Starting with the 2015 tax year, the ITALIAN Government has introduced important tax breaks aimed at encouraging investment by companies, particularly those favouring innovation. One of the new measures is the so-called Patent Box, i.e. the possibility of opting for favourable treatment of income deriving from the use of certain types of intangible assets.
The benefit consists in the exclusion from the total income of 50% of the income deriving from the concession in use or from the use of intangible assets (IP Box), through a decrease in the Income Form (Modello Redditi) and in the IRAP Form (Modello IRAP).
Who can benefit from this measure?
The benefit is available to business income holders, regardless of their legal status, size or production sector.
The benefit is not eligible to:
- Legal entities subject to procedures not aimed at the continuation of their activity (bankruptcy, compulsory liquidation, extraordinary administration of large enterprises in crisis);
- Holders of self-employment income;
- Persons with business income who determine their income using methods other than analytical methods or who apply facilitated regimes for determining income and taxes (e.g. agricultural regime).
In accordance with the OECD “nexus approach” principle, it is necessary that the legal entities exercising this option:
- Have the right to the economic exploitation of intangible assets, which must be legally protected (e.g., copyrighted software, registered patent);
- Carry out R&D activities in relation to the asset to be subsidised.
This makes it possible to link the use of the benefit to the actual carrying out of an economic activity that takes the form of the development, maintenance and growth of the intangible asset itself. In other words, there must be a link between the R&D activities, the intangible assets and the eligible income attributable to them.
The share of income that can be attributed to the exploitation of intangibles on which to calculate the 50% percentage is given by the product of the above mentioned income and the Nexus Ratio (ratio between R&D costs incurred for the production of the intangible and the total costs related to that asset).
What types of use are eligible for the benefit
The categories of use eligible for relief are the following:
- Granting of the right to use the intangible assets – indirect use with Royalty as revenue for the use of the IP Box.
- Direct use of intangible assets in the business activity – direct use of the intangible.
In the second case, starting in 2019, Article 4 of Decree-Law 34/2019 (so-called converted ″Growth Decree″) introduced the possibility, as an alternative to the ruling procedure with the Revenue Agency, to directly determine the income eligible for the benefit, indicating the information necessary for the aforementioned determination in appropriate documentation prepared in accordance with the provisions of Measure 558445/2019 of the Director of the Revenue Agency (issued on 30/07/2019).
How to obtain the benefit
Legal entities exercising this option, which takes the form of the direct self-liquidation of the option, divide the decreasing variation (with respect to each financial year) into three annual instalments of equal amount, to be indicated in the Income Form SC (Modello Redditi SC) and in the IRAP Form (Modello IRAP), relating to the tax period in which the option is exercised and in those relating to the two subsequent tax periods.
The correspondence of the documentation with the provisions of Measure 558445/2019 and the proven suitability of the procedure for determining the taxable income used allows access to the benefit of the disapplication of administrative sanctions in the event of adjustment by the tax authorities.
The option can be exercised, by express provision, also in case in which ruling procedure is in progress, provided that the related agreement has not been concluded. In this case, the taxpayer must expressly inform the Revenue Agency of its willingness to renounce the procedure.
Patent Box: what is the Residual Profit Split?
The preferred method for identifying the income eligible for the benefit deriving from the direct use of intangible assets is the one based on the profit split: Residual Profit Split.
The approach consists in isolating the part of the result attributable to the routine functions from the economic result of the enterprise allowing, by difference, the determination of the residual profit or loss deriving from the use of intangible assets, through the following steps:
- Identification of the economic result of the enterprise to be distributed among the business functions
- Remuneration of the so-called routine functions
- Determination of the extra-profit deriving from the use of all intangible assets
- Identification of all intangible assets and selection of the intangible assets to be assisted
- Allocation of the share of the extra-profit attributable to the qualifying intangible asset
- Tax changes (increases or decreases) for IRES and IRAP purposes relating to the specific qualifying IP Box.
In relation to the extra-profit, it can be said that the access to the benefit is precluded to those who do not show a particularly performing EBIT compared to the sector averages.
A practical example
Alfa S.R.L. applying the residual profit split has identified a share of income attributable to the use of intangibles of €875,000, 58% of total income. The remaining €625,000 is attributed to the routine distribution function.
The share of income eligible for the benefit is identified as follows:
- Determination of the portion of the income attributable to the exploitation of intangibles, equal to the product of the EBIT attributable to intangibles and the nexus ratio (which in this example is assumed to be 1).
- Application of 50% to the income eligible for the benefit
|Balance sheet items||Alfa S.R.L Company||Share of income eligible for the benefit||437,500 €|
|Value of production||10,000,000 €||Share for each financial year||145,833 €|
|Costs of production||8,500,000 €|
|EBIT attributable to intangibles||875,000 €|
Assuming a taxable income for the financial years 2021, 2022 and 2023 respectively of €1,300,000, €800,000 and €1,500,000, it can be seen from the tables below that, by applying the Patent Box regime, the decreasing variation of €145,833 to be made for the three-year period leads to an overall IRES and IRAP saving of €122,063.
TAXES WITHOUT PATENT BOX
|1,300,000 €||2021||312,000 €||50,700 €|
|800,000 €||2022||192,000 €||31,200 €|
|1,500,000 €||2023||360,000 €||58,500 €|
|TOTAL TAXES||1,004,400 €|
TAXES WITH PATENT BOX
|1,154,167 €||2021||277,000 €||45,013 €|
|654,167 €||2022||157,000 €||25,513 €|
|1,354,167 €||2023||325,000 €||52,813 €|
|TOTAL TAXES||882,338 €|
OVERALL SAVINGS FROM APPLICATION OF RESIDUAL PROFIT SPLIT € 122,063
What we can do to obtaining the Patent Box tax benefit
Our firm Studio Frisacco, also thanks to the collaboration with a Certified Incubator, can assist you in obtaining the Patent Box tax benefit:
- Supporting you in the reporting of R&D costs and in the identification of the intangible object of the benefit.
- Supporting you in the identification of all the costs incurred for the production of the intangible and in the calculation of the Nexus Ratio.
- Elaborating the Residual Profit Split procedure for the identification of the eligible income for the benefit, in case of direct use of the asset.