To our CLIENTS THEIR PLACE OF BUSINESS 29 June 2015 PATENT BOX ON INTANGIBLE ASSETS Among the most significant tax changes in 2015 are the adjustments made to the Patent Box regime (Article 1, paragraphs 36-45 of the stability law), an optional system of tax breaks for income derived from the use and/or licencing of intangible assets. Italy has adapted a process already in effect, albeit using different methods and rates from those of countries such as Hungary, Belgium, Great Britain, Cyprus, the Netherlands, Luxembourg and Spain. The ultimate aim is to ensure that intangible assets remain within the country and to encourage the return of those transferred to other states, so that the high profitability that they can achieve, especially in the light of their fairly modest development costs, remains in their country of origin. The migration of major Italian groups (Fiat being a recent case) and large pharmaceutical research centres certainly took into account those countries in the EU where the "patent box" is already operational and forced Italy into seriously considering the adoption of a system of tax breaks on income from the exploitation of patents and other intellectual property rights, such as trademarks, designs, processes and formulas. WHAT TAX BREAKS What is the benefit introduced by the patent box? exemption from taxation of income derived from: 1. Licencing for use 2. Direct use 3. Capital gains from sales to third parties of certain categories of intangible assets.
WHAT ASSETS industrial patents designs and models technical know-how trademarks: original works Processes, formulae and information relating to experience accrued in a legally protectable industrial, commercial or scientific field. the Investment compact law decree has eliminated the reference to functionally equivalent to patents, thus also extending the field of application to all commercial trademarks. A difference of the Italian scheme was the extension of the concession also to cover the exploitation of intangibles usually excluded from foreign schemes such as trademarks and designs. This choice thus allows the facility to be applied not only to industrial sectors with high technological content, but also to areas such as fashion, food and design, in which Italy is the undisputed leader. WHO BENEFIT FROM THE REGULATIONS corporations partnerships individual entrepreneurs permanent Italian organizations of residents of "white list" countries provided they are: - legally entitled to the business income - carry out research and development activities, on condition that such are carried out in-house or by means of research and development contracts entered into with universities, research centres or comparable bodies (outsourcing).
The beneficiaries of the concessionary regime must of necessity be resident in Italy or in countries with which there are agreements to avoid double taxation. In the latter case, without prejudice to the need for confirmation by the tax authorities, the income to which the concession applies must have been generated in Italy by a permanent establishment (as laid down by Article 23 paragraph 1 letter e) of Presidential Decree 917/1986). In this regard, governance of the patent box is entrusted to other institutions within our legal system (in the same way as regulations on CFCs) whose purpose is to discourage the establishing of entities that generate passive income in foreign countries, particularly if they are tax havens. In fact, on the one hand CFC regulations penalise shareholdings by making their costs non-deductible if the country is on the Black List. The patent box, instead, exempts the income of those who adopt what is deemed to be a virtuous approach and retain such earnings within the country. Coming back to the types of tax concessions available, they can be distinguished by the use made of the asset: 1) LICENCING FOR USE The exemption is valid for both aggregate corporate income (IRES/IRPEF) and for the overall value of production, which is of relevance for IRAP purposes. The exemption percentages increase annually: - 30% of earnings for 2015-40% of earnings for 2016-50% of earnings for the period 2017-2019 QUANTIFYING THE BENEFIT: THE NEXUS APPROACH In order to put the method of calculating the concession into context, it is important to specify that this is a real reduction that must be made at the time that the business income is determined: the variation is in the form, not of a positive component of income, but of a portion of the income itself that is excluded from taxation, that is equal to the difference between the proceeds derived from the exploitation of the intangible assets and the costs attributable to them.
The portion of the earnings from the use of the intangible asset is calculated on the basis of a coefficient determined as follows: - First of all the income derived from the use of the intangible assets licenced to third parties must be determined; - Secondly, the ratio must be determined between the research and development costs incurred for those assets (increased where appropriate by an amount that is not more than 30% of the costs incurred for the acquisition of the assets or for research contracts), and the overall costs incurred for the production of the asset; - Thirdly, the first value obtained must be multiplied by the second: The result thus obtained is the income that qualifies for the tax concession: - Finally, the tax concession percentage laid down is applied to this income. It can be depicted as follows: the costs of research and development activities (1), of relevance for tax purposes, incurred for the maintenance, enhancement and development of the intangible asset + MAX 30% of Asset acquisition cost Infragroup research contract costs Overall costs incurred for the production of the intangible asset (1) By research and development activity is meant the cost of highly qualified personnel employed in research and development, or depreciation of the acquisition or utilization costs of laboratory instruments and equipment and costs relating to research contracts with universities, research institutes and similar establishments.
