Law no. 190 issued on 23 December 2014 ("2015 Stability Law") finally introduced the "Patent Box" rule ("Patent box"); a provision which has already been widely adopted across many EU countries.
Patent box aims to:
- encourage the placement in Italy of intangible assets currently held abroad;
- encourage the maintaining of intangible assets in Italy (or rather, prevent their relocation abroad);
- encourage investment in research and development.
Patent box provides for an optional regime of favourable taxation on income deriving from the intangible property of Italian companies provided that certain conditions are met.
The new legislation states that companies which are not resident in Italy but do have a permanent establishment in Italy, may apply for the Patent box if they are resident in countries with which agreements to avoid double taxation and facilitate an effective exchange of information are in force.
Companies are allowed to adopt the Patent box if they carry out research and development activities which are aimed at the production of intangible assets subject to the tax benefit in examination, including research through universities or research institutes and similar establishments.
Patent box applies to the income deriving from:
- the utilisation of intellectual property;
- industrial patents;
- functionally equivalent trademarks;
- processes, formulas and information relating to experience gained in industrial, commercial or scientific areas, which is legally protectable.
Patent box not only refers to the income deriving from granting the right to use intangible property to third parties (ie royalties), but also following direct use of these intangible properties by the company itself.
Where the patent box applies, it is first necessary to identify the economic contribution that the intangible property brings to the total income of the company. Determination of this contribution requires an application to the Tax Agency to obtain a ruling. (The guidelines that the Tax Agency must follow when making such a ruling will be set out in a Ministerial Decree which is yet to be published).
The ruling will aim to:
- identify the components of income that are attributable to the direct use of intangible assets; and
- define the criteria used in order to proceed with the allocation of the relative costs.
The part of the income benefiting from the favourable tax regime is determined on the basis of the relationship between:
- the costs of research and development incurred for the maintenance, growth and development of the intangible asset ;
- the total costs to produce those assets.
The level of exemption from taxation increases from 30% in 2015 up to 50% during the period of 2017-2019, and the exemption will last for five years, starting in 2015 and ending in 2019. In 2017 the regime will allow tax payers to benefit from an effective tax rate of 13.75% (50% of the corporate tax rate of 27.50%) on income from intangible property. The new regime also applies to Local Tax (IRAP).
In the case where income is derived from operations between companies belonging to the same group, the regime can apply provided that income is determined based on a prior application for a ruling from the Tax Agency .
The tax relief is also extended to the capital gains deriving from the sale of intellectual property (similar to Patent box rules in force in other EU countries). These are entirely tax exempt provided that by the end of the second tax year following the sale, at least 90% of the consideration is reinvested in the maintenance and development of other intangible property. Also in this case a prior application for a ruling from the Tax Agency is required.
The option to adopt the favourable Patent box tax regime has a duration of five years and is irrevocable.