The Ministry of Economic Development and the Ministry of Economy and Finance recently approved Decree-Law 174/2015, which establishes the rules for implementing the 'Patent Box', an optional tax system for income arising from the use of IP rights. The Patent Box system is already applicable to the present fiscal year.
The Patent Box provides tax relief for revenues deriving from the exploitation and assignment of IP rights. Despite its name, the Patent Box applies not only to patents and know-how, but also to copyright (at least partially), trademarks and designs. It was introduced by Law 190/2014 (Article 1, Paragraphs 37-43) and amended by Law 33/2015 (Article 5), which broadened the application of the system by reducing the circumstances in which an 'international ruling' (a petition to the Italian Tax Agency pursuant to Article 8 of Decree-Law 269/2003) is mandatory in order to take advantage of the system.
The establishment of the Patent Box is aimed at dissuading the phenomenon of IP rights registration (especially patent registration) in the names of companies established in countries with more favourable IP tax regimes. The first European country to introduce such an incentive was Ireland in 2000. France, Belgium, Hungary, Luxembourg, the Netherlands, Spain and the United Kingdom followed. As part of its Base Erosion and Profit Shifting project, the Organisation for Economic Cooperation and Development has recommended the implementation of a common approach, aimed at ensuring that only the income created in one country can benefit from that country's corresponding tax relief, proportionate to the investment made there. The Italian legislation has clearly been inspired by this approach, in particular regarding its method for determining the income to which the incentives apply in the event of direct exploitation of IP rights.
Italy's Patent Box is optional and thus requires a formal statement of accession from the parties specified in Article 2 of the implementing decree, "provided that they perform research and development activities" as defined by Article 8. Such formal statement of accession will be valid for five years. The Patent Box provides two basic benefits:
- the exclusion from taxed revenues of up to 30% (in 2015), 40% (in 2016) and 50% (as of 2017) of the income flowing from IP rights exploitation, determined on the basis of the relationship between costs and revenues identified by Article 9 of the implementation decree. In the case of direct exploitation, the income share which benefits from the exclusion must be determined through the international ruling procedure. However, this procedure is optional in the case of income deriving from licensing to companies within the same group and does not apply to licensing to entities outside of the group; and
- the exclusion from taxation of capital gains deriving from IP rights assignment, provided that in the two subsequent years at least 90% of the capital gains are reinvested in R&D activities towards further intangible assets. Article 8 of the implementing decree defines these R&D activities reasonably widely, including not only patent-related activities (eg, technological research, basic and applied research and new product tests for commercialisation), but also activities which are key for the development of trademarks and designs (eg, design, anti-counterfeiting activities – including litigation – and certain promotional activities). International ruling is optional and may be applied only when the gain is accrued as part of transactions with the holding company or with subsidiaries or affiliate companies (Article 10(3)).
The limits on the types of IP right that can benefit from the incentives provided by Article 6 of the implementing decree are questionable. Regarding trademarks, Article 6 considers only "registered or still pending" trademarks (ie, not unregistered trademarks), while Law 190/2014 (which establishes the Patent Box) refers generally to trademarks. Further, among the "creative works" indicated in the law (ie, every kind of copyrighted work) the implementing decree takes into consideration only software (however, it may be argued that copyrighted design is also included, because the decree refers to "legally protectable designs and models" – an expression that may include registered and unregistered designs and designs protected by copyright). These limitations seem to be illegitimate and are arguably unlikely to be applied, since a secondary source (ie, the implementing decree) cannot prevail over a primary source (ie, the law).
IP rights combinations
Article 6(3) of the implementing decree states that where two or more rights of the same type and owned by the same party are connected so that the finalisation of a product or process is subject to joint use of these rights, they are considered jointly as a single right. This clarification is undoubtedly appropriate, since one product will often incorporate a number of IP rights. However, a single product will most commonly contain different types of right (eg, trademarks, designs and patents) combined reciprocally. It seems that in this case the expenses and revenues of each type of right must be considered separately, which may prove extremely difficult.
In a step towards clarifying problematic areas such as these, Article 12 of the decree provides that microenterprises and small to medium-sized enterprises will be provided with simplified procedures, to be established by an act released by the Italian Tax Agency.
Aside from the above difficulties, the Patent Box system makes it possible to derive significant fiscal benefits from the careful management of IP rights within a company group. It reduces tax on income – particularly from licensing activity – and exempts from taxation capital gains deriving from the transfer of the IP rights that are reinvested into the development of similar rights. This is particularly important for enterprises that produce creative works regularly – not only innovation-based enterprises, but also those that operate in the fashion and design sectors. Alongside these fiscal benefits, other aspects of the new system must be taken into consideration – namely, the direct consequences of IP rights registration in the name of a specific enterprise or the tangible assignments deriving from intragroup IP rights transfers and contractual relationships. These elements should be considered in terms of corporate law and IP law liability, including the possibility of individual liability.
The establishment of the new system emphasises the fact that the use of IP rights among companies within the same group requires management. The free circulation of rights within a group is insufficient: each assignment must have detailed and accountable justification. Enterprises must balance the benefits of outsourcing (eg, reduced production costs) against the value added by emphasising the Italian origins of the product and the advantages of the Patent Box. Again, no one-size-fits-all solution exists: the better choice may be a combination of offshoring and reshoring. This can be especially beneficial where reshoring is combined with active management that takes advantage of all the opportunities available, including new distribution methods that can take advantage of both offshore and domestic strengths.
For further information on this topic please contact Cesare Galli at IP Law Galli by telephone (+39 02 5412 3094) or email (email@example.com). The IP Law Galli website can be accessed at www.iplawgalli.it.
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