Nov 3, 2015 - On 20 October 2015, Italian Official Gazette no. 244 formally announced the publication of the Patent Box
Tax Alert KPMG in Italy 3 November 2015
Italy issues the Patent Box implementation decree
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On 20 October 2015, Italian Official Gazette no. 244 formally announced the publication of the Patent Box implementation decree (approved on 30 July 2015) on the Italian Ministry of Economic Development’s website. The decree clarifies the main technical aspects of the Patent Box, the optional regime introduced by the 2015 Budget Law(1) and amended by the ‘Investment Compact Decree’(2) (see our Tax Alerts of 2 December 2014 and 2 February 2015). The benefit is available for Patent Box income arising from the tax year following that in progress on 31 December 2014 (i.e. 2015 for calendar-year taxpayers). There are some transitional measures. The implementation decree substantially confirms the Patent Box law rules and contains some clarifications, the most relevant of which are summarized below. The facility Essentially, a certain percentage(3) of income attributable to the ‘use’ of qualifying assets is excluded from the tax base. Who can benefit
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The implementation decree clarifies that only taxpayers (resident entrepreneurs and Italian permanent establishments) entitled to exploit intangibles can benefit from the optional regime. The type of legal title by which they do so is irrelevant: they may have developed the intangibles internally or purchased them from third parties (even under a licensing agreement).
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Non-resident companies/entities are eligible for the regime provided that they (i) are resident in a treaty country allowing an effective exchange of information with Italy, and (ii) have a permanent establishment in Italy to which the intangibles are ‘attributable’. According to the report accompanying the implementation decree, ‘attributable’ means that the intangibles must form part of the net assets of the permanent establishment, in compliance with article 7 of the 2010 OECD Model and Commentary.
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(1) Article 1 (paragraphs 37-45) of Law no. 190/2014. (2) Article 5 of Decree no. 3/2015, converted into Law no. 33 of 24 March 2015. (3) For calendar-year taxpayers: 30 percent in 2015, 40 percent in 2016 and 50 percent from 2017.
TAX ALERT / KPMG in Italy / 3 November 2015 © 2015 Studio Associato - Consulenza legale e tributaria, an Italian professional partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ('KPMG International'), a Swiss entity. All rights reserved.
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The decree also lists taxpayers who cannot take the benefit (e.g. companies going through bankruptcy).
How the option can be exercised and how long the regime lasts
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For 2015 and 2016 (for calendar-year taxpayers), the option must be communicated to the Italian Revenue Agency in the ways established by its Director(4), and the regime will last for the year of the communication and the following four.
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Income from licensing is represented by royalties, net of connected direct and indirect tax costs accrued in the year.
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Income attributable to direct use must be determined, for each intangible asset, in agreement with the Italian Revenue Agency, through the international tax ruling procedure(6) .
R&D costs that qualify for relief
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From tax year 2017 (for calendar-year taxpayers), the option must be exercised in the income tax return and the 5-year regime will be effective from the year to which the tax return refers.
‒ Fundamental research ‒ Applied research
If a tax ruling is requested, the option will be effective from the tax year in which the request is filed. There are transitional provisions, which apply until the ruling is obtained.
‒ Design ‒ Design and implementation of software protected by copyright
Intangible assets that qualify for relief
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‒ Testing of products, market research and other studies
The implementation decree partly amends the list of eligible assets indicated in the 2015 Budget Law, as amended by the Investment Compact Decree, i.e. assets to which qualifying income is attributable. The new list is shown below.
‒ Presentation, communication and promotional
activities that may increase the distinctiveness and reputation of a brand and help to build awareness of products/services, designs or other assets and boost their commercial success and image.
‒ Software (protected by copyright) ‒ Patents (granted or pending)
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‒ Trademarks (registered or pending) ‒ Designs and models (legally protectable) ‒ Processes, secret formulas and industrial,
commercial or scientific knowledge (legally protectable).
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The accompanying report explains that eligible intangibles can also be those protected under the laws of a foreign country(5).
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The decree clarifies that if two or more intangibles belonging to the same taxpayer are complementary, so that the realization of a product or process depends on their joint use, these intangibles represent one individual asset for Patent Box purposes. For instance, a model of a vehicle should be treated as an individual asset, even if more than one patent is involved.
Notion of ‘use’
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Income qualifies for the Patent Box when the intangible’s owner earns it by:
‒ licensing the intangible to third parties; ‒ using the intangible directly.
The decree lists the R&D costs that qualify for the benefit when they are incurred in order to maintain, enhance and develop an intangible asset.
The report accompanying the decree clarifies that it is not relevant where the qualifying R&D is carried out (in Italy or abroad).
How the eligible tax base is calculated
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The implementation decree and accompanying report confirm that the eligible income is calculated in accordance with the Modified Nexus Approach identified by the OECD, in order to link the Patent Box benefit with an economic ‘substantial activity’ in Italy(7).
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The implementation decree and accompanying report also provide clarifications and examples of how to calculate the benefit. For instance:
‒ The eligible income must be computed for each intangible asset.
‒ The R&D costs to be included in the computation
are those incurred in the tax year in which the benefit is taken and must be attributed to each individual intangible asset. However, in the first three tax years of effectiveness of the regime, the relevant costs are those incurred in the year in which the benefit is taken and in the previous three, and they are considered as a whole without being attributed to the individual intangible assets.
(6) Special instructions will be issued, explaining how SMEs may follow a
simplified international tax ruling procedure.
(4) Instructions have not yet been published. (5) For a definition of the eligible intangible assets, the implementation decree
clarifies that reference should be made to domestic, EU and international law, to EU regulations, and to international treaties and conventions on industrial and intellectual property, applicable in the territory where the assets are protected.
(7) See final report on Action 5, Countering Harmful Tax Practices More
Effectively, Taking into Account Transparency and Substance, issued on 5 October 2015. Qualifying income is calculated by multiplying the income derived from the intangible asset by the ratio of qualifying R&D expenditures over the total expenditures incurred to develop the intangible asset. Qualifying expenditure can be increased, up to 30 percent (up-lift), by including the costs of acquiring the asset or the intercompany costs of R&D contracts for the asset (non-qualifying expenditures).
TAX ALERT / KPMG in Italy / 3 November 2015 © 2015 Studio Associato - Consulenza legale e tributaria, an Italian professional partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ('KPMG International'), a Swiss entity. All rights reserved.
‒ Certain expenses (i.e. interest expenses, real-estate
expenses and those that cannot be directly linked to an intangible asset) are excluded from the ratio.
Documentation requirements
• The direct link between R&D and eligible intangibles, and between eligible intangibles and the income qualifying for the benefit, must be traceable from adequate accounting and other information systems (‘tracking and tracing’ systems).
Contact us Studio Associato - Consulenza legale e tributaria Domenico Busetto
KPMG, Tax & Legal T: +39 045 811 4111 E:
[email protected]
Roberto Romito
KPMG, Tax & Legal T: +39 06 809631 E:
[email protected]
TAX ALERT / KPMG in Italy / 3 November 2015 © 2015 Studio Associato - Consulenza legale e tributaria, an Italian professional partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ('KPMG International'), a Swiss entity. All rights reserved. The KPMG name, logo and 'cutting through complexity' are registered trademarks or trademarks of KPMG International Cooperative ('KPMG International').
Paola Sella
Studio Associato - Consulenza legale e tributaria is a leading Italian law firm and a member firm of KPMG International for tax and legal services.
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KPMG, Tax & Legal T: +39 045 811 4111 E:
[email protected] 