The Impact of IP Box Regimes on the M&A Market

Abstract

Intellectual property (IP) box regimes reward ownership of successful technology by imposing a lower tax rate on income derived from the commercialization of IP relative to other sources of business income. Coupled with explicit provisions regarding the eligibility of acquired IP, IP boxes may affect merger and acquisition (M&A) incentives through multiple channels. Applying panel difference-in-differences, triple-differencing, and event study methods, we examine the effects of these modified incentives on the volume of M&A transactions and the probability that a firm is acquired in the context of international and domestic deals. In regimes with strict nexus requirements, reducing the tax rate on patent income is associated with reductions in the number of deals and the probability of being acquired for patent-owning firms due to the potential loss of eligibility for preferential taxation. However, this effect dissipates where nexus requirements are relaxed, and significant positive effects of IP box tax savings on M&A activity in the more permissive regimes are indicative of increased after-tax valuations of merger-driven synergies.