The Italy 2020 Budget Law (Law No. 160 of December 27 2019), published in the Official Gazette on December 30 2019, introduces measures and tax incentives for the competitiveness of companies.
For 2020, the list of tax credits available for business investments in Italy has grown: tax credits have been introduced for investments in R&D, ecological transition, technological innovation '4.0', and other innovative activities.
Tax credit for research and development
The new measure substantially replaces the previous research and development credit referred to in Article 3 of Legislative Decree No. 145/2013, which was therefore terminated early in 2019, instead of 2020.
The percentage of the contribution and the basis of the calculation have changed significantly. For R&D activities that can be facilitated, the tax credit is granted for the amount of 12% of the relative calculation basis (which takes the place of the differentiated contribution of 50% or 25% depending on the eligible items), net of the other incentives or contributions for any reason received by the company on the same eligible expenses.
The new regulation also introduces a maximum limit of €3 million ($3.4 million) of the tax credit per fiscal year.
Investments in R&D, fundamental research, industrial research and experimental development in scientific or technological field are also considered facilitated activities.
Tax credit for technological innovation
The tax credit for technological innovation covers activities – other than R&D – aimed at creating new or substantially improved products or production processes.
The rule specifies that "new or substantially improved products or production processes" are to be understood as a tangible/intangible asset/service/process, that differs from those already made or applied by the company in terms of technological characteristics/performance/eco-friendliness/ergonomics/other relevant substantial elements in the various production sectors.
For the technological innovation activities that can be facilitated, the tax credit is foreseen, separately, for the amount of 6% (or 10% for technological innovation activities aimed at achieving an ecological transition goal or digital innovation '4.0') of the relative calculation basis, net of the other incentives or contributions for any reason received by the company for the same eligible expenses, with a maximum limit of €1.5 million of the tax credit per fiscal year.
Tax credit for other innovative activities
Furthermore, design and aesthetic ideation activities carried out by companies (operating in the textile and fashion, footwear, eyewear, goldsmith, furniture and furnishings and ceramics sectors) for the conception and realisation of new products and samples, are part of the innovative activities eligible for tax credit.
For these activities, the tax credit available is 6% of the relative calculation basis, net of the other incentives or contributions for any reason received by the companies for the same eligible expenses, with a maximum limit of €1.5 million of the tax credit per fiscal year.
For the purpose of determining the calculation basis, as an example, the following expenses are considered eligible:
- Personnel expenses relating to researchers and technicians;
- Expenses for contracts concerning the direct performance by the commissioner of activities eligible for tax credit;
- Expenses for consultancy services and equivalent services related to activities eligible for tax credit; and
- Depreciation allowances related to movable tangible assets used in activities eligible for a tax credit, etc.
By the decree of the Minister of Economic Development, which should be published within 60 days from the date of entry into force of the 2020 Budget Law (i.e. January 1 2020), the criteria for the correct application of the measure will be provided.
The tax credit can only be used in compensation of the tax due in the same fiscal year, in three yearly instalments of equal amounts, starting from the fiscal year following the year of maturity of the tax credit.
For the purposes of the recognition of the tax credit, the effective payment of the eligible expenses and their correspondence to the accounting documentation prepared by the company must result from a specific certification issued by statutory auditors.
Patent box regime and R&D expenses
In addition to the new tax credits mentioned above, companies engaged in R&D activities can still benefit from the patent box regime.
Enforced in 2015, the Italian patent box regime is an optional tax benefit allowing reduced taxation for income arising from the direct or indirect (i.e. licensing) use of intellectual property (IP) assets by companies and commercial entities performing R&D activities.
It grants a 50% exemption from corporate income tax (i.e. IRES) and regional tax on productive activities (i.e. IRAP). It is characterised by a five-year lock-in period in case of direct use certified via an advance ruling with the Italian tax authorities.
The election is renewable, and its tax benefits include:
1) Income deriving from the licence to third parties of intangibles;
2) Direct use of the intangible; or
3) Exemption of the gain deriving from the disposal of an IP, provided that at least 90% of the price received is re-invested within two years in new R&D activities. In cases where the intangible is exploited by the same company that performs the R&D activities, it has to identify an amount corresponding to the economic contribution that the intangible adds to the aggregate income by activating a formal negotiation with the Central Revenue (via the so-called 'international standard ruling procedure').
Amendments introduced in 2019 for direct use cases
Law Decree No. 34 (Growth Decree), which was published in the Official Gazette on April 30 2019, states that companies which opt for the patent box regime are allowed (in cases of direct use) to determine by themselves and declare the eligible income, avoiding the preventive ruling procedure with the competent tax office.
