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“Patent box” rules for tax cuts on intellectual property income are finally spelled out

by Marco Mobili and Giovanni Parente

A streamlining of the system of taxation on income from patents, including greater transparency on the deductibility of losses, less complex formulas and a mechanism for including trademarks, are some of the changes in Italy's so-called “patent box” legislation, a regime of lighter tax burdens for patents and trademarks.

The revisions are currently being examined by the Italian government and will be presented over the next few days in the form of an amendment to the 2016 Stability Law, which is now being reviewed by the Chamber of Deputies.

Save any last minute reversals, the government has in fact already put in place correctives in the new, more favorable regime that calls for the lower taxes on income from the use of intangible assets like intellectual property and industrial patents.

This patent box regime was introduced in the 2015 Stability Law. Italy's Tax Revenue Agency on Tuesday issued the first clarifications about how the patent box law will work, included a revised rule on determining losses -- a necessary step in establishing their deductibility.

Without the option of diluting its losses over a period of time, a company that deals in intellectual property in Italy, and holds an asset such as a patent for example, would see its tax benefits delayed, which is why the amendment was needed.

The other tweak being studied is an expansion of the current limits on the so-called “complementarity” of goods, that, for instance, doesn't currently allow for the simultaneous tax consideration of patents and trademarks that are related.

The current regime says the same tax rate can only be applied to identical classes of intellectual property. The amendment would remove this obstacle so, for example, related assets like “know-how” and software could be combined to come up with a single, reduced tax rate.

The head of Italy's revenue agency Rossella Orlandi acknowledged that “the way the code was written was bound to create difficulty in interpretation. An aggregation of complementary goods would resolve the issue, and is highly desirable.”

Professionals and business representatives stressed the importance of the patent box regime during a conference in Milan yesterday at the headquarters of Il Sole 24 Ore-Italy24.

Confindustria chairman Giorgio Squinzi, in his opening comments, noted that “the industrial policy of a nation is built on actions. Tax credits and the patent box regime are the first steps in building a policy that favors growth and helps companies that create added value in the global market through innovation, research and development.”

There are still many outstanding issues. Firstly, the policy must be aligned with recommendations from OECD, which were laid out in the conclusions of the BEPS project (base erosion and profit shifting) that call for a very gradual scaling back of the regime in order to guarantee tax breaks through 2021 for those who exercise the option by the end of June, 2016.