Italy issues draft legislation for new patent box regime

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October 21, 2021
2021-1911

Executive summary

On 15 October 2021, the Italian Government shared a draft Law Decree (Draft Decree) with a series of urgent economic and tax measures, including repealing the old patent box regime. While it will be immediately effective from the day after its publication in the Official Gazette, the Law Decree will have to be converted into Law (with potential changes) within 60 days from its publication to remain in force. Some implementing measures will follow.

Article 7 of the Draft Decree repeals the old patent box regime by shifting from a profit-based incentive (50% exemption) to a cost-based incentive by introducing a super deduction for research & development (R&D) expenses (190% deduction of qualifying expenditures).

The patent box changes should be effective for 2021 but the current language of the Draft Decree leaves room to interpretation about retroactive effects, putting at risk patent box elections for 2020.

The business community is pushing for an amendment of the Draft Decree language that would establish that the new rules do not affect 2020 patent box elections. There are discussions going on at the institutional level with expectations that the Draft Decree will be amended.

Because of the uncertainty regarding the application of the new rules to 2020 patent box elections, some companies have decided to file an early 2020 tax return (i.e., before the enactment of the new rule, which may occur in the upcoming days) for the sole purpose of electing the patent box regime, although it is unclear whether early filing may be a clear solution for all cases.

Detailed discussion

New patent box regime

R&D costs incurred with third parties in relation to copyrighted software, patents, trademarks, designs, models and qualifying know-how may be recognized for tax purposes for an amount equal to 190% of the relevant expenditure for both corporate income tax (IRES) and regional tax (IRAP). R&D costs incurred with related parties should not be eligible.

Companies electing the new patent box regime will not be allowed to claim the R&D tax credit provided by Law n.160/2019.

The election for the new patent box regime will be irrevocable and last for five fiscal years with the possibility of subsequent renewals.

A separate decree will provide additional details on specifics for implementing the new regulations.

Penalty protection

Taxpayers may seek protection against penalties (ranging from 90% and 180%) imposed by the tax authorities if a deduction taken under the new regime is challenged. Taxpayers will have protection if they (i) draft a defensive file based on specifics detailed under separate guidelines to be issued by the tax authorities and (ii) notify the tax authorities of the possession of the mentioned documentation in the tax return related to the fiscal year for which the deduction is claimed.

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For additional information with respect to this alert, please contact the following:

Studio Legale Tributario, International Tax and Transaction Services, Milan