The patent box regime, adopted at the end of 2014 with Italy’s Stability Law, was recently modified by the Investment Compact Decree and implemented into law at the end of March 2015. A distinctive feature of the Italian regime is that the measure now also covers trademarks and designs.
A discounted tax rate is applied not only to profits deriving from the exploitation of patents (as one would be led to believe by the name!) and copyrights, but also royalties deriving from the exploitation of trademarks and designs. The percentage of profits deriving from intellectual property rights to be excluded from taxation will be 30 percent in the first year, 40 percent in the second year and then 50 percent for the remaining three years.
The new regime is optional and can be accessed by any entity carrying out business activities in Italy, under the condition that the IP right is the result of R&D activities carried out either directly or through agreements with third parties. 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 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 income deriving from the licensing of qualifying intangible assets.
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 must be identified through an advanced pricing agreement (APA) with the Italian tax authorities.
The same APA procedure could 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. However, in this case the APA is optional rather than 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 the 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 by applying the ratio between qualifying expenses and overall expenses. Qualifying expenses include 30 percent of the expenses incurred for the acquisition of already existing intangible properties, as well as expenses incurred under R&D outsourcing agreements signed with entities that are part of the same group. These provisions also aim to include in the regime income from repatriated intangibles assets.
The patent box regime is one of the Italian government’s measures to create an appealing environment for technological development in Italy for Italian and foreign investors. Other measures include incentives granted to start-up companies, a notional interest deduction for entities funded with equity and tax credits granted for research and development expenses.
An essential condition to be eligible for tax property rights is the result of R&D activities, carried out by the company either directly or by outsourcing.
Currently, Italy’s Ministry for Economic Development is drafting its ministerial decree to implement the law – an essential part of this new approach, which will define what would constitute R&D expenses. This is a delicate phase, essential for the success of the initiative in creating an appealing environment for the growth of the economy of intangibles in Italy.
The IP box represents an important step to stimulate innovation and, overall, an incentive to foreign investments in the country. It is therefore in the interest of the trademark and design owners in various sectors (first of all fashion) to gain information on this measure.