

In 2021, Frische-Forschung AG, domiciled in Canton A (financial year 1.1. - 31.12), transferred Patent F, which had already been registered since 2018, to its sister company Grosse-Forschung AG, domiciled in Canton B (financial year 1.1. - 31.12), at a profit tax value of CHF 1. R&D expenses of CHF 8 million were incurred on patent F in Canton A in the past. The tax authorities of Canton A have confirmed that the requirements for a tax-neutral transfer according to Art. 24 para. 3quarter StHG are met.

As of 1 January 2022, Grosse-Forschung AG applies for reduced taxation in Canton B in accordance with Art. 24b StHG.

Questions

• Can the reduced taxation pursuant to Art. 24b StHG still be applied for as of 1 January 2022, even if the patent was already registered in 2018?
• To what extent and in which canton is entry into the patent box taxed?

2. facts variant

In deviation from the basic facts above, the R&D expense of CHF 8 million was not charged to the income statement but capitalised, so that the profit tax value of patent F at the time of the asset transfer is CHF 8,000,001.

Question Variant

• Does this change anything with regard to taxation under Art. 24b para. 3 StHG compared to the basic facts?

Case 5: Fusion

1. facts of the case

Instrumentenbau AG, based in Canton B, develops and produces precision instruments. The product portfolio includes two product families (A and B). The products within the product families are each protected by the same patents. A breakdown of the relevant costs for the individual products is not possible due to the existing management systems.

Instrumentenbau AG has outsourced the production of the products from product family A to a subsidiary, Auftrags AG, also based in Canton B, which carries out the production on a contract basis and invoices Instrumentenbau AG on the basis of the cost-plus method.

In addition, Instrumentenbau AG sells the products it manufactures, insofar as these are intended for export abroad, via a sister company, Export AG, also domiciled in Canton B. The transfer prices for the products which Instrumentenbau AG sells to Export AG for subsequent export by the latter are determined on the basis of the resale price method.

Question

• Instrumentenbau AG wonders whether and to what extent a merger of Auftrags AG and/or Export AG would be advantageous with regard to the future tax burden or what effects a merger would have on the patent box deduction?

Case 6: Extension of the patent box

1. facts of the case

Same basic facts as in case 5, but with a total of four corresponding product families. The following clarifying information exists for the individual product families.

The products of product family A contain a complex mechanism based on a proprietary invention developed in Switzerland, which was patented in 2018.

Product family B is manufactured using a special injection moulding process, which has been protected by a process patent since 2016. The products in product family C were also developed in-house. However, no patent registration was filed for the developments contained in the products of this product family C, although the relevant developments would actually have been patentable.

Finally, product family D consists of products manufactured by Instrumentenbau AG abroad on the basis of a patented invention by a third-party company. The use of this patent is compensated with an exclusive licence to the foreign licensor.

Questions

• For which products/product families can Instrumentenbau AG apply for the patent box deduction:
• Product family A, whose products are patented?
• Product family B that goes through a manufacturing process that is protected by a registered process patent?
• Product family C with patentable technology?
• Product family D, which is manufactured on the basis of a patented invention licensed abroad?
• If not, how would one have to proceed in order to qualify for the patent box deduction?
• Does it matter if two series of product A are produced and sold in product family A, series XS, in which the special, patented mechanism is built in, and series LS, in which a functionally similar but slightly less complex and non-patented mechanism is built in?
• Does the amount of the LS series' share of the turnover from product family A play a role?

2. facts variant

Instrumentenbau AG is also examining the possibility of selling the activities including the associated know-how and technology in connection with the C product family to a third party (asset deal). It calculates that a buyer would be willing to pay a purchase price share of approximately 50% of the total purchase price for the patented technology alone. The estimated sales price is CHF 12 million.

Questions

• What influence would a prior registration of a patent for product family C have?
• Does it matter whether the buyer is a domestic or foreign company?

Case 7: Patent exploitation company and exclusive licence

The entire case is based on intensive, non-conclusive discussions and is therefore mainly intended to highlight areas for discussion.

1. facts of the case

PatentCo A, which is domiciled abroad, registered a European patent for a special process (patent X) in 2019 based on its own developments abroad. The costs for the development of the patented invention amounted to a total of CHF 5 million in the years 2010 to 2019. The ongoing costs in connection with the ongoing patent defence amount to CHF 100 thousand annually.

With effect from 2020, the foreign PatentCo A has granted an exclusive licence to ProduktionsCo B, domiciled in Canton Z, to use this patent. According to the licence agreement, ProduktionsCo may further develop the patented technology and use it for the production or subsequent sale of product A or its further developments.

The annual licence fee owed by Production Co B to Patent Co A amounts to 5% of the turnover from the sale of Product A. The annual turnover from Product A amounts to CHF 50 million. The annual turnover from product A in the years from 2020 onwards amounts to CHF 50 million. The costs for the own further development costs, which are exclusively carried out in Switzerland and which are borne by ProduktionsCo B, amount to CHF 1.5 million per year. The net annual profit from product A amounts to CHF 10 million.

Questions

• Can ProductionCo B claim the patent box deduction?
• What applies regarding entry into the patent box
• What are the historical R&D costs that need to be taken into account?
• How is the patent box deduction determined, does it matter whether PatentCo A and ProduktionsCo B are group companies or independent third parties?
• What would be different if PatentCo A was not based abroad but in Switzerland in Canton Z and the patent development activities had taken place exclusively in Switzerland?
• What would change if PatentCo A and ProduktionsCo B were to merge on 1 January 2022?

2. facts variant

Patent X was not only registered under patent law in 2019, but already in 2012 and exclusively licensed by PatentCo A to ProductionCo B as of 2013. The other factual and quantitative information is otherwise unchanged.

Question(s)

• What changes regarding the tax treatment in contrast to the main variant? Does it matter that the patent has already been exploited since 2013 when it enters the patent box at the beginning of 2020?

Case 8: Exit from the patent box

1. facts of the case

Gross International AG is part of a foreign group, the Gross Group, with a turnover of > EUR 750 million and a group parent company in a Member State of the EU. Gross International AG conducts R&D activities in Canton B. Accordingly, it has internationally registered patents. In addition, it acts as a headmaster company that sells the group's products via group distribution companies in numerous countries.

Since the profitability of Gross International AG is very high relative to the historical R&D costs of the patented products, the purchase into the patent box could already be made in full in 2020 and 2021 by means of an offsetting solution. From 2022, the tax burden in Canton B will be around 12% due to the application of the patent box.

Because the country of domicile of the parent company of the Gross Group will introduce the OECD BEPS Pillar 2 Income Inclusion Rule in 2023, Gross International AG wants to ensure the internationally required minimum tax burden of 15% in Canton B and therefore withdraw from the patent box at the end of 2022 to the extent necessary to achieve this goal.

Questions

• Can Gross International AG waive the patent deduction in whole or in part?
• When the patent box was introduced at the beginning of 2020, the historical R&D costs were calculated for tax purposes in accordance with Art. 24b para. 3 StHG. This is based on the assumption that the patent box deduction will apply to the patented products until patent protection expires in 2035. The patent box deduction for 2022 is significantly lower than the historical R&D costs that were taken into account in 2020 and 2021. Can Gross International AG reverse part of the accounting of the historical R&D costs?
• Would there be other ways to avoid overtaxation from entering the patent box?