The Portuguese Patent Box Regime

1. What it is and the framework of the Patent Box regime

The Patent Box regime, established in Article 50-A of the Corporate Income Tax (CIT) Code, is a tax framework designed to benefit income generated by the economic exploitation of intangible assets, such as patents, industrial designs, and software. This regime was introduced in Portugal in 2014, through the CIT Reform Law (Law no. 2/2014), initially allowing a 50% exclusion from taxation on eligible income.

Later, following the evolution of the digital economy, the State Budget Law for 2020 (Law no. 2/2020) expressly extended the application of this benefit to copyrights on computer programs, but it was with the State Budget Law for 2022 (Law no. 12/2022), that the exclusion of this income from the determination of taxable profit was reinforced to a very significant 85%.

The creation and the reinforcement of this regime had a very clear economic and strategic purpose on the part of the legislator. Firstly, it was intended to introduce a privileged regime that would increase the competitiveness of the national legal-tax system through the attraction and retention of investment in Research and Development (R&D), in order to make Portugal an attractive and aggregating platform for innovation investment with true economic substance. Secondly, it is intended not only to promote the creation of technology, but above all the economic valuation of intellectual property, compensating companies that manage to commercialize and generate income through the innovation they develop. Finally, as the Government publicly assumed at the time of the increase in the deduction to 85%, the express intention to transform the Portuguese Patent Box into one of the most attractive tax regimes in the entire European Union in this field, compensating and attracting technology companies that invest intensely in R&D.

2. Access conditions and asset requirements

In order for a company to benefit from this exceptional measure of tax relief, Article 50-A of the CIT Code requires the cumulative fulfillment of four very precise conditions, to which other specific formal requirements must be added when the asset in question is software. The four cumulative conditions for access are:

the entity that acquires the right to use the asset – the licensee – must compulsorily use it in the pursuit of an activity of a commercial, industrial, or agricultural nature;

the results of the use of the software by the client cannot materialize in the delivery of goods or the provision of services that would originate tax-deductible expenses in the very company that provided the software. This rule also extends to other companies that belong to the same group, whenever special relations exist, thus avoiding abusive tax planning of cascading tax benefits;

the client who acquires the license for use cannot be resident in a country, territory, or region with a clearly more favorable tax regime (offshore);

the technology company (taxable person) is obliged to have highly organized accounting records, which allow for a clear distinction of which income originates from the eligible software, and must be able to unequivocally identify all expenses and losses incurred with Research and Development (R&D) directly attributable to the creation of that same software.

When the asset in question involves computer programs (software), the law dictates that these must present a creative character and originality, and cannot be a mere copy, which guarantees them legal protection identical to that conferred on literary works, and they must also be registered. In practice, this means that the company must deposit and register its software with competent entities, such as the Portuguese Software Association (ASSOFT) or the General Inspection of Cultural Activities (IGAC). This step is essential, as the registration creates a presumption before the Tax Authority of the existence of the software and the ownership of copyright within the sphere of the creative company. In the case of complex solutions (such as the RCS software discussed in the courts), registrations can even be made by separate modules (e.g.: Platform, MaaP and Apps).

3. Tax benefits and calculation formula (nexus approach)

The Patent Box regime works through a direct deduction in the determination of the company's taxable profit. As we have seen, since the amendment introduced by the State Budget Law for 2022, the benefit translates into a tax exclusion of 85% of eligible income. However, this calculation does not fall blindly on gross turnover, following a strict logic of investment compensation.

