Closing Pandora’s IP Box: The Impact of the Nexus Approach on Patent Shifting and Innovative Activity

Abstract

This study investigates the impact of the nexus requirement on entities’ location decisions for
intellectual property and investments. The nexus requirement links the preferential Intellectual
Property Box (IP Box) taxation to domestic research activity, aiming to reduce cross-border
patent shifting. Using a stacked difference-in-differences design on a sample of European
entities, I analyze whether entities alter their location decisions for investments and intellectual
property after the nexus requirement applies. Analyses reveal that the nexus requirement is
effective in reducing entities’ patent shifting from non-IP Box entities to IP Box entities.
Additional results suggest that multinational entities reallocate capital and labor investment
from non-IP Box entities toward IP Box entities to meet the nexus requirement and retain the
IP Box tax benefit. Overall, the evidence indicates less geographical separation between
research and income taxation. While substance requirements were intended to prevent IP and
profit outflows from high-tax countries without IP Boxes, they have instead led entities to
reallocate investments and innovative activity from these countries to countries offering IP
Boxes.

Keywords: Intellectual Property Boxes, Patent Shifting, Corporate Innovation, Investments, Employment

JEL Classification: H20, H25, H32