The introduction of a Patent Box Regime in Malta
The Patent Box (Deduction) Rules (the “Rules”) were published on the 13th of August 2019 by virtue of Legal Notice 208 of 2019.
The Rules set out the conditions which must subsist in order for beneficiaries to be able to claim deductions against income derived from qualifying intellectual property (the “Qualifying IP”), in accordance with Article 14(1)(p) of the Income Tax Act (Cap 123).
What is the Qualifying IP against which deductions can be claimed?
Rule 2 defines Qualifying IP as:
- A patent or patents, whether issued or applied for, or where the issue of the patent is still pending and extensions of patent protection, so however that in the case of a patent which has been applied for and is pending, but where the application is eventually rejected, such patent shall cease to constitute Qualifying IP ab initio; 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, other intellectual property assets as are non-obvious, useful, novel and having features similar to those of patents, to the satisfaction of the Malta Enterprise, which shall determine this through a transparent certification process in terms of guidelines issued by the Malta Enterprise.
One must also note that marketing-related intellectual property assets including brands, trademarks and trade-names do not constitute Qualifying IP.
How is the deduction calculated?
Rule 4 states that the Patent Box Regime deduction shall be calculated on the basis of the following formula:
95% x (Qualifying IP expenditure x income or gains derived from Qualifying IP)
Total IP Expenditure
Income against which deductions may be claimed
The Rules also set out the income or gains derived from Qualifying IP to be taken into account for the purpose of determining the applicable deductions. In this respect, income from Qualifying IP shall include income derived from trading activities as well as income derived from capital gains, 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 and as being calculated after deducting such expenditure, whether of a capital nature or otherwise, as is deductible from income derived from the Qualifying IP.
Expenditure which shall be taken into account
Further to the above, the Rules also specify the expenses to be taken into account for the purpose of calculating the Qualifying IP. Such expenses shall be established at the time when they are incurred and shall consist of the following:
- Expenditure incurred directly by the beneficiary for, or in the creation, development, improvement or protection of, the Qualifying IP;
- Expenditure incurred by the beneficiary for activities related to the creation, development, improvement and protection of the Qualifying IP subcontracted to persons which are not related to the beneficiary; and
- Where expenditure has been incurred which does not fall within paragraphs (a) and (b), an amount equivalent to the lower of:
- The costs actually incurred in the acquisition, creation, development, improvement or protection of the Qualifying IP, excluding expenditure falling within the purport of paragraphs (a) and (b), and
- Thirty percent (30%) of the total of the amounts referred to in paragraphs (a) and (b)
In no case shall the Qualifying IP expenditure comprised in paragraphs (a), (b) and (c) exceed the Total IP Expenditure.
In this respect “Total IP Expenditure” shall consist of expenditure directly incurred in the acquisition, creation, development, improvement or protection of the Qualifying IP, being the sum of:
- 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
- Acquisition costs and expenditure for outsourcing activities made to related parties
Conditions which must be satisfied for deductions to be allowed
The entitlement under these Rules is subject to all of the following conditions:
- The research, planning, processing, experimenting, testing, devising, designing, development or similar activity leading to the creation, development, improvement or protection 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;
- The beneficiary shall be the owner of the Qualifying IP or the holder of an exclusive license in respect of the Qualifying IP;
- 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 his income tax return.
In the case where a deduction has been claimed in respect of a patent that is still pending and the application in respect of such patent is eventually rejected, any such benefit claimed shall be reversed.
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