Italy: Italian Law Decree revises patent box regime

Article 6 of the Decree change the nature of the patent box regime by shifting from a profit-based incentive to a cost-based incentive. The new patent box regime will allow eligible taxpayers to claim a super tax deduction equal to 90% for research and development (R&D) expenses, in addition to the current 100% deduction. 

With the new regime, Italian companies and permanent establishments in Italy of the foreign companies, will be able to benefit from an overall 190% deduction for R&D expenses, related to intangible assets, i.e., copyrighted software, patents, trademarks, designs, models, qualifying know-how. R&D activities may be carried out internally by the company or through research agreements with universities, research organizations or third parties that must be neither directly nor indirectly be linked to the taxpayer requesting the benefit, R&D costs incurred with related parties would non be eligible. 

The abovementioned R&D costs may be recognized for tax purposes for both corporate income tax (IRES) and regional tax (IRAP). Based on applicable corporate income tax and regional tax, this would generate tax relief approximately equal to 25.11% of the costs incurred. 

To avoid a duplication of tax incentives, companies who elect the new super deduction regime will not be allowed to claim the R&D tax credit provided by Law n.160/2019. The entities interested in exploring the new patent box regime should carefully evaluate in advance the expected advantages. 

The election for the new patent box regime will be irrevocable and valid for five years with the possibility of subsequent renewals. It is required to submit the application to the Italian tax authorities. 

The decree provides for transition rules regulating the procedure between the two regimes, companies who have already opted for the previous patent box regime on a date prior to date of entry into force of the Decree (i.e., prior to 22 October 2021) may choose to join the new regime. However companies who have already signed a ruling with the tax authorities, as well as those who have joined an alternative self-computation regime under article 4 of Law Decree n.34/2019, will not be able to make an alternative choice. Finally, the companies who have submitted a ruling application but have not yet signed a tax ruling, will be able to apply the new regime.

Companies may seek protection against penalties if they have used R&D tax credit for fiscal years 2015 through 2019 for expenditures or projects that were not eligible. However, this penalty protection will not be available if a taxpayer received the R&D tax credit due to fraudulent conduct.