The Stability Law introduces a tax credit for the period 2014 - 2016 on R&D expenses sustained by Italian resident companies, plus subsidiaries of foreign groups as well as Italian branches of foreign companies. The tax credit is substantially different from similar incentives previously available in Italy such as the tax credit for the period 2007-2009 (Law n.296/2006). The amount of the tax credit in the previous Italian Law provision was equal to 10% of the cost related to R&D up to a maximum amount of €5 million per year (the tax credit was similar to the above-the-line (ATL) credit for large companies existing in the UK). The benefit is now expected to be recognised in the form of a tax credit on 50% of the increasing R&D costs registered during the three-year period, with a maximum amount of €2.5 million per year and a minimum amount of €50,000. The tax credit is expected to be tax exempt from direct taxes.
The amount of credit can also be reimbursed from the authorities, depending on the company's choice - compensated at the moment of payment of other taxes (direct taxes, VAT, social contribution). This practically means that in most of the cases the credit turns into an immediate benefit on corporate's cash positions. The credit will now be recognised on the basis of the results of a centralised computer database in order to avoid the setting up of single lists for each Italian region and a different possibility to the benefits being given, depending on the region in which the registered offices of each single entity are based.
The tax credit is also applicable to expenses related to typical R&D projects but a relevant interest is for those companies operating in the areas of fashion and design: the new law provision no longer limits the application of the incentives to certain specific sectors. This is seen as a great opportunity as a design project is now of interest not only to the fashion sector but also to many other industries. Many of them, operating in different sectors, allocate massive budgets in the pre-competitive activity of style research: just think of the relevance of expenses sustained for internal style research activities and for independent stylists. The idea to apply the R&D credit to the style expenses was brought to the attention of Italian tax authorities for the first time during 2008 (tax ruling filed in the Lombardia region). After that time, a fashion project started and there was a wide application and use of the credit made from the fashion sector but no application to the design industry up until today.
With reference to the new R&D law provision, technical meetings are continuing with the Ministry to verify the opportunity to include either design costs incurred for in-house/internal design activities and/or similar costs related to external activities provided by third parties under the R&D activity. The idea underlying the design project is that R&D activities are not only those destined for the "invention" of a new product/material but also other activities that are aimed at improving the shape/exterior of a product; in other words its style or design. It is in fact clear that all expenses which are directed towards defining a new or improved design - if considered at the same level of material or quality - give a company a pre-competitive advantage according to EU provisions (2006/C 323/01).
The new version of the tax credit will have a positive impact on the level of investments in R&D – equal to €600 million in 2014 – and will be entirely financed with EU funds. Future plans to expand the amount of funds in R&D are also foreseen.
All entities interested in the possible design project should in the current weeks proceed with a preliminary activity consisting in a deep analysis of all costs that are (for their nature) eligible to the benefits of the tax credit and, once the client's specific situation has been analysed, in the subsequent tax ruling. The ruling process requires a period of 120 days - generally extended due to the fact the tax administration requires further documents. The design project is also interesting for other EU jurisdictions as the Italian experience can be used in other EU countries that have already adopted a R&D tax credit but are yet to extend it to style, fashion and design.
Fabrizio Capponi is a partner, and Roberta Moscaroli is a senior associate at DLA Piper. They are based in the Rome office.
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