Patent box and R&D tax credit: regulatory news, business news

Regulations are constantly evolving and those who want to succeed in the fintech sector should not be left behind. New opportunities are created when the rules of the game change, and the professionals in the community can help by explaining them to us and enabling us to seize them. Raffaello Fossati of Fantozzi Associati explains the latest news on patent box and R&D tax credit.

What changes brings the repeal of the old Patent Box regime? What does the new regime introduce and what advantages it does provide to Fintech?

Art. 6 of the Law Decree 146/2021 introduced significant changes to the so-called Patent Box regime which was further amended in the 2022 Budget Law (hereinafter referred to as “New Regime”). Specifically, the New Regime represents a substantial shift from the former discipline (concerning the tax exemption availed on intangibles-related income) and hereby considers the research and development (“R&D”) costs with the exclusion of any intra-group expenses incurred in relation to the following IPs (either licensed or directly employed):
> copyrighted software;
> industrial patents;
> designs and models
These costs are deductible for the income tax purposes (both IRES and IRAP) at an increased total rate of 210% (i.e., at 110% more than the actual cost incurred). However, in compliance with the previous indications the option for the regime lasts for 5 tax periods, is irrevocable and renewable (as per par. 1 of the cited Art. 6). Finally, par. 10-bis of the 2022 Budget Law provides that in case if R&D costs were incurred for the development of one or more eligible intangible assets in previous years, the taxpayer can benefit of the referred 110% increased deductibility starting from the moment in which the intangible asset is registered on the overall costs incurred in up to maximum of 9 tax periods.

How does the management change for the patents and new software? Is the New Regime considered as an obstacle or, in turn, as an incentive for the innovation?

In the case of software, the New Regime could be viewed as a very appealing opportunity for increasing investments in innovation in consideration of the constant development activities carried out by “software houses”. In particular, the provisions of the old regime specified certain characteristics of the eligible R&D costs in terms of software development which were quite broad and, if the same applies under the New Regime, software houses would retain complete deductibility of the total operating expenses incurred atthe increased rate.

On an overall basis, however, the new regime reduces the incentive for producing profit generating IPs. What were the changes concerning the R&D tax credit?

As per indications provided in par. 45 of Art. 1 of the 2022 Budget Law, the amendments made with respect to the R&D Tax Credit were the following:
> R&D activity – 20% of allowable expenses up to a maximum amount of 4 mio EUR (for tax periods
2023-2031 the rate is decreased to 10% with maximum amount of 5 mio EUR);
> scientific and technological research as well as design and aesthetic ideation activities – 10% of
allowable expenses up to a maximum amount of 2 mio EUR (for tax periods 2024-2025 5% with a
maximum of 2 mio EUR);
> technological innovation activity – 15% of the allowable expenses up to a maximum amount of 2
mio EUR (for tax periods 2024-2025 5% with a maximum of 4 mio EUR).
Additionally, an indemnity was introduced for taxpayers who incorrectly benefited from R&D Tax Credit during the period 2014-2019, by allowing the ratification of the credit amounts used without a further application of penalties and fines.
Furthermore, it should be noted that the possibility for the simultaneous benefit from the Patent Box regime and R&D tax credit was confirmed.

In your opinion, how will these changes impact an innovative and agile reality like the fintech

The introduced changes in fact could be viewed as an incentive given to the taxpayers for a constant development and adjustment to the rapidly changing technological environment by providing the relevant tax savings in a medium-term perspective and thus releasing funds for the additional investment activities to be carried out by companies like Fintechs and startup.
The overall reorganization of both the R&D tax credit and Patent Box carried out since 2019 was clearly aimed at simplification, certainty and limitation of future challenges’ risks which are considered as important drivers of innovation. Subject to the final clarifications to be provided by the Italian tax authorities on the new Patent Box, we expect that startups and young Fintechs could benefit of both incentives and obtain relevant tax savings.
For instance, a company operating as a software house could avail of the Patent Box regime on the vast majority of its costs and be taxed only on the portion of profits which exceeds such development costs (e.g., no taxes should be due until the EBIT margin is approx. 50%).

R&D tax credit and the Patent Box. What about?

