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Italy introduces patent box regime in line with the OECD ‘nexus approach’

Italy
The Italian Budget 2015 introduces an optional patent box regime, which grants beneficial exemptions such as a 50% exemption on income derived from the direct use of a qualifying IP, as well as 100% exemption on capital gains arising from the sale of qualifying a IP. Taxand Italy highlights the main aspects of the new patent box regime and discusses the impact for multinationals.

The main aspects of the new patent box include:

  • Option: The Italian patent box regime is optional. The option is irrevocable and has a duration of 5 years
  • Qualifying taxpayer: Both resident entities and branches of non-resident entities may opt for the regime. In particular, non-resident entities with a branch qualify for the regime if they are resident in a country that has a bilateral tax treaty with Italy and if the exchange of information between Italy and their country of residence is effective
  • Qualifying IP: The regime covers patents, know-how, brands and other intellectual property which may be subject to legal protection. Qualifying IP may be either self-developed or acquired. The regime is applicable if the taxpayer performs R&D activities finalised to maintain/develop the qualifying IP. The taxpayer may perform R&D activities by itself or it may outsource them to unrelated third parties
  • Income exemption: The regime grants a 50% exemption on income derived from the exploitation or the direct use of qualifying IP, both for corporate income tax (IRES, generally levied at 27.5%) and local tax purposes (IRAP, generally levied at 3.9%). However, the exemption is phased in and will be 30% for fiscal year 2015 and 40% for fiscal year 2016. If the qualifying IP is directly used by the taxpayer, an advance ruling with the Italian tax authorities is required to determine the income allocable to the qualifying IP. “Directly used” means that the taxpayer uses the qualifying IP itself, without licensing it to other entities
  • Capital gain exemption: Capital gains arising from the sale of qualifying IP will be totally exempted if at least 90% of the sale consideration is reinvested, within the following 2 fiscal years, in the maintenance or development of other qualifying IP. As stated above, qualifying IP may be either self-developed or acquired
  • OECD ‘nexus approach’: The regime is in line with the OECD ’nexus approach’ as described in the report released on 16 September 2014 'Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5: 2014 Deliverables'. The regime only applies to the amount of income derived from the qualifying IP, which is determined by applying the ratio of (1) R&D expenditures incurred by the taxpayer for maintaining/developing the IP, increased by part of the costs of the acquisition of the IP, if any, and (2) the total cost of producing that IP. The commentary on the Budget law for 2015 expressly refers to the substantial activity requirement as specified by the OECD ‘nexus approach’

 

Your Taxand contact for further queries is:
Guido Arie Petraroli
T. +39 02 7260591
E. gpetraroli@fantozzieassociati.it

Taxand's Take

Key opportunities for multinationals include:

  • 50% exemption on income derived from the exploitation or the direct use of a qualifying IP both for corporate income tax (IRES, generally levied at 27.5%) and local tax purposes (IRAP, generally levied at 3.9%)
  • A 100% exemption on capital gains arising from the sale of a qualifying IP
  • A patent box regime that is in line with the OECD ‘nexus approach’

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