The Upcoming Implementation of the Italian Patent Box Regime

McDermott Will & Emery
Contact

Several press articles in recent weeks have anticipated the upcoming enactment of the Ministerial Decree which will eventually implement the Italian Patent Box regime. The Ministry of Economics and Finance announced on 29 July 2015 that the competent ministries have signed the decree, and therefore its publication in the Official Gazette is imminent.

At the end of 2014, the Italian Parliament approved the Budget Law for 2015, which, inter alia, introduced for the first time in Italy a Patent Box tax regime, similar to those already in place in many other European countries, which is relevant for both Corporate Income Tax (IRES, 27.5 per cent rate) and the Regional Tax on Productive Activities (IRAP, ordinary rate at 3.9 per cent). This new regime is aimed at providing an effective tax incentive for enterprises to create, relocate and maintain intangible assets in Italy.

The Italian Patent Box is actually a very attractive and broad regime: it determines a 50 per cent exemption (30 per cent in 2015, 40 per cent in 2016) on income derived from the exploitation of a wide range of qualifying intangible assets, after the application of a certain ratio based on the costs borne for the development, acquisition, enhancement and maintenance of such intangibles. The incentive is determined according to a formula which can be summarised as follows:

Furthermore, the Patent Box grants a full exemption from taxation over the capital gains arising from the sale of the same qualifying intangible assets, under the sole condition that 90 per cent of the consideration obtained from such sale be re-invested in the maintenance, enhancement or development of other qualifying intangible assets.

The Patent Box regime is optional and requires a five-year irrevocable election.

Although other jurisdictions may have implemented similar IP regimes which are even more favourable than the Italian one in terms of tax rate reduction, the appeal of the Italian Patent Box regime lies in the broadness of its potential scope of application.

Scope of Application

From a subjective standpoint, any taxpayer carrying out a business activity in Italy, either as a tax resident or through a permanent establishment located therein, is eligible for such regime. The sole requirement is a substantial one: carrying out a qualifying research activity which leads to the creation of a qualifying IP asset. If non-qualifying research only is carried out, or no qualifying IP is obtained, no benefit is granted. The true strength of this regime, however, resides in its wide range of qualifying intangibles:

  • Industrial patents, biotech inventions, utility models, patents for plant varieties and semiconductors’ topographies
  • Business, commercial, industrial and scientific information and know-how which can be held as secret and whose protection can be legally enforced
  • Formulas and processes
  • Designs and models, legally protected
  • Software protected by copyright
  • Trade marks, including collective trade marks, either registered or in the process of registration

OECD Grandfathering Clause on Non-Compliant IP Regimes: Trade Marks

Special attention should be paid to trade marks, especially from an Italian perspective. Many Italian enterprises have built their success on high-end products whose value is often due not only to intrinsic high quality, but also to their famous and prestigious trade marks. Such trade marks have often been developed and maintained through intensive and costly marketing activities which have greatly increased the added value of the products sold. Notable examples in the Italian industry include fashion, automotive and food.

However, it should be kept in mind that the Organisation for Economic Co-operation and Development (OECD) since 2013 has been implementing the so-called BEPS Action Plan, an action plan conceived in order to devise solutions widely agreed at the international level to tackle Base Erosion and Profit Shifting (BEPS) practices. Within the enactment of the BEPS Action Plan, the OECD is also addressing issues related to harmful tax competition among States through IP regimes, by setting a common standard of rules and principles which shall be implemented by all OECD countries in their domestic legislation by 2021 (Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, BEPS Action 5; Agreement on Modified Nexus Approach for IP regimes, so called “Modified Nexus Approach” of 8 March 2015; plus a third, final document, which was expected in July but is still pending).

The Italian Patent Box regime has been shaped already in compliance with the (non-final) guidelines provided by the OECD so far. The only feature of the Italian rules which is not in line with the OECD principles is the inclusion of trade marks within the scope of intangibles qualifying for the incentive.

Nevertheless, such extension of the Patent Box regime to trade marks should benefit from a five-year grandfathering clause, which allows the States to apply their current non-compliant IP regimes until 30 June 2021, when all States will be required to have implemented fully compliant rules (the so-called abolition date). Italy-based undertakings will therefore have a one-off opportunity to benefit from the Italian Patent Box regime also in respect of trade marks for the limited timeframe of 2015 to 2021. To take advantage of such benefit, taxpayers must take timely action, since OECD documents (Modified Nexus Approach) also provide a foreclosure to “new entrants” starting 30 June 2016 which will likely require taxpayers to provide their opt-in for the Patent Box before that date. A decree addressing the formalities for the election filing is expected. Since under current regulations even the opt-in for 2015, as a matter of principle, would be made within the tax return for 2015 (due, as a general rule, by 30 September 2016), it is likely that the government will provide special election procedures in order to allow taxpayers to file in 2015 in order to fully benefit (with effects starting from fiscal year 2015) from such transitional regime extended to trade marks. For those cases where the ruling request is mandatory, it will be crucial that both the election and the ruling submission are filed within 2015 (see next paragraph for the effects of the ruling).