Furthermore, those taxpayers that (i) decide to benefit from this simplification, (ii) prepare dedicated supporting documentation according to the specific regulations issued by Central Revenue on July 30 2019, and (iii) give communication of its possession to Revenue before the beginning of a tax audit on that fiscal year, will benefit from a penalty protection in case officers challenge the calculation of the patent box incentive.
The patent box benefit shall be split in three equal instalments. Worth noting is that this simplification can be exploited both by taxpayers that have already started the ruling procedure with the competent tax office and by those which made the application for previous fiscal years, but have not been convened by the officers yet.
The 2019 enforced provisions on the patent box regime have a clear goal to boost support for companies engaged in R&D activities, which have historically suffered from delays in negotiations due to the technicalities required for IP analysis, and the limited resources of the tax offices for valuations. Considering the practical indications provided in July 2019 by the Central Revenue, strategic and operational implications have to be evaluated.
Taxpayers who have not applied for the regime and those who have not completed the ruling procedure with the Italian tax authority have to decide between the old and new automatic patent box regime.
The two possibilities have different implications and the choice should be evaluated on a case-by-case basis. Namely:
- The old patent box procedure (i.e. where companies decide to identify the amount of the tax relief by means of a preventive ruling), grants taxpayers the possibility of benefitting from a tax reduction previously agreed with the tax office, with limitations on potential litigation with the Central Revenue (practically confined to the verification of the correct implementation of the calculation mechanisms agreed during the ruling phase). Going along the path of the preventive ruling would also imply making the downward adjustment, for the specific year it is related to, entirely in the pertaining tax return (instead of splitting it equally across three fiscal years).
- In cases where the company chooses an automatic application of the patent box regime (i.e. self-liquidation of the relief according to the new provisions), it would benefit from simplification in procedure (no ruling required) and timing. Among others, the new procedure would be a crucial resource in terms of economic, as well as financial planning, especially in those situations where the IP contribution to the business has been remarkable in previous fiscal years and the relating patent box relief could have a significant impact on the coming years. It is an option that could be suggested to those companies who can clearly identify the intangibles used and the attributable income.
Simplification measures for the patent box regime relies on a cooperative relationship between Central Revenue and the taxpayer. The latter is requested to adopt a proactive attitude when preparing advance supporting documentation to satisfy all formal and substance requirements.
Considering the vast number of companies that may be attracted by patent box relief and simplified access, the way the tax offices will conduct tax inspections on this topic will be pivotal to evaluate an appeal in the medium to long-term.
Postponing checks during a tax audit (with limited time given by the law) may generate additional litigation. Accordingly, supporting documentation will be unavoidable and will have to become part of the ordinary compliance work to manage a tax risk that may have a big impact on the financial and operational sides.
In the end, the great commitment that Italy is devoting to foster R&D activities is witnessed by the possibility to benefit contemporaneously from the patent box regime and the other tax credits presented above: they are all to be seen as incentives for the competitiveness of companies and to attract new investments in high-value creating activities.
|Gian Luca Nieddu|
Hager & Partners
Tel: +39 02 7780711
Gian Luca Nieddu is a partner at Hager & Partners where he leads the transfer pricing (TP) and tax value chain department. He is a chartered public accountant focused on international taxation matters, with specific skills in TP and value chain (re)structuring. For several years, he has been assisting multinational groups, both Italian and foreign, in their cross-border operations. He has also acquired expertise in global expansion projects for companies which have developed and maintained business on foreign markets (including on the internationalisation, advice on instruments for the capitalisation and growth of companies) as well as competencies on IP box regimes.
Gian Luca regularly speaks at conferences and courses (both in Italy and abroad) on transfer pricing and international taxation topics, as well as on R&D tax incentives and regularly contributes to publications (both in Italy and abroad) on the same subject matters.
Hager & Partners
Tel: +39 02 7780711
Barbara Scampuddu is a partner at Hager & Partners where she leads the tax disputes department and research centre. She graduated summa cum laude in business and economy studies at the University of Cagliari in 1996. She attended the business school of Il Sole 24 Ore, the main Italian daily business newspaper, and received a master's degree in tax law. She is a professional tax adviser and auditor, admitted to the Italian Institute of Chartered Certified Accountants since 2001. Her professional practice areas are particularly focused on Italian and international tax consulting and tax litigation.
Since 2002, she teaches a Master's level course in tax law at Il Sole 24 Ore in the area of mergers and acquisitions. Starting from 2013, she is also teaching a master's level course in tax law at Bocconi University, one of Europe's leading economics and business universities, as well as at the Università di Roma LUMSA.
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