Legal notice 208 of 2019, issued on the 13th August, introduced a patent box regime (on qualifying intellectual property) and deductible in terms of Article 14 (1) (p) of the Income Tax Act. The deduction is applicable with effect from 1 January 2019.
Qualifying Intellectual Property
For the purpose of the rules, qualifying IP means:
- a patent or patents, whether issued or applied for (unless such application is subsequently rejected in which case it is considered not to be a qualifying IP from the beginning) , or where the issue of the patent is still pending and extensions of patent protection, or
- assets in respect of which protection rights are granted in terms of national, European or international legislation, including those relating to plants and genetic material and plant or crop protection products and orphan drug designations; or
- utility models; or
- software protected by copyright under national or international legislation;
- in respect of a small entity (revenue of less than €7.5m as a stand-alone and part of a group with a turnover of less than €50m calculated on an average five year period), other IP assets as are non-obvious, useful, novel and having features similar to those of patents, to the satisfaction of Malta Enterprise, which shall determine this through a transparent certification.
Provided that marketing-related intellectual property assets including brands, trademarks and trade-names shall not constitute qualifying IP.
The conditions to claim the deduction are as follows:
- the research, planning, processing, experimenting, testing, devising, designing, development or similar activity leading to the creation, development, improvement or protection (hereinafter referred as the qualifying activity) of the qualifying IP, shall be carried out wholly or in part by the beneficiary, solely or together with any other person or persons or in terms of cost sharing arrangements with other persons, whether these are resident in Malta or otherwise:
For the avoidance of doubt, qualifying activities include among others:
- functions carried out in the course of qualifying activities which are performed by employees of other enterprises, which employees are acting under the specific directions of the beneficiary in a manner equivalent to that of employees of the beneficiary;
- functions carried out through a permanent establishment (including a branch) situated in a jurisdiction other than the jurisdiction of residence of the beneficiary, where such PE derives income which is taxed tax in the residence state of the beneficiary.
- the beneficiary shall be the owner of the qualifying IP or the holder of an exclusive license in respect of the qualifying IP. For the avoidance of doubt, even where the beneficiary creates, develops, improves or protects the qualifying IP together with any other person or persons or in terms of cost sharing arrangements with other persons, the beneficiary must own or share in the ownership of the qualifying IP or be the holder of an exclusive license in respect thereof.
- the qualifying IP is granted legal protection in at least one jurisdiction;
- the beneficiary maintains sufficient substance in terms of physical presence, personnel, assets or other relevant indicators, as is commensurate with the type and extent of activity being carried out in the relevant jurisdiction in respect of the qualifying IP;
- where the beneficiary is a body of persons, such beneficiary is specifically empowered to receive such income; and
- the beneficiary requests the Patent Box Regime deduction in computing his income or gains in the tax return.
Where a benefit is claimed in respect of a patent that is still pending, and the application is eventually rejected, any such benefit claimed shall be reversed by making the appropriate adjustment in the year in which it is ascertained that the particular patent is not being issued.
The Patent Box Regime deduction is calculated using the following formula:
The income or gains derived from qualifying IP includes:
- income taxable in terms of both Articles 4 or 5 of the ITA and which is derived from the use, enjoyment and employment of the qualifying IP,
- royalty or similar income whether this is embedded in the consideration for the sale of goods and, or services or otherwise,
- advances and similar income derived from the qualifying IP,
- any sum paid for the grant of a licence or similar empowerment to exercise rights under qualifying IP,
- compensation for infringements in respect of qualifying IP whether such compensation is granted through judicial means or otherwise,
- gains on disposal of qualifying IP and such other similar or related income as is derived from the qualifying IP.
The income is calculated after deducting such expenditure (whether of a capital nature or otherwise) as is deductible from income derived from the qualifying IP. In all cases, the determination of the qualifying income or gains must be made on the basis of a Transfer Pricing method which is appropriate for this purpose in terms of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
“Total IP Expenditure" comprises expenditure directly incurred in the acquisition, creation, development, improvement or protection of the qualifying IP, being the sum of:
(a) all expenditure actually incurred by the beneficiary and constituting qualifying IP expenditure and any other expenditure incurred by any other person which would constitute qualifying IP expenditure had it been incurred by the beneficiary,; and
(b) acquisition costs and expenditure for outsourcing activities made to related parties.
The costs which taken into account when calculating the Qualifying IP Expenditure consist of the following:
(a) expenditure incurred directly by the beneficiary for qualifying activities in respect of the qualifying IP or which are related thereto and subcontracted to persons which are not related (as defined) to the beneficiary; and
(b) other expenditure equivalent incurred for qualifying activities (excluding interest payments, building costs, acquisition costs or any costs that could not be directly linked to a specific qualifying IP asset) up to a limit of the deduction in (a);
The qualifying IP Expenditure can never exceed the Total IP Expenditure.
Expenditure for general and speculative R&D which cannot be included in the qualifying IP expenditure of a specific qualifying IP asset can be divided pro rata across all the qualifying IP assets to the extent that they are incurred for qualifying activities.
Qualifying IP Expenditure which is attributable to a PE cannot be deductible against income earned by the beneficiary which is attributable to its head office, unless the PE to which such expenditure is attributable is in operation at the time that the beneficiary earns the said income.
Loss from qualifying IP
If the beneficiary incurs a loss in respect of the qualifying IP which he is entitled to set-off against his income or gains in terms of article 5 or article 14 of the ITA and the beneficiary claims the benefit of such loss, he is entitled to elect to benefit from any one of the following:
(a) in lieu of the entitlement set out in article 5 and article 14 of the Act, a deduction corresponding to 5% of the loss which would otherwise be available for deduction in terms of the ITA in respect of the qualifying IP; or
(b) a deduction corresponding to the full amount of the loss which would be available for deduction in terms of the ITA, so however that:
(i) the beneficiary would not be entitled to claim the tax treatment referred to in paragraph (a) for any subsequent year of assessment; and
(ii) in subsequent years of assessment, any such loss is then deducted from the "Income or Gains derived from qualifying IP" on which the patent box regime deduction is calculated, until such losses are fully utilised.
The rules also provided detailed rules with respect to record keeping and submission of information to Malta Enterprise and the CfR, the issue of confirmation by Malta Enterprise and the spontaneous exchange of information on beneficiaries claiming the Patent Box Regime deduction by the CfR.
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