The main changes to patent box regulations stemming from the 2016 Stability Law concern the objective scope of the regulations and the simplification of de-taxation in case of complementary intangible assets.
The Patent Box is an optional facilitated tax scheme that provides for the exclusion from taxation of a share of the income arising from the use of:
- software protected by copyright
- industrial patents, including those for inventions, such as biotechnological inventions and the related protection certificates
- drawings and models, subject to legal protection
- corporate information and technical-industrial know-how, including commercial or scientific know-how, which may be protected as secret information, subject to legal protection.
This facility was established by the 2015 Stability Law (Law 190/2014), in order to bring back to Italy intellectual property located abroad, and promote investment in research and development.
The beneficiaries of the facility in question are the holders of corporate income (such as limited companies, partnerships, Italian entrepreneurs and stable Italian organisations of persons resident in so-called White List countries); conversely, companies subject to bankruptcy and compulsory liquidation procedures are excluded from the preferential scheme. The above-mentioned subjects may enjoy a partial deduction from the corporate income (30% in 2015, 40% in 2016 and 50% in 2017) of the proceeds arising both from the granting for use of intangible assets and of those used directly by the applicant.
Now let us look at the method of calculation of the share of income that can benefit from the facility and the methods for subjecting this share to the facilitated Patent Box regime.
Determining the share of income eligible for the facility
The share of income that can benefit from the facility must be determined on the basis of the ratio between the costs incurred for the research and development activities for the maintenance, growth and development of the intangible asset, and the overall operating costs. To this end, it is necessary for the company to allow the identification of the direct connection between research and development costs, intangible assets, used and/or realised assets and the related income produced.
In the event of direct use of the intangible asset, the company determines the share of income eligible for the facility in consultation with the Revenue Agency, in order to avoid the risk of undergoing subsequent adjustments to the income determined on a discretionary basis. The option under examination has a duration of five years and is renewable. This means that a company owning an intangible asset, such as a trademark or a patent, can enjoy a benefit resulting from the Patent Box without time limits, until it conducts research and development activities on the same and starting from the tax period in which the option is notified and for the next four years.
It should be noted that the benefit deriving from joining the facilitated scheme can be obtained starting from the tax period in which the Ruling application was submitted, provided that the share of income eligible for the facility relating to the tax periods included between the date of submission of the application and the date of signature of the agreement is specified in the income tax return relating to the period in which the agreement was signed.
Before analysing the Ruling procedure, it’s important to mention two important aspects covered by the legislation in question.
- Non-taxation of capital gains: the Decree specifies that the capital gains deriving from the sale of intangible assets that may be subject to the facility do not count towards the determination of the corporate tax, provided that at least 90% of the proceeds is reinvested in research and development activities aimed at the maintenance and growth of other intangible assets, within the second tax period following that in which the transfer took place.
- Treatment of the losses deriving from the exploitation of the intangibles: circular 36/E of the Revenue Agency clarifies that, if the costs incurred for the intangible asset exceed the revenues derived from the same, the resulting loss will contribute to the formation of the corporate income during the reference period. It follows that the company adhering to the Patent Box regime may defer the positive effects from joining said scheme to the financial periods in which the asset will generate income and, hence, when it will generate income purified of any previous losses; in any case it is deemed appropriate to emphasise that the facility does not expire if there are any losses.
The Ruling procedure
As mentioned previously, in the event of direct use of intangible assets (referred to in Art. 6 of the implementing Decree), the determination of the share of income that can benefit from the facility takes place on the basis of a special agreement with the Revenue Agency, whose effect occurs from the date of stipulation.
The start of this procedure takes place by application on free form, sent by registered letter with return receipt, containing information on the taxpayer, on the type of intangible asset and on the research and development activity carried out; specific simplifications are laid down for the "micro, small and medium-sized enterprises" categories as defined pursuant to the Annex to the recommendation of the Commission of the European Communities 2003/361/EC of 6 May 2003.
The procedure is then terminated by signing an agreement on the part of the Revenue Agency and a company director. The application may in any event be rejected by the financial administration within 30 days from receipt thereof but does not produce harmful consequences against the taxpayer save as refusal to join the facilitated scheme. The rejection may be challenged before the Tax Commission.
Another important aspect to stress is that the taxpayer who wishes to take advantage of the facilitated scheme throughout the entire five-year period must not change the initial conditions laid down at the time of signing the application; if the Revenue Agency finds that the taxpayer has not complied with the terms of the agreement, it may ask the same to submit the records within 30 days from the notification. If the records do not meet the Office's requirements or if they are submitted after more than 30 days, the agreement shall be considered terminated with effect from the date on which the breach was determined.
Changes introduced by the 2016 Stability Law
The main changes introduced by the 2016 Stability Law to the Patent Box regulations concern the objective scope of the regulations and the simplification of de-taxation in case of complementary intangible assets.
- The objective scope: the amendment relates to Art. 1 of paragraph 39 of Law 190/2014 (2015 Stability Law) which limits the scope of application of the facility in relation to intellectual property solely to "software protected by copyright". The other fixed assets to which the option applies remain unchanged.
- Complementarity of intangible assets: Art. 6 of Ministerial Decree of 30 July 2015 makes it possible to consider complementary intangible assets (if used jointly for the creation or development of a product or process) as a single intangible asset for the purposes of the Patent box scheme. The amendment also specifies that the use of intangibles, in addition to products or processes, may also relate to several families of products or processes, provided that they are in line with the principles established by the OECD.
The 2016 Stability Law has added a new paragraph, 42-ter, which specifies the following: "If multiple assets among those referred to in paragraph 39, belonging to the same subject, are connected by complementarity constraints and are used jointly for the purposes of the development of a product or a family of products or a process or a group of processes, such assets may constitute a single intangible asset for the purposes of the provisions of paragraphs 37 to 42-bis".
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Our experts can assist you in understanding whether your company’s assets may be subject to the above facility, as well as in the Ruling Procedure with the Revenue Agency in order to determine the amount subject to the facility. TMF Group can also take care of your company’s tax assessment and tax returns.
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