Tax regulations implementing Italy’s patent box regime were published by the Ministry of Economic Development and Ministry of Economy and Finance in the February 6 Official Gazette.
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.
The new guidance (article 2) states that the patent box regime applies to individuals, resident companies, cooperatives, and other public and private entities carrying on business activities; and to Italian commercial partnerships, with the exception of simple partnerships.
The regime applies further to non-resident entities having a permanent establishment in Italy to which the qualifying IP may be attributed if resident in a country that has a tax treaty in force with Italy and that allows an effective exchange of information.
Persons subject to bankruptcy and insolvency procedures are not entitled to apply for the regime (article 3).
The guidance also enumerates what types of IP can qualify for the new regime (article 6).
The patent box will apply to software protected by copyright; industrial patents, granted or in the process of being granted comprising patents on inventions including biotech inventions and related certificates; utility models; plant varieties and semiconductors’ topographies; designs and models which can be legally protected; processes; formulas and information related to business, commercial, or scientific knowledge which can be legally protected; and two or more listed IPs, where complementary and jointly exploited for the realization of a product or process.
The guidance states that national law, EU law, and other international provisions included in relevant treaties and international agreements on industrial and intellectual property should be taken in account to elaborate the definition of the listed qualifying IP and the related protection requirements.
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 (article 4).
The regime applies to taxpayers that have the right to exploit the IP directly or indirectly where the use is granted to another subject (article 7). In case of extraordinary operations, like mergers or demergers, the assignee takes the rights of the option (article 5).
The guidance also explains which activities can qualify as R&D activities (article 8) for the development, maintenance, and improvement of IP.
Specifically, qualifying activities are fundamental research (or basic, pure, or blue-sky 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.
Qualifying R&D also includes the design, outline, and the enhancement of products, processes, and services with the inclusion of their exterior appearance.
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.
Interest expense, immovable property costs, and other costs which may not be directly connected to a specific qualifying IP cannot be taken into account in this calculation.
While article 11 states that 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.
The decree further provides a grandfathering clause until 30 June 2021 for taxpayers who opted for the patent box regime in relation to trademarks, including collective trademarks, registered or in the process of registration in the two fiscal years following the fiscal year including 31 December 2014 (article 13).
Finally (article 14), the decree states that the Italian tax authorities will exchange information on non-resident taxpayers who opted for the patent box regime in relation to trademarks with their countries of residence, provided that such countries are members of the inclusive framework for the global implementation of the OECD/G20 base erosion profit shifting plan (BEPS) and an international legal instrument allowing the exchange of information is in force.
This exchange will take place within three months of receiving the tax return related to the relevant tax period.