Computer Program (Software) and the Application of Patent Box Benefits

Tomáš Strapec

Managing Associate

What is the "Patent Box"?

The Patent Box is a special tax regime for the commercial utilization of intangible assets, including computer programs.

This special tax regime was introduced into the Income Tax Act with effect from January 1, 2018. It could first be applied for the tax period starting no earlier than January 1, 2018.

In essence, it involves specific taxation rules for selected income, providing certain tax benefits if specific required conditions are met.

Who can benefit from the Patent Box?

The Income Tax Act explicitly stipulates which entities may apply the special Patent Box regime if statutory requirements are fulfilled. These include:

  • Legal entities with a registered office or place of effective management in the territory of the Slovak Republic (the place of effective management refers to the place where management and business decisions of the statutory and supervisory bodies of the legal entity are made, even if this address is not registered in the Commercial Register), and

  • (Foreign) legal entities conducting activities in the territory of the Slovak Republic through a permanent establishment, if the patent, utility model, or computer program (software) is functionally connected with this permanent establishment.

The Patent Box does not apply to natural persons.

Income eligible for the Patent Box

The tax benefit provided by the Patent Box applies to selected income (revenue) arising from remuneration for granting the right to use or for the use of:

  • an invention protected by a patent or subject to a patent application,

  • a technical solution protected by a utility model or subject to a utility model application,

    or

  • a computer program (software) subject to copyright protection.

A basic condition for applying the Patent Box is that these intellectual property items must result from research and development conducted by the taxpayer.

The tax benefit provided by the Patent Box cannot be applied to income derived from exclusively purchased patents, utility models, or computer programs (software), as these may indeed result from research and development, but of a different entity, not the taxpayer.

Amount of tax benefit provided by the Patent Box

If all legally required conditions are met, 50% of the income derived from remuneration for granting the right to use or for the use of the relevant intellectual property will be exempt from income tax.

Under what conditions can Patent Box benefits be applied to a computer program (software)?

Although the conditions under which Patent Box benefits can be applied are clear in the case of inventions and technical solutions (as these intellectual property rights require registration), this is not as evident in the case of computer programs (software).

As mentioned above, income tax exemption in the specified amount can be applied to income from licensing a computer program (software), provided that the program results from development conducted by the taxpayer.

In addition to this condition, the second condition stipulated by the Income Tax Act must also be met, namely, that the computer program (software) must be subject to copyright protection under the Copyright Act.

This raises the question: under what conditions does a computer program (software) qualify for copyright protection under the Copyright Act?

From the definition of a computer program, it is evident that a computer program is protected under the Copyright Act only if it is the result of the author’s creative intellectual activity.

In this respect, we believe that a computer program (software) will be subject to copyright protection under the Copyright Act only if it is the result of the author’s creative intellectual activity, that is, only if it is original. No additional criteria are applied to determine whether a computer program (software) is protected under the Copyright Act.

However, only the expression of a computer program (software) in source or machine code is protected. The ideas and principles underlying any element of a computer program (software), including those forming the basis of its interfaces, are not protected under the Copyright Act[1].

Originality requirement for a computer program (software)

The originality of a computer program (software) must be assessed individually in each case.

However, given the absence of a legal definition of "creative intellectual activity of the author," questions arise about the parameters for determining whether a particular program developed by a legal entity reflects the creative intellectual activity of its programmers and, therefore, meets the originality requirement.

The vague formulation of the originality requirement, as well as the absence of its legal definition, causes uncertainty about whether a particular computer program (software) is protected under the Copyright Act and, consequently, whether it is eligible for Patent Box benefits.

The answer to this question should be sought in relevant court decisions. Since we are not aware of any Slovak court decisions on this issue, we have examined decisions of the Court of Justice of the European Union (CJEU) and U.S. courts in this regard.

Originality requirement in the European Union

The CJEU has dealt with the originality requirement to a certain extent in specific cases it has decided.

From these decisions, certain minimum standards can be derived that should be considered when assessing whether a computer program (software) meets the originality requirement.