Edoardo Belli Contarini and Raffaello Fossati (Fantozzi & Associati) explained everything you need to know about the Research and Development tax credit and the Patent Box regime during a mentorship meeting with start-ups from the Fintech District community. Here is what emerged from their in-depth analysis, we share it with all those who are looking for help in learning more

What are the Research and Development (“R&D”) tax credit and the Patent Box regime?

They are both tax incentives aimed at stimulating R&D investments and intangible assets development in Italy. The R&D Tax Credit was originally introduced by art. 3 of Law Decree 145/2013 with a further clarification provided in the Ministerial Decree of 27 May 2015 and other subsequent documents from the Italian tax authorities and Ministry of Economic Development. These identified the following eligible R&D activities (reference is made to the OECD Frascati Manual):

  • experimental (theoretical) work carried out, without direct commercial use;
  • planned research and critical investigations for development of new and existing products and services;
  • acquisition, combination and use of existing scientific, technological and commercial knowledge (skills) for designing projects or plans for new or improved products and services (applicable also for prototypes not intended for commercial use);
  • production and testing of products, processes and services (not used for commercial purposes).

Starting from 2020 the R&D Tax Credit has been substituted with a new incentive called “R&D and Innovation Tax Credit” (“R&D+I”). The calculation mechanism has been simplified and depends on R&D type:

  • scientific and technological research – 12% of allowable expenses up to a maximum amount of 3 mio EUR in 2020, increased to 20% with a maximum of 4 mio EUR in 2021;
  • creation of new or substantially improved products (processes) – 6% of allowable expenses up to a maximum amount of 1.5 mio EUR in 2020, increased to 10% with a maximum of 2 mio EUR in 2021;
  • ecological transition and digital innovation 4.0 – 10% of allowable expenses up to maximum of 1.5 mio EUR in 2020, increased to 15% with a maximum of 2 mio EUR in 2021.

In turn, the Patent Box regime was introduced by Law 190/2014 (art. 1, co. 37- 45 Stability Law 2015) and subsequently amended by art. 5 of Law Decree 3/2015 (Investment Compact), updated by Ministerial Decree as of 28 November 2017 and provides for a partial relief of the income derived from the following intangible assets (“IP-related income”), also used in a joint manner:

  • software;
  • industrial patents;
  • designs and models;
  • know-how which consists of processes, formulas and information relating to experiences acquired in the industrial, commercial or scientific field which can be legally protected (secret industrial processes having economic value and being subject to confidentiality).

Who may avail of these tax incentives?

All the companies performing eligible R&D activities can avail of the R&D tax credit. It is worth keeping in mind that the discussed tax credit is available for all companies that invest in the above-mentioned activities despite their legal form, size, economic sector or “seniority” with only condition that the considered investment has to be include the element of “novelty” so that the benefit of this credit should be viewed as a reward for bearing the risk of failure.
Similarly, the Patent Box requires the performance of certain R&D activities as well as the ownership (or at least the license to use) an eligible intangible asset. If these requirements are met the existence of an IP-related income should give rise to a tax benefit for the firm.
Companies involved in insolvency proceedings are, instead, excluded from both the incentives.
The R&D tax credit is directly set-off with the other tax payments and requires:

  • a certification by a statutory auditor regarding the effectiveness of the costs incurred;
  • a technical report listing the activities carried out and the results achieved (generally provided by specialized firms);
  • a communication to the Ministry of Economic Development.

For the Patent Box regime, instead, there are some options to be considered which includes the possibility of:

  • requesting a ruling to the Italian tax authorities in order to determine the methodology and criteria for calculating the benefit;
  • or preparing appropriate documentation in order to avail of penalty protection in case of challenge.

Each option implies different requirements and allows to obtain the benefit according to specific timeframes.

What are the benefits of these tax incentives?

The more direct and immediate benefit relates to potential tax savings which for the Patent Box can be significant (up to 50% of the tax burden). The Patent Box may also increase the value of the firm in case of ownership transfer.
As it can be referred from the above, the R&D tax credit rewards innovative companies, regardless of the experiment’s (i.e., project or investment) success as such making the premium double fold in sense that the incurred costs are not only considered as deductible from taxable income but also a portion of them forms a tax credit to be used for offsetting other taxes and social security duties of the taxpayer. However, it should be mentioned that the R&D+I Tax Credit, introduced in 2020, can be used only to set-off other tax payments in three equal annual instalments starting from the tax period following the vesting one. The company can benefit from tax relief in an automatic mode, meaning that no application or ruling is needed to be submitted to the Revenue Agency with an exception for doubtful cases.
Indirect benefits of both the incentives relate to the need to formalize the R&D projects and the related outcomes. The Patent Box regime also requires implementing appropriate tracking and tracing procedures for R&D costs dating back to 2015 and for each intangible asset. This is expected to increase the awareness of the firms on the need to properly document their strategy connected to intangible assets development.