The concept of income and the accumulated balance rule: for the purposes of accessing this regime, the income that benefits from this exemption corresponds to a net value corresponding to the positive balance between the gains earned in a given year and the expenses or losses with Research and Development (R&D) incurred in that same period for that software. Furthermore, the accumulated negative balance rule applies here, so that the deduction is only applicable to the part of the income that exceeds any historical negative balance. Bearing in mind that in the first years of creating software, the company will have many R&D expenses and few (or no) revenues, generating a negative balance, this tax benefit only becomes truly evident when the profitability of the software finally exceeds the totality of the investment that the company accumulated in its development;

The legal formula (nexus approach): to determine the exact amount to be deducted from profits, the law stipulates the following formula, based on an international guideline: (QE / TE) x RI x 85%, where:

QE (Qualifying Expenditures) represents the R&D expenses incurred by the company itself to develop the software. To reward internal effort, the law allows these expenses to be increased by 30% (without this increase being able to exceed the value of TE).

TE (Total Expenditures) represents the totality of the R&D expenses associated with that asset. The great difference compared to QE is that Total Expenditures also include the costs of subcontracting (outsourcing) to other entities belonging to the same business group.

RI (Total Income) represents the positive balance generated by the exploitation of the asset in the period, after applying the rules of the accumulated balances explained above.

The ratio of qualifying expenditures / total expenditures: the ratio formed by the division of Qualifying Expenditures by Total Expenditures (QE/TE) is the heart of this formula and serves as a weighting factor. The legislator designed this ratio to reward companies that conduct research directly and domestically and to penalize those who subcontract R&D to related companies abroad. In practice, if a company subcontracts a large part of the development to its own group in another country, its TE will rise significantly in relation to QE, causing the ratio to fall below 1 (for example, 0.6), which will dilute and reduce the final value of the 85% tax benefit. Conversely, if the development is internal or subcontracted only to independent external entities, the ratio will be 1 (i.e., 100%), allowing for a maximization of the tax deduction.

4. The restrictive position of the Tax Authority (AT)

Despite the legislator's intention to create a highly attractive regime for innovation, the practical application of the Patent Box has collided head-on with a resistant attitude and the restrictive interpretation of the administration. Through various Binding Rulings (among which Binding Rulings nos. 22777, 21235, 20807, and 25460 stand out), the AT has built a systematic argument to deny this tax benefit to software companies, based essentially on three main obstacles:

the strict requirement for royalties and the refusal of standardized software: the AT has argued that only income perfectly subsumable under the classic concept of royalties fits within the Patent Box regime. In the view of the Tax Authorities, if a company grants a license to use standardized software – such as standardized copies distributed to end-users or via digital platforms – without proceeding with the transfer of the intellectual property of the code, such an operation will constitute a mere provision of services or commercial sale. To this end, it argues that the simple authorization for the client to use the program, being limited to what is strictly necessary for its operation, does not constitute a true “assignment or temporary use of copyright”;

the rejection of “perpetual” licenses: another argument repeatedly wielded by the AT relates to the temporality of the granted use. The law requires that the income be “derived from contracts having as their object the assignment or temporary use” of copyright. In cases such as that of binding ruling no. 25460 – concerning hospital software licenses – the AT detected that the contracts stated that the licenses sold to clients were “perpetual” and irrevocable. Since for the AT, a perpetual license means that the company has definitively alienated the economic utility of the asset, approaching a permanent sale, the AT has denied the tax benefit for this type of license;

the trap of “royalty-free” jargon: finally, the AT has frequently used the contractual vocabulary itself against companies, an example of which is the common reference in international technology business models to the use of royalty-free software after the payment of a single initial amount (up-front fee). From this clause, the AT has made a completely literal reading, stating that if the contract itself, drafted by the company, stipulates that the license is royalty-free, then it must be concluded that, admittedly, there are no royalties to benefit from the exemption of article 50-A of the CIRC. This defensive posture of the AT has created an enormous gap between the application of the law on the one hand, and the real economy of technology companies, which is what the legislator’s intention sought to promote, welcome, and capture. According to the AT’s own statistics, in 2024 only about 28 taxpayers enjoyed this regime in Portugal, a very modest number for a measure intended to be a key to capturing innovation.

