R&D tax credit and the Patent Box. What about?
Edoardo Belli Contarini and Raffaello Fossati (Fantozzi & Associati) explained everything you need to know about the Research and Development tax credit and the Patent Box regime during a mentorship meeting with start-ups from the Fintech District community. Here is what emerged from their in-depth analysis, we share it with all those who are looking for help in learning more
What are the Research and Development (“R&D”) tax credit and the Patent Box regime?
They are both tax incentives aimed at stimulating R&D investments and intangible assets development in Italy. The R&D Tax Credit was originally introduced by art. 3 of Law Decree 145/2013 with a further clarification provided in the Ministerial Decree of 27 May 2015 and other subsequent documents from the Italian tax authorities and Ministry of Economic Development. These identified the following eligible R&D activities (reference is made to the OECD Frascati Manual):
- experimental (theoretical) work carried out, without direct commercial use;
- planned research and critical investigations for development of new and existing products and services;
- acquisition, combination and use of existing scientific, technological and commercial knowledge (skills) for designing projects or plans for new or improved products and services (applicable also for prototypes not intended for commercial use);
- production and testing of products, processes and services (not used for commercial purposes).
Starting from 2020 the R&D Tax Credit has been substituted with a new incentive called “R&D and Innovation Tax Credit” (“R&D+I”). The calculation mechanism has been simplified and depends on R&D type:
- scientific and technological research – 12% of allowable expenses up to a maximum amount of 3 mio EUR in 2020, increased to 20% with a maximum of 4 mio EUR in 2021;
- creation of new or substantially improved products (processes) – 6% of allowable expenses up to a maximum amount of 1.5 mio EUR in 2020, increased to 10% with a maximum of 2 mio EUR in 2021;
- ecological transition and digital innovation 4.0 – 10% of allowable expenses up to maximum of 1.5 mio EUR in 2020, increased to 15% with a maximum of 2 mio EUR in 2021.
In turn, the Patent Box regime was introduced by Law 190/2014 (art. 1, co. 37- 45 Stability Law 2015) and subsequently amended by art. 5 of Law Decree 3/2015 (Investment Compact), updated by Ministerial Decree as of 28 November 2017 and provides for a partial relief of the income derived from the following intangible assets (“IP-related income”), also used in a joint manner:
- software;
- industrial patents;
- designs and models;
- know-how which consists of processes, formulas and information relating to experiences acquired in the industrial, commercial or scientific field which can be legally protected (secret industrial processes having economic value and being subject to confidentiality).
Who may avail of these tax incentives?
All the companies performing eligible R&D activities can avail of the R&D tax credit. It is worth keeping in mind that the discussed tax credit is available for all companies that invest in the above-mentioned activities despite their legal form, size, economic sector or “seniority” with only condition that the considered investment has to be include the element of “novelty” so that the benefit of this credit should be viewed as a reward for bearing the risk of failure.
Similarly, the Patent Box requires the performance of certain R&D activities as well as the ownership (or at least the license to use) an eligible intangible asset. If these requirements are met the existence of an IP-related income should give rise to a tax benefit for the firm.
Companies involved in insolvency proceedings are, instead, excluded from both the incentives.
The R&D tax credit is directly set-off with the other tax payments and requires:
- a certification by a statutory auditor regarding the effectiveness of the costs incurred;
- a technical report listing the activities carried out and the results achieved (generally provided by specialized firms);
- a communication to the Ministry of Economic Development.
For the Patent Box regime, instead, there are some options to be considered which includes the possibility of:
- requesting a ruling to the Italian tax authorities in order to determine the methodology and criteria for calculating the benefit;
- or preparing appropriate documentation in order to avail of penalty protection in case of challenge.
Each option implies different requirements and allows to obtain the benefit according to specific timeframes.
What are the benefits of these tax incentives?
The more direct and immediate benefit relates to potential tax savings which for the Patent Box can be significant (up to 50% of the tax burden). The Patent Box may also increase the value of the firm in case of ownership transfer.
As it can be referred from the above, the R&D tax credit rewards innovative companies, regardless of the experiment’s (i.e., project or investment) success as such making the premium double fold in sense that the incurred costs are not only considered as deductible from taxable income but also a portion of them forms a tax credit to be used for offsetting other taxes and social security duties of the taxpayer. However, it should be mentioned that the R&D+I Tax Credit, introduced in 2020, can be used only to set-off other tax payments in three equal annual instalments starting from the tax period following the vesting one. The company can benefit from tax relief in an automatic mode, meaning that no application or ruling is needed to be submitted to the Revenue Agency with an exception for doubtful cases.
Indirect benefits of both the incentives relate to the need to formalize the R&D projects and the related outcomes. The Patent Box regime also requires implementing appropriate tracking and tracing procedures for R&D costs dating back to 2015 and for each intangible asset. This is expected to increase the awareness of the firms on the need to properly document their strategy connected to intangible assets development.
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