Italy’s recently published 2015 Financial Bill (Law 23 December 2014 no. 190) provides for the introduction in Italy of the patent box regime, based on the OECD nexus approach.
The patent box regime is one of the Italian government’s measures that aim to create an appealing environment for technological development in Italy for Italian and foreign investors. Other measures include incentives granted to startup companies, a notional interest deduction for entities funded with equity and tax credits granted for research and development expenses. These measures appear in the 2015 Financial Bill.
In previous years, Italian law already provided for tax credits upon R&D expenses to incentive technological development of Italian entities. There were however no incentives on the revenue side. Often this meant that multinational groups maintained R&D centers in Italy that benefitted from tax credits, but that those multinationals subsequently transferred any developed IP to other countries, where the taxation on royalties was lower. This mechanism implies a loss of taxable basis for the Italian tax authorities.
The new patent box regime aims to stop this phenomenon so that intangible assets remain in Italy, and potentially those currently held abroad by Italian and foreign multinational groups may be repatriated.
How it works
The new regime is optional and can be accessed by all the entities carrying out business activities in Italy, under the condition that they carry out R&D activities either directly or through agreements with university or other research entities. Foreign entities carrying out business activities in Italy through a permanent establishment can also benefit from the regime, provided that they are resident in a country that has a double tax treaty in force with Italy and undertakes to effectively exchange information with Italy
The option for the regime is irrevocable and has effect for the subsequent five fiscal periods. After the first five fiscal periods, it will likely be possible to renew the option.
The patent box regime provides for the exclusion from taxation, both for corporate income tax (IRES) and for local income tax (IRAP), of 50 percent of the royalties deriving from the licensing of qualifying intangible assets. In other words, royalties deriving from the licensing of eligible intangible assets would be subject to taxation at the rate of 15.7 percent instead of the standard 31.4 percent (27.5 percent for IRES and 3.9 percent for IRAP purpose). For fiscal years 2015 and 2016, the percentage of excluded income is capped at 30 percent and 40 percent, respectively.
The exemption is also granted to those entities that do not license their intangible assets but use them in manufacturing processes or provide services using one of the eligible intangible assets: the portion of income deriving from the use of the IP shall be identified through an advanced pricing agreement (APA) with the Italian tax authorities.
The same APA procedure shall also be entered into when intangibles are licensed to entities that directly or indirectly control the licensing entity; are controlled by the licensing entity; or are controlled by the same entity that controls the licensing entity. Based on the amendments proposed to the regime and still under discussion, the ruling procedure in case of intercompany licensing could become facultative instead of mandatory.
Furthermore, potential capital gains realized upon the sale of the assets are entirely exempt from taxation, under the condition that at least 90 percent of the compensation received is reinvested into research and development activities.
As per the nexus approach identified by OECD in the Report "Countering Harmful Tax Practice More Effectively, Taking into Account Transparency and Substance Action 5: 2014 Deliverable," income that is eligible for the exemption is determined applying the ratio between qualifying expenses and overall expenses.
The Italian patent box regime is applicable to any kind of patent, to certain brands "functionally similar to patents," as well as to processes, formulas and know-how related to industrial, commercial or scientific fields that can be legally protected. Also, income deriving from the exploitation of copyrights appears to be included.
The Italian patent box regime clearly takes inspiration from similar regimes already in place elsewhere in the EU.
Notably, the range of intangible assets to which the Italian version of the patent box regime is applicable is quite wide compared to the regimes adopted by other European countries (with the exception of Luxembourg and Hungary, which have similar scopes). By way of example, the patent box regime in the United Kingdom and in Belgium is limited to income deriving from patents or Supplementary Protection Certificates, while in France and in the Netherlands, the R&D regimes may also apply to other patentable assets or assets for which an R&D certificate has been obtained.
Based on the current wording of Italy’s law, only trademarks seem to remain out of the scope of the patent box, even if some amendments have been already proposed so to include also trademarks. The regime may apply to brands provided that they require expenses on R&D to be developed or maintained. A formal decree to be issued by the competent ministry will further detail the scope of application.