The Italian Finance Bill for 2015 has enhanced an important provision named “Patent Box”, to facilitate and attract foreign taxpayers, improve the Research and Development in Italy and most important preserve the “i.e. Made in Italy”.
This provision introduced in Italy is an optional tax regime, that allows reduced taxation for income arising from direct use or licensing of intellectual property assets by companies and commercial entities performing Research & Development activities.
These measures are provided by the Italian government, in particular to permit more assessments appealing tax regimes in order to attract foreign investments and relocate IP assets.
Italy’s Patent box regime is applicable to specific entities, in particular to the following taxpayers: individuals business income holders, companies and institutions, partnerships, trusts and non-residents with a Permanent Establishment in Italy that carry out research and development activities aimed at the production, maintaining and enhancing certain intangible assets (i.e. qualifying Intellectual Properties). This regime is also available for
- income earned from licensing qualifying Intellectual Properties to third parties and
- income attributable to direct use of qualifying Intellectual Properties by their owner.
In this way, the income attributable to direct use must be determined in agreement with the Italian Revenue Agency, through the international tax ruling procedure or without but with the possibility to be controlled by the Revenue Agency opting on the tax return.
The regime is excluded to some particular entities such as: self-employed, bankrupt companies and entities that use a non-analytic method to determinate the taxable income.
The tax benefit consists of an exclusion from the taxable base, included in corporation tax (i.e. IRES) and regional tax (i.e. IRAP), of a percentage of the income sourced from the exploitation of qualified intellectual property assets.
The percentage excluded of the taxable income is set at 50 per cent from the tax year 2017 onwards and once a taxpayer decides to opt into the regime, the election is irrevocable for a five-year period, which may be renewed. In particular, the incomes provided by the regime are the following:
- Industrial patents that have been granted or that are in the process of being granted;
- Software protected by copyright;
- Models and designs capable of being legally protected;
- Business and technical-industrial know-how (in particular for Know-how its necessary a technical appraisal).
Unfortunately, before the Decree Law April 24, 2017 No.50 “trademarks” were included in the Patent box regime, but now, income arises from registered or unregistered trademarks that are excluded from the tax benefit if the application for the patent box regime is exercised from tax year 2017 (the tax benefit still applies to patent box procedures started in tax years 2015 and 2016).
The procedure to determine the benefit of the patent box regime consists in a particular evaluation based on the percentage of favour income.
The first part of the operative evaluation consists on the identification of the possible favour incomes, in particular the incomes deriving by the utilization direct or indirect of intangible assets and Intellectual Properties.
The second part, consists of the evaluation of the i.e. “nexus ratio” that is a principle, promoted by OECD, that provides the ratio between qualified costs and overall costs.
The third and last part to determine the favour income consists in the multiplication between the favour income identified as (first part) and the “nexus ratio” as the (second part).
In specific, for qualified costs it is intended for the Research and Development activities, fiscal pertinent, aimed at the production, maintaining and enhancing certain favour intangible assets, whereas, for overall costs it is intended that the costs, fiscal pertinent, are supported to make these assets.
Furthermore, Research and Development has to consist in different activities listed by the Tax Authorities, in particular the Italian Revenue Agency, as:
- Basic Research;
- Applied Research;
- Software Development;
If the company has opted to the Patent box regime and the income produced by the intangible assets become negative, the positive effects could be used on the consecutive fiscal year, with the i.e. “recapture mechanism”.
In case of direct employment of intangible assets, in order to be able to use the benefits of the Patent box regime, it is necessary to exhibit an advance ruling to the Italian Revenue Agency or exhibit the Italian tax return with the confirmation that the documentation is available that could prove that the use of the regime is correct.
In particular, basing the ruling on the following conditions:
- the determination of the economic capacity to the production of corporation income or losses in case of direct use of intangibles assets;
- the determination of income deriving from the use of the intangibles assets;
- the determination of capital gain realized in operations with companies that control other companies or are under control.
The methods used to determine the economic capacity to the production is represented by the Comparable Uncontrolled Price Method (CUP) or the Profit Split Method.
The CUP method is applied referring to the “royalty” and is much more useful to quantify the favour income referred to the Intellectual Properties.
Moreover, it is considered to be a more appropriate aim to the “price comparison” of selling products and services.
Whereas, the Profit Split Method has the purpose to determine the proper allocation of income and deductions among parties to an intercompany transaction where one party is comprised of controlled taxpayers and another consists of uncontrolled taxpayers.
The profit split method is used to evaluate controlled transactions to determine if the allocation of profits and losses between the related parties were conducted at arm’s length based on the relative value of their contributions to the profit or loss.
By: Sergio Sirabella