These include:

  • maintaining the author’s free and creative choice when creating the computer program (software); and

  • ensuring the computer program (software) reflects the author’s personal touch.

These conclusions can also be found in academic articles, which state that a computer program (software) can be considered the result of the author’s creative intellectual activity only if it bears the author’s personal stamp. It is necessary (though not sufficient) that the author’s freedom of decision-making is maintained when the author (programmer) creates the computer program (software). If the author lacks such freedom and merely follows a path leading to a single result, the computer program would lack originality (i.e., merely performing functional routines cannot be considered original intellectual activity).

Despite these criteria applicable to determining originality, there is still no practical approach in Europe or Slovakia to test whether a computer program (software) is protected under copyright.

Testing copyright protection for a computer program (software) in the U.S.

In this regard, the approach of U.S. courts is interesting. To determine whether a tested computer program (software) constitutes a protected copyrighted work, they have employed a three-phase test (the Altai test[4]).

This test was used in cases where the court examined whether non-literal copying of a computer program (software) constituted a violation of its copyright protection.

This test typically consists of three phases and generally answers whether the computer program (software) contains elements that are copyright-protected. By applying this test to the examined computer program (software), protectable and unprotectable parts of the program are separated.

Based on this test, U.S. courts concluded that the following elements of a computer program are not copyright-protectable:

  • Elements whose expression is conditional on the effectiveness of solving the given problem (i.e., modules that are necessary for the efficient execution of the part of the computer program that is being implemented);

  • elements dictated by external factors - represented by standard techniques in a specific computing environment that limit the programmer’s design choices, such as:
          - the mechanics of the computer on which the program is to operate;
          - requirements for compatibility with other computer programs with which the proposed computer

    program is intended to function (be interconnected).
          - computer manufacturers' standards;
          - requirements set by the specific industry in which the computer program (software) is to be used;
          - generally accepted programming practices within the computer industry; and

  • elements taken from the public domain – i.e., computer programs that have entered the public sphere through freely available software exchanges, etc.

Only after filtering out the above elements do (if any) parts of the computer program (software) remain that may be protected under copyright.

Although this approach of U.S. courts is not binding for local conditions, it sheds some light on how to proceed and what to consider when analyzing whether a computer program (software) is copyright-protected.

What aspects should be considered?

Given the above, before applying Patent Box benefits to the development of a computer program (software), we recommend asking the following questions:

  • Does the computer program (software) reflect the programmer’s personality and demonstrate their creative individuality?

  • Does the program bear the programmer’s personal stamp?

  • Is the programmer free to make creative decisions when designing the program, or do they follow a path leading to a single possible result?

  • Is the creation (programming) process mechanical or routine for the programmer?

  • What portion of the program consists of elements dictated by efficiency?

  • What portion of the program is dictated by external factors?

  • What portion of the program consists of elements derived from the public domain?

Answers to these questions should help the taxpayer (or their tax advisors) determine whether the computer program (software) is the result of the author’s creative intellectual activity and, therefore, whether it qualifies for copyright protection, enabling the application of Patent Box benefits.

Given that no relevant decisions of Slovak courts on this issue are currently available, it will be interesting to observe how courts address the determination of copyright protection for individual computer programs in the future.

The reference: https://www.epravo.sk/top/clanky/pocitacovy-program-softver-a-uplatnenie-vyhod-patent-boxu-4505.html

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[1] See § 87(1), last sentence of Act No. 185/2015 Coll., the Copyright Act, as amended, and also point 11 of the recitals of Directive 2009/24/EC of the European Parliament and of the Council of 23 April 2009 on the legal protection of computer programs.
[2] See the decisions of the European Court of Justice in the cases Infopaq International A/S (C-5/08); Bezpečnostní softwarová asociace – Svaz softwarové ochrany (C-393/09); Eva-Maria Painer (C-145/10); and SAS Institute Inc. (C-406/10).
[3] Intellectual Property Rights in Software.
[4] See the Decision of the United States Court of Appeals for the Second Circuit dated 22 June 1992 in the case of Computer Associates International, Inc. v. Altai, Inc., 982 F.2d 693. Available>>>here