Italy introduces new patent box regime

By Luca Tortorella and Michele Targa, Gatti Pavesi Bianchi Ludovici, Milan

On 21 October, the Italian government fully repealed and replaced the former patent box regime through the publication of law decree 146/2021 on “urgent economic and tax measures” in the Italian Official Gazette. The decree entered into force upon publication but must be converted into law within 60 days from the date of publication to remain in force.

The new rules, applicable from 2021 onwards, change the nature of the patent box regime that was applicable until now. They shift the regime from a profit-based incentive to an extra deduction for certain research and development costs incurred by Italian entities with third parties in relation to copyrighted software, patents, trademarks, designs, models, and qualifying know-how.

In this sense, it is worth noting the re-inclusion of trademarks among the relevant intangible assets. In 2017, Italy had amended the former patent box to remove trademarks from the list of eligible intellectual property to comply with OECD guidance on intellectual property regimes (BEPS Action 5).

Although it is not clear yet which research and development costs will be eligible for the deduction (authorities are expected to issue operational instructions in the near future), the decree expressly provides that Italian entities which bear costs aimed at “creating and developing the qualifying intangibles” will be allowed to increase the deduction of these costs for corporate and regional tax purposes by an additional 90%. This would generate tax relief equal to approximately 25.11% (based on applicable corporate and regional tax rates) of the costs incurred.

The new approach implies that the patent box will no longer be connected to the profits generated by the exploitation of intangible assets, but only to the actual amount of costs incurred for performing qualified research and development. Consequently, a taxpayer can now benefit from the new regime even if it is exploiting an intangible property in a loss position or with a very low profitability. In this sense, in the new regime the recapture of losses, which was mandatory under the previous patent box, appears superseded and irrelevant. This makes the new regime advantageous especially for innovating entities in the process of developing new intangibles, while it becomes less appealing compared to the former regime for companies exploiting mature intangibles which typically require fewer investments.

To apply for the new regime, it is requested to declare an irrevocable option that lasts for five fiscal years, potentially renewable. The increased deduction must be calculated autonomously by taxpayers and, differently from the previous regime, it is no longer possible to start a ruling with the Italian tax authorities to define in advance the tax benefit.

However, to avoid administrative penalties in the event of challenges by the tax authorities, Italian entities may decide to prepare a supporting set of documents to be made available during tax audits. Given the low threshold for the application of tax criminal penalties in Italy, it would be commendable if, during the process of converting the decree into law, the provision specifies that the optional documentation might provide a shield also against tax criminal implications.

Finally, differently from the former rules, the new incentive becomes an alternative to the research and development tax credit provided by Law n. 160/2019. Italian entities interested in exploring the new patent box regime should then carefully evaluate in advance the expected advantage. From preliminary simulations and based on the current information, the new patent box appears to be more attractive than the research and development tax credit (which generates a maximum tax bonus of 20% on costs sustained and cannot exceed EUR 4 million).

As mentioned, the new patent box regime should be applicable as of 2021. The law decree provides transition rules regulating cases where taxpayers are still under the old regime. Nevertheless, its language (including the language of the bill to convert the decree into law) is controversial, leaving uncertainty as to how such transition rules have to be interpreted because apparently, it might retroactively damage certain taxpayers who legitimately expected to benefit from the old regime for the period 2020-2024 by electing the regime in their tax return due on 30 November. The decree puts at risk the possibility for these entities to proceed with the previous regime, notwithstanding that in some cases they already considered the tax relief when calculating the taxes due for 2020. Only the technical report to the decree seems to leave the door open for these taxpayers, specifying that the previous rules can be applied until 2024.

The decree is generating confusion within the business arena, and the uncertainty definitively needs to be resolved soon. In this regard, additional clarifications from authorities in the short term will be key, even before the conversion into law and within the deadline for the filing of the tax returns.

• Luca Tortorella is a senior associate at Gatti Pavesi Bianchi Ludovici, Milan.

• Michele Targa is an associate at Gatti Pavesi Bianchi Ludovici, Milan.