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Facilities for startups: Leyton’s point of view

What benefits can a startup count on today? What can be expected for the future, especially in the fintech sector? During a mentorship meeting, proposed to the startups of our fintech ecosystem, we had the opportunity to talk with mentor Marco Pozzi, Innovation Consultant of Leyton, one of the players in the FD marketplace.

What are the 3 most important benefits for startups in 2020?

The panorama of benefits for startups in 2020 is very varied: among the various decrees issued during the Covid-19 emergency, measures aimed at strengthening the startup ecosystem have also been defined, with a focus on innovative ones. Although each measure has to be considered individually, some of the most important ones include

  • Smart&Start: is the main national tool to support the birth and development of innovative high-tech startups. The facility consists of zero interest financing
  • SME Guarantee Fund: thanks to the Liquidity Decree, the possibility of obtaining public guarantees to support financing provided by 31 December 2020 has been strengthened, with advantageous conditions such as the automatic and free issue of the guarantee and the absence of creditworthiness assessment by the Fund
  • The Tax Credit for Research & Development and Technological Innovation and the Tax Credit for Instrumental Goods and Software: these represent a commercial lever to be used to offer services to customers and prospects, especially after the recent equalisation of innovative startups to universities and research institutes. In the case of extra-muros research, in fact, thanks to contracts entrusted to innovative startups you can in fact benefit from an increase of 50% of the costs eligible for the R&D tax credit.

From your point of view, how are the new facilities impacting on the startup ecosystem and in particular on the fintech ones?

With regard to the measures put in place, we can discuss the extent or mode of operation, but there is no doubt they are having an impact on the entire ecosystem and have implemented, at least in part, the requests promoted by trade associations and the proposals of the most influential players.
In addition to those already mentioned, measures have been launched in direct support of startups such as the extension from 5 to 6 years of permanence in the registry for innovative startups There are also incentive measures for the entire ecosystem such as the one to increase capital from third parties by raising IRPEF deductions in favour of investors or the establishment of a national fund to support venture capital.
The redefinition of development and investment guidelines in recent years is having a positive impact especially on fintech. It is in fact one of the sectors that offers the greatest opportunities thanks to the general digitisation process, but also thanks to specific applications, such as open innovation and open banking, or the use of new technologies such as blockchain or artificial intelligence. It is essential, however, that the horizon of these initiatives is not limited to the national market alone, but leverages skills and opportunities at a European and global level as a drive to engage the scaleup phase.

In 2021 what news should we expect in terms of facilities and if you were a startup what measures, would you wish to see implemented?

It is difficult to make predictions, especially in a complex period like this. The government has had to face many problems and meet the demands of almost the entire entrepreneurial fabric. In order to make interventions more effective, it will be increasingly necessary to identify the priorities on which to concentrate resources as a stimulus for restarting. The lack of investment – an issue often highlighted as the main cause of the economic backwardness of our country compared to the rest of Europe – is a topic that can no longer be postponed. All measures aimed at freeing up resources and simplifying their use are desirable. In this sense, some useful tools could be an increase in tax rates to support investments in R&D and technological innovation, the offsetting of receivables and payables to the PA, the possibility of assigning or liquidating accrued tax credits, or the possibility of issuing venture debt also to leverage innovative banks. The resources that will come from the Recovery Fund and the 2021-2027 Programming of EU funds cannot be wasted as in the past.
If I were a startup I would hope for:

  • greater awareness of large companies in considering startups as a differential competitive element, supporting open innovation or corporate venture programs;
  • major opportunities to access the expertise of professionals who can help improve processes and optimize performance without losing focus on my strategy;
  • major timing and determination on behalf of institutions to support the most fragile players, especially in a context such as the current one, but which, instead, represent the engine for the development of an economy.

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