CHAPTER 2 Qualifying companies

357B Meaning of “qualifying company”

(1) A company is a qualifying company for an accounting period if—

(a) condition A or B is met, and

(b) 5in the case of a company that is a member of a group,
condition C is met.

(2) Condition A is that, at any time during the accounting period, the
company—

(a) holds any qualifying IP rights, or

(b) 10holds an exclusive licence in respect of any qualifying IP
rights.

For the meaning of “exclusive licence”, see section 357BA.

(3) Condition B is that—

(a) the company has held a qualifying IP right or an exclusive
15licence in respect of such a right,

(b) the company has received income in respect of an event
which occurred in relation to the right or licence, or any part
of which so occurred, at a time when—

(i) the company was a qualifying company, and

(ii) 20an election under section 357A had effect in relation
to it, and

(c) the income falls to be taxed in the accounting period.

(4) A right is a qualifying IP right for the purposes of this Part if—

(a) it is a right to which this Part applies (see section 357BB), and

(b) 25the company meets the development condition in relation to
the right (see section 357BC).

(5) Condition C is that the company meets the active ownership
condition for the accounting period (see section 357BE).

357BA Meaning of “exclusive licence”

(1) 30In this Part “exclusive licence”, in relation to a right (“the principal
right”), means a licence which—

(a) is granted by the person who holds either the principal right
or an exclusive licence in respect of the principal right (“the
proprietor”), and

(b) 35confers on the person holding the licence (“the licence-
holder”), or on the licence-holder and persons authorised by
it, the rights in respect of the principal right that are listed in
subsection (2).

(2) The rights are—

(a) 40one or more rights conferred to the exclusion of all other
persons (including the proprietor) in one or more countries
or territories, and

(b) the right—

(i) to bring proceedings without the consent of the
proprietor or any other person in respect of any
infringement of the rights within paragraph (a), or

(ii) to receive the whole or the greater part of any
5damages awarded in respect of any such
infringement.

(3) Where the licence-holder has any right within subsection (2)(b) by
virtue of any enactment or rule of law, the right is to be regarded for
the purposes of this section as conferred by the licence.

(4) 10Where—

(a) a company (“C”) that is a member of a group holds either a
right to which this Part applies or an exclusive licence in
respect of such a right, and

(b) C confers on another company that is a member of the group
15all of the rights held by C in respect of the invention,

that other company is to be treated for the purposes of this Part as
holding an exclusive licence in respect of that right.

(5) For the purposes of subsection (4) it does not matter if the rights
conferred by C do not include the right to enforce, assign or grant a
20licence of any of those rights.

357BB Rights to which this Part applies

(1) This Part applies to the following rights—

(a) a patent granted under the Patents Act 1977,

(b) a patent granted under the European Patent Convention,

(c) 25a right of a specified description which corresponds to a right
within paragraph (a) or (b) and is granted under the law of a
specified EEA state,

(d) a supplementary protection certificate,

(e) any plant breeders’ rights granted in accordance with Part 1
30of the Plant Varieties Act 1997,

(f) any Community plant variety rights granted under Council
Regulation (EC) No 2100/94.

(2) Where—

(a) directions are in force under section 22 of the Patents Act 1977
35(information prejudicial to national security or safety of
public) with respect to an application for a patent under that
Act, and

(b) the person making the application has been notified under
section 18(4) of that Act that the application complies with
40the requirements of the Act and the rules,

the person is to be treated for the purposes of this Part as if the person
had been granted the patent under that Act.

(3) Where—

(a) a person holds a marketing authorisation in respect of a
45product in accordance with any EU legislation, and

(b) the product benefits from marketing protection (see
subsection (4)) or data protection (see subsection (5)),

the person is to be treated for the purposes of this Part as having been
granted a right to which this Part applies in respect of the product.

(4) For the purposes of this section a product benefits from marketing
protection if—

(a) 5the product benefits from marketing protection by virtue of
Article 14.11 of Regulation (EC) No 726/2004 of the European
Parliament and of the Council of 31 March 2004 laying down
Community procedures for the authorisation and
supervision of medicinal products for human use, or

(b) 10any of the following prohibitions is in force—

(i) the prohibition on placing on the market a generic of
the product imposed by Article 10.1 of Directive
2001/83/EC of the European Parliament and of the
Council of 6 November 2001 on the Community code
15relating to medicinal products for human use,

(ii) the prohibition imposed by Article 8.1 of Regulation
(EC) No 141/2000 of the European Parliament and of
the Council of 16 December 1999 on orphan medicinal
products, and

(iii) 20the prohibition on placing on the market a generic of
the product imposed by Article 13.1 of Directive
2001/82/EC of the European Parliament and of the
Council of 6 November 2001 on the Community code
relating to veterinary medicinal products.

