Patent box regime repealed and replaced with super deduction
The Italian government published a law decree on 21 October 2021 that repeals the patent box regime and introduces a super deduction for qualifying research and development (R&D) expenses. Fundamental changes have been made to the incentive regime in that the benefits of the super deduction will be based on actual expenses incurred on qualifying R&D, rather than profits derived from the exploitation of intangible property. The decree is effective from the day following publication (i.e., 22 October) and must be converted into law within 60 days to remain in force.
Overview of new rules
The patent box regime introduced in 2014 offered a profit-based incentive that granted a 50% exemption from corporate income tax and the regional tax on productive activities (IRAP) on income arising from the direct and indirect use of qualifying intangible property. This regime is replaced with a cost-based incentive regime that grants a super deduction for qualifying R&D expenses incurred by companies for the creation or development of intangible assets.
The decree provides that 190% of R&D expenditure incurred in relation to copyrighted software, patents, trademarks, designs, models and know-how may be deducted for purposes of the corporate income tax and the IRAP.
Beneficiaries under the new super deduction regime are the same as those under the old patent box regime:
- A company that is tax resident in Italy and subject to corporate income; and
- A nonresident entity that has a permanent establishment in Italy to which the qualifying IP can be attributed, provided the entity is resident in a country that has concluded a tax treaty with Italy that provides for the effective exchange of information.
Requirements to qualify for the super deduction
- A company electing the new super deduction must carry out R&D activities, including under research contracts with companies other than those that directly or indirectly control the company, are controlled by it or are under the common control of a third company, or with universities or research institutions and similar bodies.
- The new super deduction is optional. Once a company opts into the regime, the election is irrevocable for a five-year period, but can be renewed for subsequent five-year periods.
- A company electing the super deduction will not be allowed to claim the R&D tax credit provided by Law n.160/2019 (which grants a maximum credit of 20% on eligible costs incurred up to an annual maximum of EUR 4 million).
- A taxpayer may claim protection against penalties imposed by Italy’s tax authorities where a deduction taken under the new regime is challenged provided the taxpayer has prepared a defensive file based on guidelines to be issued by the tax authorities and notifies the authorities that it is in possession of the documentation. The notification must be made in the corporate income tax return for the fiscal year for which the deduction is claimed.
The new super deduction applies as from 2021 for first-time adopters. Transitional rules apply to taxpayers that are operating under the old patent box regime:
- A company that made a patent box election before the effective date of the decree (i.e., before 22 October 2021) may opt into the new super deduction regime.
- A company that already submitted a ruling request to the tax authorities pursuant to Presidential Decree No. 600/1973 (including for the renewal of an existing agreement) and signed an agreement with the authorities is excluded from the new super deduction. Also excluded is a company using the alternative “self-compensation regime” (which allows a company to determine its eligible income for purposes of the patent box rather than requesting a ruling from the tax authorities).
- A company that submitted a ruling request pursuant to Presidential Decree No. 600/1973 (or a request to renew the terms of a signed agreement) but has not yet signed an agreement and that intends to opt into the new super deduction, must communicate its intention to renounce the prior agreement or to renew it.
The technical report accompanying the decree states that the transitional rule “does not require taxpayers that already benefit from the old regime to immediately transfer to the new regime, since it is possible that such benefits may continue to apply up to fiscal year 2024.” (The reference to fiscal year 2024 can be explained by the fact that 2020 elections for the patent box generally should last for five years, i.e., until 2024.) It, therefore, would seem that that 2020 elections would continue to be valid at least where a ruling approving the election has been obtained. It is unclear, however, whether companies that have filed a 2020 tax ruling request (including a renewal request) can opt into the new super deduction regime if the election for the patent box did not become effective before the new regime entered into effect. Hopefully, the government will clarify these issues in the near future.