5. The jurisprudence on these matters (CAAD)

In the face of systematic refusals by the Tax Authority (AT), several technology companies have turned to the Arbitration Courts (CAAD) and have obtained very significant victories. The courts have deconstructed, point by point, the AT's arguments, adopting a vision that protects the legislator's original intention to incentivize innovation. Described below are the four main pillars of the companies' defense validated by the courts (with emphasis on cases 409/2025-T, 434/2025-T, and 585/2025-T):

the covered income: while the AT argues that only pure and classic royalties allow direct access to the Patent Box, in the arbitration decision rendered within the scope of case 585/2025-T (CAAD), it was clarified that the law does not require such exclusivity. The court determined that the benefit covers income from contracts for the assignment and temporary use of software, regardless of the nature of this income, therefore restricting the benefit only to the strict accounting concept of royalty frustrates the competitiveness objectives of the regime;

the deconstruction of the “royalty-free” jargon: the courts also clarified that the AT makes an incorrect reading of the Anglo-Saxon commercial jargon commonly used in technology contracts. Thus, the circumstance that a contract states that the license is royalty-free does not mean that the copyright is not paid, but only that the technology company invoices a single up-front payment and will not charge additional or recurring payments each time the end-user uses the software. This initial payment is, for all intents and purposes, the remuneration for the copyright;

perpetual licenses: the court clarified that the mention of perpetual and irrevocable licenses serves only to contractually guarantee the client that they will not be disturbed in the use of the software, and that, as licenses cannot legally be perpetual, they are, in their substance, limited in time, fulfilling the requirement of the law;

customized software and the right to use: in view of the AT's attempts to classify the sale of licenses as a mere provision of services or sale of a commercial product, arguing that intellectual property remained with the creating company, the arbitration decisions have instead clarified that it is precisely because the base intellectual property remains in the sphere of the author that we are dealing with a temporary assignment and not a definitive alienation (sale). In the cases analyzed, the courts proved that the software (such as the complex “RCS” solution) has enormous originality and differentiation, requiring high levels of adaptation and the creation of connectors to integrate into the clients' systems. Therefore, the granting of “Right-to-Use” licenses is a true act of exploitation and disposal of copyright, perfectly eligible for the 85% CIT exemption.

In view of all these arguments, the arbitration courts have annulled the AT's corrections, recognizing that the licensing of complex software, even if paid for at once and commercially nicknamed perpetual or royalty-free, fits perfectly into the spirit and the letter of article 50-A of the CIRC.

6. Conclusions

Although the legislator designed the Patent Box regime with the objective of making it “one of the most attractive in the European Union” by exempting from income tax a substantial part (85%) of the income obtained from these innovations, the truth is that its practical application has been hindered by a reluctant administration. The same took place upon the approval of the non-habitual resident regime, which in an initial phase faced resistance from high-ranking officials of the Portuguese tax administration who did not agree with that regime enshrined in parliamentary law. In any case, the truth is that the regime remains in force, just as the reasons that led to its establishment remain current and, as we have seen from the most recent case law, far from resigning themselves, companies must be informed and must claim for themselves this enormous tax saving to which they are undoubtedly entitled.

For a software company to be able to apply the Patent Box in total safety and shield itself against possible AT inspections, the rigorous adoption of some best practices is recommended, such as contractual rigor, ensuring that the contracts entered into with clients are reviewed and adapted in light of Portuguese law, it being fundamental that the contract identifies the assignment as a granting of rights of use (right to use) and makes it clear that the ownership of the intellectual property remains within the sphere of the national company. It is essential that the software be registered with ASSOFT or IGAC, and the company must ensure that there is documentary consistency, making the names of the software modules registered with ASSOFT coincide exactly with the descriptions appearing on the invoices issued to clients. The finance department must implement specific cost centers, maintaining analytical accounting that can unequivocally isolate the income and R&D expenses attributable to each specific asset (software).

These and other practices are those that will make the difference, significantly protecting companies that intend to benefit lastingly from this regime.