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Patent Box Framework

Josef Mercieca , Tax Partner |

13 August 2019

BDO Malta Patent Box Framework


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:

  1. 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


  1. 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
  2. utility models; or
  3. software protected by copyright under national or international legislation;


  1. 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:

  1. 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:

  1. 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;
  2. 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.
  1. 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.
  2. the qualifying IP is granted legal protection in at least one jurisdiction;
  3. 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;
  4. where  the  beneficiary  is  a  body  of  persons,  such beneficiary is specifically empowered to receive such income; and
  5. 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.


Deduction Calculation

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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