R&D costs: the “extra deduction” patent box and its relationship with R&D tax credit in Italy

published on 9 July 2024 | reading time approx. 4 minutes

The extra deduction patent box provides for an optional preferential scheme, connected to costs incurred while carrying out R&D activities related to software protected by copyright, patents and legally protected designs. These costs can be subject to an R&D tax credit.

Art. 6 of Law Decree 21.10.2021 no.146 provides for replacement of the patent box regime with a new option for increased deductibility, for the purposes of income tax and regional tax, of R&D costs incurred in the creation and development of software, patents and designs (extra-deduction).

Extra deduction: who does it apply to?

Extra deduction is intended for holders of business income who are “investors”– understood as holders entitled to economically exploit subsidy-eligible intangible assets, who invest in relevant activities in the context of their business and bear the relative costs, assuming the risks and making use of any results – and for taxpayers who use the intangible assets by virtue of a license or sub-license agreement that entitles them to economic exploitation of said assets.

Extra deduction: how it works?

It consists of a higher deductibility of 110 per cent of R&D costs, for the purposes of IRES and IRAP, effected by means of inserting the decrease in the tax declaration. Assuming subsidised R&D costs of 100,000 Euro, the total tax deductible amount will be 210,000 Euro, of which 100,000 euro will be routinely deductible by derivation from the balance sheet as an income statement cost, and 110,000 Euro will be deducted “off the books” by means of inserting the decrease in the IRES and IRAP declaration. In the case of an overall IRES and IRAP tax rate of 27.9 per cent, there will be a financial saving of 30.69 per cent of costs.

Which activities does the extra deduction relate to?

The extra deduction relates to activities that can be classified as industrial research and experimental development, technological innovation, design and aesthetic conception and legal protection of rights on intangible assets.

Which intangible assets are eligible?

R&D costs incurred in relation to the following are eligible:

software protected by copyright;
industrial patents, utility model patents, patents and certificates for plant varieties and for the topography of semiconductor products;
legally protected designs;
two or more of the above intangible assets linked to each other by a complementarity constraint, such that the creation of one product or of a family of products or of a process or of a group of processes is conditional upon the joint use of same.

Which costs are eligible?

The following costs are eligible:

costs for salaried personnel, self-employed personnel or personnel possessed of any other form of employment contract, directly employed in the performance of the relevant activities;
depreciation costs, capital for lease payments, operating lease payments and other costs related to movable capital goods and intangible assets used in the performance of the relevant activities;
costs for consultancy services and equivalent services relating exclusively to the relevant activities;
costs for materials, supplies and any other such products used in the relevant activities;
costs related to the maintenance of rights on eligible intangible assets, to their renewal upon expiry, to their protection, also in associated form, and to those related to counterfeiting prevention activities and the management of disputes aimed at protecting said rights.

These costs are recorded in their tax deductible amount and are attributed to each tax period in application of the economic accrual principal.

The extra deduction option: how does it work?

The extra deduction option is exercised directly in the tax declaration. It has a duration of 5 tax periods. It is irrevocable and renewable.

Cumulability with R&D tax credit

The extra deduction option is cumulable with R&D tax credit. As the basis for calculating R&D tax credit is assumed net of other subsidies or contributions received for any reason for the same eligible expenses, the costs must be assumed net of the IRES and IRAP attributable to the decrease resulting from the 110 per cent increase of the cost eligible for the patent box.

Relationship with the R&D tax credit

Similarities:

both the patent box and the R&D tax credit are front-end regimes, in that the benefit is calculated with respect to R&D costs incurred in relation to the relevant activities;
for the definition of relevant activities, the patent box refers to the R&D tax credit;
the eligible costs and types of expenses provided for the patent box also partly overlap with those eligible for the R&D tax credit.

Differences:

unlike the R&D tax credit, under the patent box the activity and eligible costs must be related to the intangible assets indicated by the legislation;
the R&D tax credit can be used by way of off-setting through the F24 form, while the patent box is a 110 per cent increased deduction for IRES and IRAP purposes of R&D costs;
there is no maximum limit of expenditure for the patent box, while there is such a limit for the R&D tax credit;
the patent box could lead to zero taxable income and generate a reportable tax loss.