For example, if we wanted to quantify the benefit for a patent taken out during 2014 with total documented costs amounting to 100, licensed for use in 2015 at a price of 50 and for which, still during 2015, further costs were incurred of 10, a nontaxable income amount would be calculated equal to: In 2015 the non-taxable portion of the company s net income will amount to 6 (30% of the qualifying income). Taking all the elements as constant, the share of non-taxable income will rise to 8 (40%) in 2016 and 10 (50%) from 2017 to 2019. Under the regime, therefore, in the case of an IRES tax-payer, there will be a tax benefit of 13.5% of the income derived from the exploitation of the asset. 2) DIRECT USE However a situation in which the tax concession is in respect of assets used directly by the business is different. In fact, in this instance since there is no income, the financial contribution derived from the use of the asset is difficult to determine. For this reason the Law provides for recourse to a mandatory settlement with the Italian Revenue Agency: the economic contribution must be calculated by following a procedure in the form and in accordance with the methods of the international ruling. INTERNATIONAL RULING Developed in the context of international groups and introduced into our system in 2003, this arrangement consists of a procedure by which it is possible, through an agreement with the tax authorities, to determine in advance some of the factors of relevance in determining taxes (such as transfer prices, royalties, the existence of conditions for confirming the existence of a permanent establishment). In the case of the patent box, during this preliminary discussion procedure the economic contribution made by intangible assets to the production of the business s overall income will be
established, in essence making the deduction due to the taxpayer permanent. It is important to remember, in fact, that the procedure in question will eventually lead to the signing of an agreement between the tax authorities and the company, which binds both parties on the issues involved for the tax period during which the agreement was entered into and for the four subsequent tax years. Following the changes introduced by Law Decree No 3/2015 the so-called "Investment Compact", the same ruling procedure can be used to determine the earnings subject to relief in cases where licencing the use of the intangible assets to third parties has been carried out in the context of intercompany transactions. 3) SALE TO THIRD PARTIES: TOTAL DEDUCTION The legislators wanted to extend the benefit to include the case of the sale of the intangible asset to a third party. In this case the concession (both for IRES/IRPEF and for IRAP) applies to the entire amount of the capital gains realised by the transaction. However, there is a condition: at least 90% of the proceeds must be reinvested within two financial years following the sale, in activities for maintaining or developing other intangible assets. It is important to consider the terminology used by the legislators: 90% of the proceeds and not just the capital gain realised. In this case also, if the transaction is carried out with parent companies or subsidiary companies, the advance ruling process can be used to quantify the benefit unambiguously, which obviously removes the uncertainty from the taxpayer. A GROUP OF BUSINESSES As an example, let s consider a group of companies that carries out ongoing research and development activities. This activity of producing intangible assets is concentrated in one company within the group, Alpha, whereas Beta is assigned to exploit them (directly or through third parties).
ALPHA cost of production of Intangible assets: 50 Income from sale to Beta: 100 CAPITAL GAIN REALISED: 50 Provided that Alpha reinvests at least 90 of the 100 received in R&D activities, the capital gain will not be subject to taxation with a net saving in taxation, in terms of IRES, of 13.5. BETA This is the company referred to in the previous example, that incurs overall documented costs of 100 to obtain its Intangible asset, then licences its use at a price of 50 and for which, still in the same year, additional costs of 10 were incurred. As seen, Beta will generate a non-taxable income of 20, from which it will make a saving of IRES taxes of: - 1.65 in 2015-2.20 in 2016-2.75 from 2017 to 2019 If the licencing to third parties by Beta takes place within the group and, in any case, if the intangible asset is exploited inhouse, it will be possible to activate the ruling, thus crystallizing the tax benefit to be enjoyed over the next 5 financial years. OPTIONALITY AND IRREVOCABILITY Finally, it is worth pointing out that the concessionary tax regime will come into force from the financial year following the year in progress as at 31.12.2014. In addition, the regime is optional and not obligatory; but should one opt for its application this will be for a period of 5 years and will be irrevocable. Noda Studio will arrange to send you any updates. Noda Studio