How The Italian Patent Box Regime Works

Italy has enhanced in 2015 its first Patent Box regime, a special tax benefit allowing reduced taxation for income derived from the direct use or licence of intellectual property ('IP') assets by companies and commercial entities which perform research and development ('R&D') activities. The programme is new to Italy but follows the recent European trend to assess appealing tax measures in order to attract foreign investments and relocate IP assets. Some European countries - France, Spain, United Kingdom, Luxembourg, the Netherlands, Belgium and Ireland - have already developed a Patent Box system. Differing from most of them, the Italian Patent Box has wider and peculiar advantages targeted specifically to the Italian market.

Measure of the tax incentive

The tax relief consists of an exclusion from the taxable base - for both corporation tax (IRES, with an ordinary rate of 25.7%) and regional tax (IRAP, with an ordinary rate of 3.9%) purposes - of a percentage of the income sourced from the usage of intellectual property. The percentage of income excluded is set at 30% in 2015, increasing to 40% in 2016 and 50% from 2017 onwards. The regime is optional, lasts irrevocably for five years and can be renewed.

Background rules and international guidelines

The Italian Patent Box regime has been introduced with 2015 Stability Law (Law no. 190, December 23, 2014) and practically enhanced with a Decree issued on July 29, 2015 by the Ministry of Economic Development, in conjunction with the Italian Ministry of Economy and Finance. In addition, the Italian Tax Authority has published various official documents in order to advise best practices on accounting matters and operational procedures (lastly, 'Circolare dell'Agenzia delle Entrate' no. 11/E and dated April 7, 2016).

The Italian IP Box legislation follows the OECD principles, in particular the Action 5 - Final Report on 'Countering harmful tax practices more effectively, taking into account transparency and substance' which requires an effective exchange of information between Tax Authorities and the presence of substantial activity where the taxpayer undertook the core income generating activities.

Who is eligible to benefit from the Italian Patent Box?

All the holders of business income deriving from the direct exploitation or the licence of IP assets and who performed R&D activities in order to maintain, enhance or develop their IP assets, are entitled to benefit from the tax advantage. These beneficiaries are probably companies, commercial entities and permanent establishments ('PE') within the Italian territory of foreign subjects. Italian branch of foreign companies can claim for the regime under the conditions that they are resident in a country which has in force a double tax agreement and have developed with Italy an effective exchange of information.

Furthermore, the OECD principles and in particular the 'nexus approach' rule, provide that all the...