The Tax Decree and the 2022 Budget Law introduced important innovations in the scope of application of the Patent box, which initially became part of our legal system in 2015
For the Patent Box regime, introduced for the first time in our legal system in 2015, the time has come for a profound restyling: the first significant changes introduced by the “Tax Decree” (Legislative Decree No. 146/2021) were followed by some new features introduced by the 2022 Budget Law (Law No. 234/2021).
The Patent Box regime
In particular, the relief, which initially consisted of a partial tax reduction on the income deriving from the use of certain intangible assets, has now been transformed into a sort of “super deduction” of 110% of the research and development costs incurred in relation to industrial patents, copyrighted software and designs and models. As with any restyling, the opinions of insiders are conflicting: in the face of an overall simplification and greater accessibility to the subsidy, we note a weakening of the tax saving potentially obtainable by businesses.
In any case, the function of the Patent Box remains undeniable and continues to represent one of the main levers for financing research and attracting investments in Italy. Below are the main innovations introduced by the legislation and some critical issues that may arise in the transition from the old to the new regime.
The Patent Box: beneficiaries and eligible assets
The recent changes have not affected the potential beneficiaries of the relief. The Patent Box therefore remains accessible to all persons with business income, regardless of size and legal form, even if not resident in Italy, provided they are resident in countries with which a treaty is in force to avoid double taxation and with which the exchange of information is effective.
What has changed, however, is the scope of application of the Patent Box. The 2022 Budget Law has in fact limited the subsidy to the following intangible assets, used directly or indirectly in carrying out the business activity:
- Copyrighted software;
- Industrial patents;
- Designs and models.
The complex of eligible assets has therefore been reduced, which until the “D.L. Fiscal” also included company brands and know-how.
R&D, which activities fall under the Patent Box
Another novelty compared to the previous regime concerns the definition of eligible Research and Development activities. While the previous legislation referred to research and development activities aimed at “the development, maintenance and increase” of the value of eligible assets, the Tax Decree now refers to research and development activities aimed at the “creation and development of the aforesaid goods.
However, the law does not specify in detail what types of activities are considered “eligible” to be able to benefit from the new facilitation, primarily to identify the costs relating to the creation and development of eligible assets. The issue of classification of eligible activities is particularly significant in the light of the recent problems that have arisen with the tax credit for research and development activities and also in consideration of the fact that for the new version of the Patent Box regime it is no longer possible for the taxpayer to define the methods for determining the relief in discussions with the Revenue Agency.
On the other hand, the possibility of carrying out the research and development activities subject to the subsidy internally or also through research contracts entered into with companies other than those that directly or indirectly control the company, are controlled by it or are controlled by the same company that controls the company remains unchanged. company or with universities or research institutions and equivalent bodies.
Method of calculation to take advantage of the subsidy
The main novelty of the restyling of the Patent Box concerns the method of calculating the benefit. The new version takes the form of a “super deduction”, valid for both IRES and IRAP purposes, of 110% of the research and development costs incurred starting from the tax period in which the eligible asset obtains an “industrial property” title . This concession is applicable starting from the 2021 financial year (for subjects whose financial year coincides with the calendar year, to which reference will be made for simplicity).
The application of the benefit is subject to the exercise of an irrevocable and renewable option lasting five tax periods. Since these are changes introduced recently, there are still some aspects that need appropriate clarification by the Revenue Agency. Firstly, it is not clear whether for the purposes of the subsidy it is necessary to register the eligible assets in the financial statements among the intangible fixed assets. Furthermore, it is not clear at the moment whether the super deduction operates immediately for the entire amount in the tax period in which the intangible fixed asset obtains an industrial property right or whether it must be “spread out” for the duration of the depreciation, operating as a sort of “super depreciation”.
The possibility for the taxpayer to indicate all the information necessary for the determination of the 110% increase in suitable documentation to be prepared in accordance with what will be provided for by a Provision of the Director of the Revenue Agency to be issued soon has not changed under the previous legislation. The production of the set of documents during accesses, inspections, checks or other preparatory activities by the Financial Administration allows the taxpayer to take advantage of the “penalty protection” regime, i.e. the non-application of the penalty for “unfaithful declaration” if from the checks carried out, the tax increase was corrected and consequently a higher tax due (or a lower credit due) was quantified.
But the production of the documentation is not in itself sufficient to access the aforementioned reward system; it is necessary to notify the Revenue Agency in the declaration relating to the tax period for which the benefit is taken.
The recovery mechanism
One of the most interesting innovations of the new Patent Box regime introduced by the “2022 Budget Law” is the mechanism of the so-called eight-year recapture, which allows the super tax deduction to be extended to research and development costs incurred in the eight years prior to that of obtaining the industrial right. This means that if a company has obtained an industrial right in 2021, it will be possible to apply the super deduction of 110% to the research and development costs incurred for the creation of this right starting from 2013.
The technical report to the “2022 Budget Law” clarified that this recapture mechanism is instead precluded for research and development costs incurred for property rights obtained in tax periods prior to 2021. On the other hand, the law did not clarify how it can be managed the recovery in the case of the software. In fact, for this asset, in the presence of the requirements of creativity and originality, legal protection is independent of a title of patent, since copyright protection arises at the moment and by the very fact of the creation of the object code of the program for processor by the author and disregards any formality.
A similar question could apply to the unregistered Community design and model, the protection of which arises even in the absence of a formal exclusive title. In the absence of clarifications from the Revenue Agency, the doctrine at the moment seems to identify the relevant moment for the purposes of applying the super deduction in the reclassification of the asset from assets under construction to intangible assets in the financial statements, to be carried out when the ownership of the right or the project has been completed.
Combination with the R&D tax credit
Another novelty of the “2022 Budget Law” is the repeal of the incompatibility between the Patent Box and the tax credit for research and development activities, initially envisaged by the “Tax Decree”. Therefore, with the approved changes, companies, for the entire duration of the option, can simultaneously take advantage of the new Patent Box and the R&D tax credit. This novelty appears interesting also in the light of the recapture mechanism previously described and the recent positions taken by the Revenue Agency which recognized that the failure to indicate the tax credit in the tax return relating to the year in which the costs were incurred does indeed constitute a violation, but not an impediment to the use of the credit.
The synergy between these two concessions can therefore generate potential benefits on research and development expenses incurred starting from 2015 (year of introduction of the R&D tax credit) in relation to industrial property rights obtained in the 2021 tax period and subsequent.
The transitional rule for the “old regime”
Starting from the 2021 tax period, it will no longer be possible to exercise the option for the “old” Patent Box or exercise the option for self-liquidation by those who are in the five-year period of previously exercised options. However, it remains possible to exercise the option for the “old regime” with reference to the 2020 tax period by sending supplementary tax returns.
It is also possible to switch to the “new regime” for those who have validly exercised or renewed the option for the “old regime” with reference to the 2020 tax period or earlier and who are in the five-year period from which the option takes effect. However, this is not permitted for those who have already signed a ruling agreement or exercised the option for self-liquidation.