Tax Relief on Exploitation of Intellectual Property Rights and Know-How

INTRODUCTION OF THE SO CALLED “IP BOX”. Law no. 190 of December 23, 2014 (“Law”), provides for a new regulatory framework concerning taxation of revenue arising from exploitation of intellectual property rights and know-how eligible for legal protection.

Starting from 2015, repatriation of intangible assets owned by Italian and foreign companies abroad will be favored. Exportation or re-exportation of intangible assets to countries having more favorable taxation of revenue arising from exploitation of intellectual property rights will likely decrease, whereas investments in R&D activities in Italy should increase.

SCOPE OF THE LAW. The Law expressly covers works of intellect, patents, trademarks, design, models, processes, formulas, as well as industrial, commercial, and scientific know-how eligible for legal protection[1]. Revenue arising from both direct and indirect exploitation will receive a more favorable taxation as profits from licensing of eligible assets as well as their direct use (e.g. use of patented machineries in manufacturing processes) will be partially excluded from companies’ taxable income. The Law provides for a progressive implementation of the tax relief system. In 2015, only 30% of the profits will be excluded, whereas such percentage will increase to 40% in 2016, and to 50% in 2017[2].

Capital gains arising from sale of eligible intangible assets will be entirely tax-exempt, upon condition that at least 90% of sales revenue are invested, within two years from the relevant sale, in maintenance or development of any of such assets.

It must be noted that the tax relief will not automatically apply to all eligible entities. Instead, companies must expressly opt for the regime, and their choice will be binding and irrevocable for the following five fiscal years.

WHO CAN BENEFIT. Entities carrying out business activity in Italy, regardless of their type or size, can benefit from the new taxation regime. Foreign companies and other incorporated or non-incorporated entities, including trusts, carrying out business activity in Italy through a permanent establishment, can also benefit from the newly introduced regulatory framework provided that their country of residency is a party to a double tax treaty and undertakes to exchange relevant information with Italy.

CONDITIONS. The exclusion of profits from corporate income will apply only to those entities that carry out R&D activities by way of contracts entered into with either universities or equivalent research entities, or with companies other than those belonging to the same group[3].

In case of direct exploitation of eligible intangible assets, companies must conclude an advanced pricing agreement (APA) with the Agenzia delle Entrate (the Italian tax agency) to determine the ratio between the production value of the assets and the corporate income[4]. Such an agreement is optional for revenue arising from exploitation of eligible assets within the same group[5], whereas it is mandatory in case of capital gains deriving from sale of the assets.

EXEMPTED INCOME. Not all of corporate income benefits from the tax relief. The benefitting quota is instead calculated on the basis of the ratio between R&D costs incurred for maintenance and development[6] of eligible intangible assets and overall costs borne to produce such assets.

[1] The Law originally provided for works of intellect, patents, trademarks that are functionally equivalent to patents, processes, formulas and know-how eligible for legal protection. The meaning of “trademarks functionally equivalent to patents” has been debated ever since, with experts stating that such trademarks could be indentified in those trademarks used to market patented inventions. The recent Law Decree no. 3 of January 24th, 2015 (currently still to be converted into law) expanded the scope of the Law to all kind of trademarks, therefore also to purely commercial trademarks, as well as to design and models.

It must be noted that the scope of the Law is wider than what provided in other European countries by similar tax regimes, where tax relief is usually limited to exploitation of patents. Such systems are therefore commonly defined as “Patent Box”.

[2] The exemption is relevant to calculation of both IRES (corporate income tax) and IRAP (regional tax on production). It is estimated that, starting from 2017, revenue arising from exploitation of eligible assets will be taxed at a rate of 13.75%.

[3] The provision is aligned with the “nexus approach” adopted by OECD, aiming at limiting harmful tax competition amongst OECD countries. According to such an approach, tax relief is to be granted only when R&D costs are incurred, therefore hindering companies from exporting intangible assets to countries with more favorable tax rates without carrying out any R&D activity in such countries. (For further information on this issue visit http://www.oecd.org/ctp/beps-2014-deliverables.htm)

[4] The agreement is reached upon an international ruling procedure that is usually applied with regards to transfer pricing and dividends within the context of multinational companies.

[5] The Law originally provided for a mandatory agreement also in case of exploitation within the same group. Law Decree no. 3 of January 24, 2015, made such an agreement optional. Please note that the agreement may remain mandatory if the law decree is not converted into law or if it is modified by the law of conversion.

[6] Law Decree no. 3 of January 24, 2015, provides that such costs are increased by those incurred for the purchase of the asset or for research contracts entered into with companies belonging to the same group up to 30% of maintenance and development costs.

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