(5) 25For the purposes of this section a product benefits from data
protection if—

(a) the product benefits from the data exclusivity conferred by
Article 10.5 of Directive 2001/83/EC of the European
Parliament and of the Council,

(b) 30the prohibition on referring to the results of tests or trials in
relation to the product imposed by Article 74a of that
Directive is in force, or

(c) data relating to the product benefits from data protection
under Article 59 of Regulation (EC) No 1107/2009 of the
35European Parliament and of the Council of 21 October 2009
concerning the placing of plant protection products on the
market.

(6) The reference to data in subsection (5)(c) does not include a study
necessary for the renewal or review of a marketing authorisation
40granted in respect of the product in accordance with Regulation (EC)
No 1107/2009.

(7) In this section—

• “European Patent Convention” means the Convention on the
  Grant of European Patents,

• 45“rules” means rules made under section 123 of the Patents Act
  1977,

• “specified” means specified in an order made by the Treasury,
  and

• “supplementary protection certificate” means a certificate
  50issued under—

  Finance BillPage 143

  (a)

  Council Regulation (EC) No 469/2009 of the
  European Parliament and of the Council of 6 May
  2009 concerning the supplementary protection
  certificate for medicinal products, or

  (b)

  5Regulation (EC) No 1610/96 of the European
  Parliament and of the Council of 23 July 1996
  concerning the creation of a supplementary
  protection certificate for plant protection products.

(8) The Treasury may by order—

(a) 10amend this section so as to make provision about the
circumstances in which a product benefits from marketing or
data protection for the purposes of this section;

(b) make such provision amending any reference in this section
to EU legislation as appears to them appropriate in
15consequence of any EU legislation amending or replacing
that EU legislation.

(9) An order made under this section may make any incidental,
supplemental, consequential, transitional or saving provision,
including provision amending or modifying this Part.

357BC 20 The development condition

(1) A company meets the development condition in relation to a right if
condition A, B, C or D is met.

Section 357BD (meaning of “qualifying development”) applies for
the purposes of this section.

(2) 25Condition A is that—

(a) the company has at any time carried out qualifying
development in relation to the right, and

(b) the company has not ceased to be, or become, a controlled
member of a group since that time.

(3) 30Condition B is that—

(a) the company has at any time carried out qualifying
development in relation to the right,

(b) the company has ceased to be, or become, a controlled
member of a group since that time,

(c) 35the company has, for a period of 12 months beginning with
the day on which it ceased to be, or became, a controlled
member of the group, performed activities of the same
description as those that constituted the qualifying
development, and

(d) 40the company remains a member of that group or (as the case
may be) does not become a controlled member of any other
group.

(4) Condition C is that—

(a) the company is a member of a group,

(b) 45another company that is or has been a member of the group
has carried out qualifying development in relation to the
right, and

(c) that other company was a member of the group at the time it
carried out the qualifying development.

(5) Condition D is that—

(a) the company is a member of a group,

(b) 5another company that is or has been a member of the group
has carried out qualifying development in relation to the
right,

(c) that other company (“T”) or, where another member of the
group begins to carry on the trade which T carried on
10immediately before becoming a member of the group, either
or both of those companies have, while carrying on that trade
as a member of the group, performed activities of the same
description as those that constituted the qualifying
development, and

(d) 15those activities of those companies, taken together, have been
performed for a period of 12 months beginning with the day
on which T became a member of the group.

(6) For the purposes of conditions A and B, a company becomes a
controlled member of a group at any time if—

(a) 20another company (“P”) either becomes the holder of a major
interest in the company, or begins to control the company, at
that time, and

(b) immediately before that time the company was not
associated with P or with any company associated with P
25immediately before that time.

(7) For the purposes of conditions A and B, a company ceases to be a
controlled member of a group at any time if—

(a) every other company which immediately before that time
held a major interest in, or controlled, the company ceases to
30do so, and

(b) as a result the company ceases to be associated with any of
those companies.

(8) Where—

(a) a company ceases to be a controlled member of a group at any
35time, and

(b) at that time the company holds a major interest in, or
controls, any other company,

that other company is to be treated for the purposes of conditions A
and B as also having ceased to be a controlled member of the group
40at that time.

(9) In subsections (6) and (7) “associated” is to be read in accordance
with section 357GD(3).

(10) The following provisions apply for the purposes of subsections (6) to
(8)—

• 45section 472 of CTA 2009 (meaning of “control”), and

• sections 473 and 474 of CTA 2009 (meaning of “major interest”).

