Italian Revenue clarifies new reporting option for patent box tax benefit

By Gian Luca Nieddu, Head of Transfer Pricing & Tax Value Chain, Hager & Partners, Milan area

The Italian Central Revenue on September 9 issued clarifications for taxpayers that want to report eligible income for the patent box regime on their tax returns rather than apply for a tax ruling. The new rules apply to taxpayers that are not on a calendar year and that have a financial year in progress on 1 May 2019.

The clarifications follow the amendments to Italy’s patent box regime recently introduced by Article 4 of the Law Decree n.34 issued 30 April 2019 and converted with the Law of 28 June 2019, n. 58 (so-called “Growth Decree”).

In particular, the new provisions state that starting May 1, holders of business income who opt for the patent box incentive can choose, as an alternative to the mandatory ruling procedure, to autonomously determine and declare the eligible income in cases direct exploitation of intellectual property. The guidance indicates the information necessary for the determination in accordance with Revenue Commissioner provisions published on 30 July.

In practice, the election to self-determine of eligible patent box income is annually communicated in the income tax return for the tax period to which the patent box benefit refers. The election is irrevocable and renewable.

Italian patent box penalty protection

Additionally, the guidance provides that if the Italian tax administration later (e.g., in case of audit) adjusts net income eligible for the patent box regime that was determined directly, no administrative penalties to be levied if the requirements of the new guidance are met.

Under these rules, during an audit, inspection, verification, or other investigative activity, the taxpayer must deliver to the tax administration the specific patent box documentation indicated on 30 July the Revenue Commissioner guidance.

However, to benefit from the penalty protection regime, the taxpayer who holds the aforementioned documentation must notify the tax administration in the tax return relating to the tax period for which patent box tax relief is obtained.

The provisions introduced by the Growth Decree also apply to taxpayers that have applied for a patent box tax ruling provided that the taxpayer notifies the Italian Revenue Agency of the intention to switch to self-reporting and provided that agreement with the competent tax office has not yet been concluded.

Taxpayers and their advisors are evaluating pros and cons of taking advantage of these new provisions, considering, on the one hand, the financial and economic impacts of getting the benefit immediately (even if split into three fiscal years) and, on the other hand, the potential risk of future disputes with the office, especially in case of highly peculiar intellectual property and niche industries.