New patent box circular n.5/E/2023 – Summary of new features

The Italian Revenue Agency has published the final version of Circular N. 5/E dated Feb. 24, 2023 on the new Patent Box regulations. It has been introduced by the tax decree (DL No. 146-2021). The final version of the circular comes at the end of the public consultation with industry stakeholders, which ended on Feb. 3, 2023, and also contains answers to specific questions on the subject.

Concurrently, the Italian Revenue Agency also published the order amending the previous document dated Feb. 15, 2022 to bring it in line with the current regulatory framework.

The new circular explains in depth the subjective and objective new regime’s taget and provides guidance on the transitional regime, the transition from the old to the new Patent Box.

Below are the main clarifications contained in the circular.

Clarification on the new Patent Box

The current Patent Box regime is a scheme that allows for an increased tax deduction of 110 percent related to expenses incurred for research and development of certain specific types of intangible assets used in business activities.

In the new scheme, the allocation of the tax benefit is directly linked to the incurrence of expenses for the enhancement and creation of value-generating intangible assets (it is therefore a so-called “front-end” scheme), while maintaining the basic principles and substantive requirements of the previous scheme.

Compared to the past, the new benefit results in an increased tax deduction of research and development costs referable to certain types of intangible assets to be shown in the tax return for the relevant tax period.

Therefore, the taxpayer benefits directly and independently from the benefit at the time of the tax return.

In detail, this circular provides clarification in relation to:

• the general structure of the institute;
• the requirements and procedures for access to the scheme, with reference to both the subjective and objective scope;
• the conditions for benefiting from the penalty exemption, in the case of adjustments to the deducted surcharge by the tax authorities;
• the interpretative solutions adopted in relation to issues related to the possible “transit” from the previous to the new Patent Box regime.

The document specifies, in particular, that the new Patent Box can be applied from the effective date of Decree No. 146-2021. Therefore, as of the tax period in progress as of October 22, 2021 (the effective date of the decree), options related to the previous regime can no longer be exercised.

For taxpayers with a tax period that coincides with the calendar year, the new regime applies starting from the 2021 tax period, while taxpayers with a tax period that does not coincide with the calendar year (“straddling” tax period) can take advantage of the regime starting from the tax period in progress as of October 22, 2021.

For example, in the case of a tax period ending on October 31, it is possible to exercise the option from the tax period from November 1, 2020 to October 31, 2021.

The practice paper resolves two critical issues

The first concerns the condition required by Article 6, according to which the eligible goods must be “used directly or indirectly in the conduct of its business activity.” In this regard, the Italian Revenue Agency has chosen not to consider “used” an asset for which an industrial property right has been obtained, but which is not used in business processes (e.g., for reasons related merely to the protection of market shares).

The second relates to the coordination between the rules of the new Patent Box regime and those of the research and development tax credit.

Paragraph 203 of Law No. 160-2019 provides that “for the research and development activities provided for in paragraph 200, the tax credit is recognized […] in an amount equal to 20 percent of the relevant calculation base, taken net of other subsidies or contributions for any reason received for the same eligible expenses.” According to the Italian Revenue Agency, the Patent Box benefit must be qualified as a subsidy that insists on the same research and development expenses eligible for the discipline of the related tax credit; it follows that the calculation base of the latter benefit must be reduced by the income tax and regional tax on production activities referable to the downward variation resulting from the 110 percent increase in the cost admitted to the new Patent Box regime.

The application of this interpretation to the tax periods affected by the bonus mechanism entails the restitution of the tax credit governed by the aforementioned Law No. 160-2019, which may have already been used. Such restitution must take place without the application of penalties and interest since at the time of the enjoyment of the tax credit the taxpayer complied with the provisions contained in the specific regulations applicable at the time.

LDP remains at your disposal for any further clarification you may need. 

Milano, March 2023