Italy’s Minister of Economic Development and Ministry of Economy and Finance issued a joint decree on the patent box on 28 November 2017, which was published in the official gazette on 6 February 2018 and amends the decree issued on 30 July 2015.
Italy’s patent box regime which entered into force January 1, provides an exemption from the corporate income tax and regional tax on productive activities of 50 percent of the income derived from the exploitation or direct use of qualifying intellectual property.
The exemption applies also to gains arising from the sale of qualifying IP that are not included in taxable income if at least 90 percent of the proceeds are reinvested within the subsequent two tax years in R&D activities for the development, maintenance, and improvement of other qualifying IP.
Taxpayers that may elect to apply the patent box regime include:
- Natural persons carrying on commercial activities;
- Italian companies, cooperatives, and other public and private entities carrying on commercial activities, as well as Italian commercial partnerships, except simple partnerships; and
- Non-resident entities with a permanent establishment in Italy to which qualifying IP may be attributed, provided that the entity is resident in a country with which Italy has a tax treaty in force that allows for the effective exchange of information.
Persons subject to bankruptcy and insolvency procedures are not entitled to apply for the regime
Qualifying IP for the regime includes:
- Copyrighted software
- Industrial patents that have been granted or are in the process of being granted, including invention patents, utility models, plant varieties, and semiconductor topographies
- Designs and models that are legally protected
- Processes, formulas, and information related to business, commercial or scientific knowledge that are legally protected, and
- Two or more of the above-listed IPs that are linked for the realization of a product or family of products, or a process or group of processes.
Moreover, the decree states that opting for the patent box is irrevocable and that it is renewable, lasting for a period of five tax years.
The regime applies to taxpayers that have the right to exploit the IP directly or indirectly where the use is granted to another subject.
Specifically, the guidance explains which activities can qualify as R&D activities for the development, maintenance, and improvement of IP.
Qualifying activities are fundamental research, meaning the experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts without any direct practical application or use in view; or applied research, meaning the activity to improve the understanding of particular business, product, service, or management problem to result in solution to problem and help in marketing new solutions.
Also, qualifying is the creation of software protected by copyright and research, tests, surveys, and studies aimed at obtaining protection of rights and adopting systems against counterfeiting.
Italy’s patent box income
Article 9 of the new patent box decree determines how to calculate the income that qualifies for the patent box. This amount is equal to the income derived from the exploitation of the qualifying IP multiplied by the ratio between qualifying R&D expenditures.
Qualifying R&D expenditures are defined as the costs related to qualifying R&D activities carried out directly by the qualifying person or through research contracts signed with non-related companies, including innovative start-up companies, universities, research institutions or equivalent entities.
Such expenditures may also include costs incurred by related companies and then recharged to the qualifying person; costs in connection with qualifying R&D activities outsourced to third parties; and certain costs incurred under a cost-sharing agreement, subject to limitations.
Qualifying R&D expenditures may be increased by the difference between the overall R&D expenditures and the qualifying R&D expenditures, up to 30%; and overall R&D expenditures, the new guidance states.
In other words, the qualifying expenditures described above, are increased by the costs incurred in transactions with related companies for the development, maintenance, and improvement of the IP and the costs related to the acquisition of the IP.
While the relevant expenses are the costs incurred in the tax years in which the regime applies, they must be computed separately in relation to each single qualifying IP.
The decree states that a tax ruling with the Italian tax authorities is required where income arises from the direct use of the qualifying IP (article 12).
However, qualifying persons may also initiate a ruling procedure to determine the amount of income or capital gains deriving from transactions with related parties.
For more information, do not hesitate to contact the Saglietti Bianco Law Firm