In November 2014 we said that the Italian patent box is also a copyright box. The patent box regime, adopted at the end of last year with the 2015 Financial Bill, was recently modified by the so called “Investment Compact Decree” published last 24 January 2015. The peculiarity of the Italian regime is that the measure now covers also 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% in the first year; 40% in the second year; and then 50% for the remaining three years.
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 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 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 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 shall 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, but in this case the APA is not mandatory but only optional.
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. Among the qualifying expenses there are also 30% of the expenses incurred for the acquisition of already existing intangible properties, and of the expenses incurred under R&D outsourcing agreements signed with entities part of the same group. This provisions are aimed to include in the regime also income from repatriated intangibles assets.
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.
It is therefore in the interest of the trademark & design owners in various sectors (first of all fashion and food & beverages) to gain information on this measure.