(11) A company that meets the development condition in relation to a
right by virtue of the performance of the activities mentioned in

subsection (3) or (5) for the period of 12 months so mentioned is to be
regarded as meeting that condition in relation to the right during that
period (as well as at any other time when the company meets the
condition).

357BD Meaning of “qualifying development”

(1) 5A company carries out “qualifying development” in relation to a
right if—

(a) it creates, or significantly contributes to the creation of, the
invention, or

(b) it performs a significant amount of activity for the purposes
10of developing the invention or any item or process
incorporating the invention.

(2) The reference in subsection (1)(b) to developing the invention
includes developing ways in which the invention may be used or
applied.

(3) 15For the purposes of section 357BC it does not matter whether the
qualifying development was carried out before or after—

(a) the company, or

(b) where the company is a member of a group, any member of
the group,

20became the holder of the right or (as the case may be) an exclusive
licence in respect of the right.

357BE The active ownership condition

(1) A company meets the active ownership condition for an accounting
period if all or almost all of the qualifying IP rights held by the
25company in that accounting period are rights in respect of which
condition A or B is met.

(2) Condition A is that during the accounting period the company
performs a significant amount of management activity in relation to
the rights.

(3) 30In subsection (2) “management activity”, in relation to any qualifying
IP rights, means formulating plans and making decisions in relation
to the development or exploitation of the rights.

(4) Condition B is that the company meets the development condition in
relation to the rights by virtue of section 357BC(2) or (3).

(5) 35Any reference in this section to a qualifying IP right held by the
company includes a reference to a qualifying IP right in respect of
which the company holds an exclusive licence.

CHAPTER 3 Relevant IP profits

Steps for calculating relevant IP profits of a trade

357C Relevant IP profits

(1) To determine the relevant IP profits of a trade of a company for an
5accounting period—

Step 1

Calculate the total gross income of the trade for the accounting
period (see section 357CA).

Step 2

10Calculate the percentage (“X%”) given by the following formula—

where—

• “RIPI” is so much of the total gross income of the trade for the
  accounting period as is relevant IP income (see sections
  15357CC and 357CD), and

• “TI” is the total gross income of the trade for the accounting
  period.

Step 3

Calculate X% of the profits of the trade for the accounting period.

20In calculating the profits of the trade for the purposes of this step,
make any adjustments required by section 357CG (and references in
this step to the profits or losses of the trade are to be read subject to
any such adjustments).

Step 4

25Deduct from the amount given by Step 3 the routine return figure
(see section 357CI).

If the amount of the qualifying residual profit is not greater than nil,
go to Step 7.

Step 5

30If the company has elected for small claims treatment, calculate the
small claims amount in relation to the trade (see section 357CM).

Step 6

Deduct from the qualifying residual profit the marketing assets
return figure (see section 357CN).

35Step 7

If the company has made an election under section 357CQ (which
provides in certain circumstances for profits arising before the grant

of a right to be treated as relevant IP profits), add to the amount
given by Step 5 or 6 (or, if the amount of the qualifying residual profit
was not greater than nil, Step 4) any amount determined in
accordance with subsection (3) of that section.

(2) If the amount given by subsection (1) is greater than nil, that amount
5is the relevant IP profits of the trade for the accounting period.

(3) If the amount given by subsection (1) is less than nil, that amount is
the relevant IP losses of the trade for the accounting period (see
Chapter 5).

Total gross income of trade

357CA 10 Total gross income of a trade

(1) For the purposes of this Part the “total gross income” of a trade of a
company for an accounting period is the aggregate of the amounts
falling within the Heads set out in—

(a) subsection (3) (revenue),

(b) 15subsection (5) (compensation),

(c) subsection (6) (adjustments),

(d) subsection (7) (proceeds from intangible fixed assets),

(e) subsection (8) (profits from patent rights).

(2) But the total gross income of the trade does not include any finance
20income (see section 357CB).

(3) Head 1 is any amounts which—

(a) in accordance with generally accepted accounting practice
(“GAAP”) are recognised as revenue in the company’s profit
and loss account or income statement for the accounting
25period, and

(b) are brought into account as credits in calculating the profits
of the trade for the accounting period.

(4) Where the company does not draw up accounts for an accounting
period in accordance with GAAP, the reference in subsection (3)(a)
30to any amounts which in accordance with GAAP are recognised as
revenue in the company’s profit and loss account or income
statement for the accounting period is to be read as a reference to any
amounts which would be so recognised if the company had drawn
up such accounts for that accounting period.

(5) 35Head 2 is any amounts of damages, proceeds of insurance or other
compensation (so far as not falling within Head 1) which are brought
into account as credits in calculating the profits of the trade for the
accounting period.