First Part of the Formula: Computation of Income Derived from the IP

For the purposes of the computation of the tax benefit, several aspects are relevant. The first part of the above-mentioned formula requires the taxpayer to determine the portion of income generated through the exploitation of the intangible. There are still some uncertainties regarding how the taxpayer will be required to compute the IP income over the relevant opt-in period. The decree will have to clarify whether the income to be considered each year is just the income realised in that year, or whether it has to be computed (similar to the costs) on a cumulative basis (net of the portion incentivised in previous years). In the latter case, which would seem the most reasonable, any loss on the IP realised in a given year will evidently (and automatically) reduce the cumulative computation, thus ruling out any doubt that such a loss had to be neutralised in the fiscal year in which it was suffered. This latter issue could make the option potentially problematic, especially considering that for newly created IP, loss-making periods often precede the profitable ones, and, in some cases, the latter may not materialise at all.

As regards the actual computation of the IP income, this task can be relatively simple when the intangible is licensed to third parties, since the royalty paid to the IP holder constitutes the primary item to be considered. However, since the tax incentive applies to net income, the taxpayer is also required to identify the relevant costs connected with the royalty revenue. More complex calculations are required when the IP is exploited internally; in these hypotheses, it appears that the use of transfer pricing methods is required in order to provide a reliable computation of the portion of income internally generated which can be attributed to the IP. The Italian Legislator is aware that these hypotheses are the most sensitive ones and therefore has established that an advanced ruling is mandatory (while in the case of IP exploitation through intercompany licensing, it is merely optional).

A ruling process can be fairly time consuming. In addition, an escalation in the workload of the ruling team can be expected because of the wide relevance of the new regime. For this reason, while the tax benefit can only be taken after the ruling is granted, the benefit will be retroactive to the fiscal year in which the ruling request is filed. This is why filing within 2015 is recommended for companies which want to fully exploit the patent box benefits.

Second Part of the Formula: The Cost Ratio

The identification of the income derived from the exploitation of the IP is only the first task. In compliance with the guidelines developed at the OECD level, it is necessary to apply a cost ratio to the IP income. Such ratio is aimed at reducing the amount of (or barring) the tax incentive when the taxpayer bears the following non-qualifying costs related to the intangible (which will be conventionally named as “tainted costs”):

  • R&D costs outsourced to companies or other entities belonging to the same group as the taxpayer
  • Costs of acquisition of the intangible from related or unrelated third parties

The ratio, in fact, is computed as follows:

  • The denominator includes all the costs incurred by the taxpayer for the purpose of acquiring, developing and maintaining the IP considered.
  • The numerator includes the same kind of costs included within the denominator, but tainted costs are computed only up to an amount equal to 30 per cent of the other qualifying costs.

Therefore the costs to be considered within the denominator and the numerator are the same in nature and differ only in their allowed amount. This means that if the taxpayer, for instance, does not bear any tainted cost (or up to an amount not exceeding 30 per cent of the other qualifying costs), the ratio will be 100 per cent. In this case, the tax exemption (up to 50 per cent of the IP income) will apply to the full amount of the income that is deemed to be derived from the exploitation of the IP considered.

The guidelines developed at the OECD level require taxpayers to consider all the costs incurred in order to acquire, develop and maintain the IP for the purposes of the computation of the cost ratio. It is thus necessary to take into consideration the expenditures incurred during the entire life of the IP asset, not only those incurred and recognised within the income statement of the tax year considered. This mechanism is aimed at creating a nexus between the IP development and the tax incentive, and avoiding possible duplications of the benefit (tainted cost related to IP for which other taxpayers could have received an incentive).

To this end, taxpayers will have to implement effective and analytic cost-tracking and tracing methods within their accounting systems in order to keep detailed track of such costs and their imputation to a certain IP. This sort of compliance is extremely important, especially for bigger enterprises, which often hold several intangibles, because the determination of the Patent Box tax incentive must be made severally for each IP (however, if several intangibles are used in connection with a single process or product, they are treated as one IP for the purpose of determining both the IP income and the cost ratio).

Looking at the whole life of the IP requires taxpayers to also consider costs incurred before the implementation of the Patent Box regime. Clearly this sort of analytic cost-tracking and tracing cannot be implemented retroactively by taxpayers; therefore, for an interim period (apparently up to and including 2017), taxpayers will be allowed to determine a single cost ratio, based on all the IP-related costs, applicable to all the intangibles held. In addition—and for the same reason—such retrospective computation should occur only up to a specific cut-off date (apparently back to and including 2012). These measures should reduce the complexities related to a computation of several ratios for each IP, in absence of an adequate cost-tracking and tracing system before the Italian Patent Box regime enters into force.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McDermott Will & Emery | Attorney Advertising

Written by:

McDermott Will & Emery
Contact
more
less

McDermott Will & Emery on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.