The recently approved Law Decree No. 34/2019 (“Growth Decree”) alters the Italian patent box regime, making it easier for Italian taxpayers to achieve related tax benefits.
In 2015, Italy introduced its first Patent box regime, with the goal of increasing the level of R&D and intellectual property (IP) development activities performed in Italy. The regime allowed companies to have a reduced tax rate for the income derived from the direct use or licensing of IP assets owned in Italy.
The scope of assets eligible under the Italian regime is very broad, as it encompasses software (whether protected by copyright or by patent), patents (already granted or in process of being granted), business and technical know-how, designs and models. This was the case also for trademarks; however, within the limit of the grand-fathering clause introduced by BEPS Action 5.
Originally, in case of direct use of IP, taxpayers were obliged to enter into a ruling procedure with the tax authority to define methods and criteria for determining the eligible income. The procedure had to be dealt with at the central level or with regional tax authorities, depending on specific revenue thresholds. The ruling procedures under the 2015 regime have proved to be particularly time-consuming and burdensome for both taxpayers and tax authorities. In fact, a significant number of cases initiated in 2015 have not yet concluded.
The Growth Decree introduces a simplification for taxpayers who may now avoid the ruling procedure.
Specifically, starting from fiscal year 2019, the taxpayer is now presented with two options:
- Filing a ruling request, as was the case for previous fiscal years; or
- Autonomously assessing the tax benefit and preparing appropriate documentation which will provide the taxpayer with penalty protection in case of tax audit if timely submitted to tax inspectors upon their request.
The content of the appropriate documentation is detailed in the tax authority provision No. 658445/2019, and it consists of the following sections:
- Section A contains an overview of the company and the strategies it pursues, a description of the functions performed, risks assumed, and assets used. It shall also describe the type of transactions performed, the role of each of the enterprise’s business units and/or departments as well as the relevant market of reference. In addition, it shall outline the intangibles assets owned and utilized and the type of R&D activities performed.
- Section B presents a summary of the economic information dealing with the determination of the eligible income; illustrates the method selected and provides the rationale for the adoption of that method.
Finally, if the information required in Sections A and B are already in the transfer pricing documentation, the taxpayer can merely refer to that documentation. Taxpayers in Italy that are seeking to take advantage of the new patent box framework should review their existing transfer pricing documentation as a potential starting point for purposes of meeting the appropriate documentation requirements outlined in the new rules.
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