Navigating tax considerations in life sciences licensing agreements
In this blog, Richard Turner, Senior Managing Director at FTI Consulting, discusses how licence and collaboration agreements in life sciences can create significant tax consequences. By proactively addressing withholding tax, loss utilisation, indirect tax, patent box, R&D incentives and structuring options, companies can ensure tax‑efficient deals and maximise long‑term returns, he argues.
Licence and collaboration agreements play a pivotal role in the life sciences industry. They often involve significant transfers of value across borders and enable companies to monetise and leverage their discoveries while managing risk through strategic partnerships.
However, these can give rise to unintended tax consequences that significantly impact profitability. Identifying and addressing tax issues early, ideally in the heads of terms, allows them to be resolved while negotiations remain flexible and before the agreement is finalised.
There are six principal tax areas to consider:
- Withholding Tax (WHT)
WHT is a tax deducted at the source by the payer of royalties before payment is made to a recipient in another jurisdiction. Although WHT is technically a tax liability of the licensor and may, in some cases, be creditable against domestic tax liabilities, it can represent a real cash cost for companies operating at a loss, with no domestic tax to offset it. Companies should quantify any potential withholding tax exposure, explore double tax treaty benefits, and include compliance co-operation clauses in any agreements. Additionally, controlling assignment rights prevents unexpected changes to the withholding tax profile. - Loss utilisation
Where a licensing agreement is expected to generate a significant milestone receipt, it is important to consider how this income can be offset against tax losses to minimise any resulting tax liability. Under current rules, milestone income is first offset against current-year losses. Brought-forward losses can generally then be utilised, but are restricted to the first £5 million of profit, plus 50 percent of any remaining profit. - Indirect tax
Template licensing agreements are often unclear on indirect tax matters, so careful review is essential to ensure appropriate treatment and clarity. Common issues include whether prices are stated as inclusive or exclusive of VAT, how sales thresholds are defined, and how cross-border transfers of materials are treated for VAT and import duty purposes. - Patent box
The UK patent box is a valuable incentive that can reduce the UK corporation tax rate to 10 percent on profits attributable to qualifying patents. Both licensors and licensees may seek to benefit from the regime, and should consider qualification requirements and ensure adequate evidence of IP rights exists. - Research and development (R&D) Incentives
Under the new merged R&D tax relief rules, subsidised expenditure (for example, costs reimbursed under a collaboration agreement) is no longer automatically excluded from R&D claims. Nevertheless, the nature and structure of a licensing or collaboration agreement can still affect a company’s entitlement to R&D tax relief and should be considered carefully. - Structuring opportunities
When a company out-licenses a programme, milestone payments, royalties, and sales-based receipts are generally taxable at the company level. A further tax charge often arises when profits are subsequently distributed to investors. It is therefore important to consider future exit or divestment scenarios at an early stage to identify any structuring opportunities that could mitigate this potential double taxation.
Many of these considerations are relatively straight forward to implement and should not be disruptive to the deal. However, if they are left too late, the opportunity can be missed. Proactive tax planning during licensing negotiations helps protect value and enhance returns. By addressing these six areas early in the process companies can structure agreements to ensure tax efficiency and long-term benefit.
View FTI Consulting’s Licensing and Collaboration Tax Insight Note to learn more.
