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The tax savings on the exploitation of intellectual property rights that can be generated through the Italian IP box are a massive opportunity.
This is a guest post by my DLA Piper colleagues Roberto Valenti and Sofia Barabino, I am sure you will enjoy it!
What is the Italian IP Box about?
The Italian IP Box provides for tax benefits not only to patents and patent applications, but also to other intellectual property rights, including copyrighted software programs, registered trademarks and trademark applications, registered or unregistered industrial designs, trade secrets and utility models.
Also, where two or more rights of the same type and owned by the same party are connected, so that the finalization of a product or process is subject to a joint use of those rights, they are considered as a single right for the purpose of accessing the tax benefit.
The percentage of profits deriving from the exploitation of intellectual property rights to be excluded from taxation as a consequence of the applicability of the IP Box amounts to 30% in the first year, 40% in the second year and 50% for the remaining three years. The regime is irrevocable and renewable after the first five years. In order to be eligible, the intangibles must be the result of R&D activities carried out by the company either directly or through outsourcing.
Furthermore, potential capital gains realized upon the sale of the assets are entirely exempt from taxation, under the condition that at least 90% of the price is reinvested into research and development activities.
Who can exploit such tax savings?
The IP Box tax savings can be exploited only by entities carrying out business activities in Italy, under the condition that they perform R&D activities either directly or through agreements with third parties. These R&D activities are defined in a wide manner, including not only patent-related activities, such as technological research, basic and applied research and new product tests for commercialization, but also activities which are key for the development of trademarks and designs, including anti-counterfeiting activities such as litigation as well as certain promotional activities.
Foreign entities carrying out business activities in Italy through a permanent establishment can also benefit from the regime, provided that they are resident in a country that has a double tax treaty in force with Italy and effectively exchanges information with Italy.
Finally the tax benefits are also granted to those entities that do not licence their intangible assets, but instead use them in manufacturing processes or provide services using one of the eligible intangible assets. The portion of income derived from the use of the intellectual property shall be identified through an Advanced Pricing Agreement (APA) with the Italian tax authorities. The same APA procedure could also be entered into when intangibles are either
- licensed to entities that directly or indirectly control the licensing entity or
- controlled by the licensing entity, or
- controlled by the same entity that controls the licensing entity, although in this case the APA is not mandatory but only optional.
The condition for accessing the IP Box tax benefit is the adoption of a tracking and tracing system, in order to be able to estimate the share of total income which is attributable to, or is derived from, every specific qualified IP item. Tracking and tracing could be based either on accounting records or on non-accounting procedures. The system will become mandatory from 2018. Until then, companies can calculate the notional income in an aggregate way, considering each category of qualified IP as aggregated. For example, 5% of income should be attributable to patents, 15% to company trademarks and 7% to know-how.
How can I apply for the IP Box regime?
In order to benefit of the tax savings deriving from the IP Box regime, companies shall apply for a tax ruling with the Italian tax authority. This application shall be submitted by the end of 2015 if the company wants to enjoy the tax benefit in 2016.
The application for the tax ruling shall provide some background information relating to the taxpayer, to the type of goods on which the tax benefit wants to be gained and the type of research and development activity performed. It is possible to provide the documentation above within 120 days from the filing of the application for the tax ruling, but as mentioned above the application has to be submitted by the end of the year if the company is willing to obtain the tax benefits in 2016.
