Italian Patent Box: how it works and advantages

Italian Patent Box consists of an optional tax relief that allows companies to reduce the tax base of income deriving from the exploitation of intangible assets.

Italy, as well as several other European countries, grants the Patent Box regime to companies holding intellectual property inside its territory to avoid that they can easily and quickly relocate those assets abroad.

The Italian Ordinary Patent Box: requirements and advantages

The Italian Patent Box was introduced by art. 1, paragraphs 37-45, of the 2015 Budget Law (Law no. 190/2014), later amended by the Legislative Decree n. 3/2015, providing for a 50% tax base reduction (starting from the year 2017) of income deriving from the exploitation of the company’s intangible assets.

The tax deduction applies to both income tax (IRPEF and IRES) and IRAP.

Resident taxpayers and foreign companies, entities and trusts perceiving business income can benefit the tax incentive. The aforesaid foreign entities can exercise the option for the Italian Patent Box if they are resident in countries having in force a Convention against double taxation, allowing an effective exchange of information with Italy.

Intangible assets whose income may benefit from the tax incentive are:

  • copyright protected software;
  • industrial patents;
  • designs and models;
  • know-how such as processes, formulas and information relating to experiences acquired in the industrial, commercial or scientific field which can be legally protected.

The benefit also applies to intangible assets having among them complementary relationships to realize products or homogeneous range of products or process or group of processes.

To take advantage of the Italian Patent Box, taxpayers must take care of the research and development of the intangible asset, even including the outsourcing to non-correlated (direct or indirect) companies or control or Universities or research bodies (or equivalent).

The taxpayer can opt for the ordinary Italian Patent Box by applying for a ruling procedure to the Tax Office (according to art. 31-ter of Presidential Decree no. 600/1973). It will follow a ruling with the Tax Authority for the determination of the tax incentive applicable to the concrete case.

Then, the reduced taxable income is declared in the tax returns regarding the years which the ruling agreement refers.

The option lasts for five tax periods, is irrevocable and can be renewed.

The income affected by the tax incentive is equal to the ratio between, at the numerator, the costs of research and development activities (for tax purposes) incurred for the maintenance, growth and development of the intangible asset in question – increased by the costs incurred for the acquisition of the intangible asset or for research contracts for the same asset entered into with correlated companies – and, at the denominator, the overall costs (for tax purposes) incurred to produce the same asset.

The relevant legislation also provides that capital gains deriving from the sale of such intangible are not subject to taxation (as they are excluded from taxable income) provided that at least 90 per cent of the consideration is reinvested for the maintenance or development of other similar intangible assets.

The tax exemption only works if the reinvestment is carried out before the end of the second tax period following the one in which the transfer occurred.

“Self-assessment” Patent Box: the new Self-assessment procedure

Starting from the 2019 tax period, the Growth Decree (art.4 of Legislative Decree no.34 / 2019), integrating the Patent Box regulation, offered taxpayers the opportunity to self-assess the tax incentive directly in their tax return. This procedure is alternative to the ordinary procedure which provides for the conclusion of a ruling with the Italian Tax Authority.

More precisely, instead of applying for the ruling, taxpayers can autonomously self-assess the tax incentive in his tax return, while providing the information used to calculate it.  The taxpayer is required to inform the Tax Authority about the documents from which that information can be inferred, through the tax return relating to the year covered by the tax benefit.

Unlike the ordinary procedure in which the benefit can be used already in the year of obtaining the ruling, for the Self-assessment procedure the reduction of the taxable amount is divided into three annual instalments of the same amount to be indicated in the tax returns of the tax period in which the option is exercised and the two subsequent periods.

Since the taxpayer self-assess the amount of the tax relief in the absence of a confontation with the Tax Authority, later the latter may provide for the adjustment of the income excluded from taxation, recovering it for taxation.

In these cases, the law provides that, without prejudice to the recovery of the higher taxes due, the penalties for unfaithful tax returns are not due (art. 1, paragraph 2, Legislative Decree no. 471/1997) if, during access , inspections or other investigative activities, the taxpayer shall deliver the documentation on the basis of which the calculation of non-taxable income has been made.

This documentation must be sufficient to allow the tax authorities to verify the correct determination of the part of income excluded from taxation, including the amount of the positive components of income (also the implicit ones deriving from the direct use of the intangible assets) as well as the identification and the measurement of the corresponding negative components.

Those who had already activated the ordinary ruling procedure can also access the new self-assessment procedure, provided that this agreement has not yet been concluded with the Tax Department and that they take charge of communicating to the Revenue Agency that they want to renounce the procedure.

It is clear that the tax benefit of the Patent Box, equal to a 50% tax reduction of income deriving from the exploitation of intellectual property, can make a difference in terms of the company’s profitability. Although the advantages are clear, we must not underestimate the process that follows to take advantage of it.

For this purpose, due attention must be paid to the type of procedure to choose, the methodologies adopted for the evaluation of intangible assets, the information to be selected, the documentation to be kept and the indicators of tax risk involved, elements that can make a big difference in the practice.

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Antonio Merola, LL.M.

Tax Lawyer specialized in International Taxation at the International Tax Center of the University of Leiden (The Netherlands) by attending the LL.M. (Master of Laws) in International Tax Law (after a University Master in International Tax Planning and a University Master in Tax Law in Italy), for several years he has been dealing with Tax Consulting and Tax Litigation in favour of Individuals and Companies.