The new Patent Box regime

The special tax regime known as “Patent Box” was introduced in Italy by the 2015 Budgetary Stability Law and has been subject to numerous revisions over the years. The legislation was in fact entirely rewritten in by the 2022 Budgetary Stability Law.

The current version of the Patent Box regime provides for a tax bonus of 110% for research and development costs related to certain types of intangible assets. In essence, a cost of 100 would be recognised as costs of 210 for tax purposes.

The tax deduction, which is relevant for direct tax and regional tax on productive activities, is available in the tax period in which a qualifying intangible asset obtains an industrial property right, and relates to expenses incurred in the year and in the preceding eight tax periods.

Who is eligible

Entities eligible for the Patent Box regime are those with business income, in whatever form they are organised (individual enterprises, limited companies, private partnerships, entities and consortia), who:

1.       hold the right to the economic exploitation of the qualifying intangible asset;

2.       use the intangible asset in their business activity, either directly or indirectly (by granting use to third parties);

3.       make investments in relevant activities within the scope of the business activity, bearing the related costs and risks.

Excluded from the Patent Box regime are those entities who determine their tax base according to cadastral or flat rate criteria and those subject to insolvency proceedings or in voluntary liquidation.

Eligible intangible assets

The Patent Box regime covers research and development activities relating to:

a)       copyright protected software;

b)      patents, utility models, new plant varieties and topographies of semiconductor products;

c)       legally protected designs.

Relevant activities

The activities whose costs are deductible under the Patent Box regime are those classifiable as:

a)       industrial research and experimental development;

b)      technological innovation;

c)       design and aesthetic conception;

d)      legal protection of rights over intangible assets.

The definition of the activities under (a) to (c) is contained in the Decree of 26 May 2020 of the Ministry of Economic Development.

These activities may be carried out directly by the enterprise or may be outsourced by means of research contracts concluded with universities, research organisations and similar bodies and with companies other than those that directly or indirectly control the enterprise, are controlled by it, or are controlled by the same company that controls the enterprise. Even if they are outsourced, they must still be carried out under the technical direction of the enterprise’s own personnel.

The contract concluded for the execution of these activities must provide that the risk of failure, both technical and financial, is borne by the enterprise.

Eligible expenses

The following types of expenses are deductible:

a)       personnel expenses (employees, freelance or other collaborators other than employees);

b)      amortisation rates, capital share of lease payments, operating lease fees and other expenses relating to movable instrumental assets and intangible assets used;

c)       expenses for consultancy and equivalent services relating exclusively to the relevant activities;

d)      expenses for materials, supplies and other similar products;

e)      expenses related to the maintenance of rights over eligible intangible assets, their renewal upon expiry, their protection, and those related to the prevention of counterfeiting and the management of litigation aimed at protecting those rights.

Where the expenses, with the exception of those referred to in (e), relate only in part to the relevant activities, they may be taken into account only for the portion attributable to that use.

Penalty protection

The current Patent Box regime no longer provides for the possibility (provided for in the old formulation of the regime) to enter into a prior agreement with the Italian Revenue Agency establishing the criteria and methods for determining the benefit.

However, it is possible for the taxpayer to prepare, in advance, appropriate documentation in which the information necessary to determine the tax benefit is set out, thereby obtaining, in the event of an audit finding that the benefit was not due, the non-application of penalties for misrepresentation (penalties ranging from 90% to 180% of the unpaid taxes found to be due).