(6) Head 3 is any amounts (so far as not falling within Head 1) which are
40brought into account as receipts under section 181 of CTA 2009
(adjustment on change of basis) in calculating the profits of the trade
for the accounting period.

(7) Head 4 is any amounts (so far as not falling within Head 1) which are
brought into account as credits under Chapter 4 of Part 8 of CTA 2009

(realisation of intangible fixed assets) in calculating the profits of the
trade for the accounting period.

(8) Head 5 is any profits from the sale by the company of the whole or
part of any patent rights held for the purposes of the trade which are
taxed under section 912 of CTA 2009 in the accounting period.

357CB 5 Finance income

(1) For the purposes of this Part “finance income”, in relation to a trade
of a company, means—

(a) any credits which are treated as receipts of the trade by virtue
of—

(i) 10section 297 of CTA 2009 (credits in respect of loan
relationships), or

(ii) section 573 of CTA 2009 (credits in respect of
derivative contracts),

(b) any amount which in accordance with generally accepted
15accounting practice falls to be recognised as arising from a
financial asset, and

(c) any return, in relation to an amount, which—

(i) is produced for the company by an arrangement to
which it is party, and

(ii) 20is economically equivalent to interest.

(2) In subsection (1)—

• “economically equivalent to interest” is to be construed in
  accordance with section 486B(2) and (3) of CTA 2009, and

• “financial asset” means a financial asset as defined for the
  25purposes of generally accepted accounting practice.

(3) For the purposes of subsection (1)(c), the amount of a return is the
amount which by virtue of the return would, in calculating the
company’s chargeable profits, be treated under section 486B of CTA
2009 (disguised interest to be regarded as profit from loan
30relationship) as a profit arising to the company from a loan
relationship.

But, in calculating that profit for the purposes of this subsection,
sections 486B(7) and 486C to 486E of that Act are to be ignored.

Relevant IP income

357CC 35 Relevant IP income

(1) For the purposes of this Part “relevant IP income” means income
falling within any of the Heads set out in—

(a) subsection (2) (sales income),

(b) subsection (6) (licence fees),

(c) 40subsection (7) (proceeds of sale etc),

(d) subsection (8) (damages for infringement),

(e) subsection (9) (other compensation).

This is subject to section 357CE (excluded income).

(2) Head 1 is income arising from the sale by the company of any of the
45following items—

(a) items in respect of which a qualifying IP right held by the
company has been granted (“qualifying items”);

(b) items incorporating one or more qualifying items;

(c) items that are wholly or mainly designed to be incorporated
5into items within paragraph (a) or (b).

(3) For the purposes of this Part an item and its packaging are not to be
treated as a single item, unless the packaging performs a function
that is essential for the use of the item for the purposes for which it is
intended to be used.

(4) 10In subsection (3) “packaging”, in relation to an item, means any form
of container or other packaging used for the containment, protection,
handling, delivery or presentation of the item, including by way of
attaching the item to, or winding the item round, some other article.

(5) In a case where a qualifying item and an item that is designed to
15incorporate that item (“the parent item”) are sold together as, or as
part of, a single unit for a single price, the reference in subsection
(2)(b) to an item incorporating a qualifying item includes a reference
to the parent item.

(6) Head 2 is income consisting of any licence fee or royalty which the
20company receives under an agreement granting another person any
of the following rights only—

(a) a right in respect of any qualifying IP right held by the
company,

(b) any other right in respect of a qualifying item or process, and

(c) 25in the case of an agreement granting any right within
paragraph (a) or (b), a right granted for the same purposes as
those for which that right was granted.

In this subsection “qualifying process” means a process in respect of
which a qualifying IP right held by the company has been granted.

(7) 30Head 3 is any income arising from the sale or other disposal of a
qualifying IP right or an exclusive licence in respect of such a right.

(8) Head 4 is any amount received by the company in respect of an
infringement, or alleged infringement, of a qualifying IP right held
by the company at the time of the infringement or alleged
35infringement.

(9) Head 5 is any amount of damages, proceeds of insurance or other
compensation, other than an amount in respect of an infringement or
alleged infringement of a qualifying IP right, which is received by the
company in respect of an event and—

(a) 40is paid in respect of any items that fell within subsection (2)
at the time of that event, or

(b) represents a loss of income which would, if received by the
company at the time of that event, have been relevant IP
income.

(10) 45But income is not relevant IP income by virtue of subsection (8) or (9)
unless the event in respect of which the income is received, or any
part of that event, occurred at a time when—

(a) the company was a qualifying company, and