The tax system treats innovators unfairly and encourages them to send their intellectual property overseas, an expert says.
Paul Adams, chief executive of North Shore technology commercialisation company EverEdge IP, said that under this country's tax regime money spent on patents must be capitalised and treated as an asset, rather than a tax deductible expense.
"However if you then sold that patent to someone, then you have to pay income tax on it," he said.
Adams said patent owners were getting the worst of both worlds as assets - such as machinery or a building - were usually tax-free when sold.
"But with patents this very unusual feature of the law treats them as an asset one way and as an income item the other," he said.
This discouraged innovation.
"That seriously discourages anyone from putting innovation in New Zealand or developing innovation in New Zealand."
Robin Oliver, of Inland Revenue, said expenditure incurred through developing a patent was tax deductible.
"The patent developer is allowed an immediate tax deduction for any expenditure that is R&D [research & development]," he said.
"Later expenditure on developing the patent is deducted over the life of the patent - 20 years - if the patent is used in the person's business or, if the patent is sold, in the year of sale."
Adams said it was true that R&D expenses were tax deductible, but once the patent application process began all further expenditure relating to the patent application had to be capitalised.
"In other words an immediate tax deduction is no longer available for the expenditure incurred," he said.
Adams said the high tax rate on royalties made taking intellectual property overseas a compelling option.
He said R&D staff tended to be based where intellectual property was held, and he knew of a number of New Zealand businesses, which he declined to name, that had taken their innovations overseas because of the tax law.
"The country ends up missing out on high value job creation, innovation and export revenue."
Few accountants had a good understanding of the laws around patents, he added.
"People are being caught out because they don't realise that selling intellectual property, even in the context of a receivership, liquidation or restructure could create a substantial tax liability."
KPMG tax partner Adrian Michael said tax law around patents was an anomaly.
"It's certainly unusual in a tax system which doesn't, by and large, tax capital gains," he said.