New rules on allowable deduction introduced in August 2019

In Malta, intellectual properties are allowed for a deduction against qualifying income derived from qualifying intellectual property (IP), as provided by Article 14(1)(p) of the Income Tax Act. On 13^th August 2019 new rules has been introduced through Legal Notice 208 of 2019 setting the conditions and the calculation method to be computed for the allowable deduction.

Applicable

The Patent Box Regime deduction is applicable from 1^st January 2019.

Qualifying Intellectual Property

Qualifying intellectual property is defined as:

1)    A patent or patents whether issued or applied for (including where the issue of the patent is still pending) and extensions of patent protection.

In the case of a patent which has been applied for and is pending, in the event that the application is eventually rejected, such patent shall cease to constitute qualifying IP from the beginning.

or

2)   Any of the following:

• 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;

or

3)    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.

*Small entities -> Group total turnover not exceeding €50m and stand-alone gross revenue from all its intellectual property assets not exceeding €7.5m.

Important note: Marketing-related intellectual property assets including brands, trademarks and trade-names shall not constitute qualifying IP.

Conditions

Deduction entitlement shall be subject to the satisfaction of all the following conditions:

1)    The following activities 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 research,
• planning,
• processing,
• experimenting,
• testing,
• devising,
• designing,
• development,
• similar activity leading to the creation, development, improvement or protection of the qualifying IP, including among others: functions carried out in the course and as part of the above-mentioned 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 such 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 permanent establishment derives income which is subject to tax in the jurisdiction of residence of the beneficiary;

 

2)    the beneficiary shall be the owner of the qualifying IP or the holder of an exclusive license in respect of the qualifying IP. 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 in order to satisfy this condition;

3)    the qualifying IP is granted legal protection in at least one jurisdiction;

4)    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;

5)    where the beneficiary is a body of persons, such beneficiary is specifically empowered to receive such income; and

6)    the beneficiary requests the Patent Box Regime deduction in computing his income or gains in the tax return.

Important note: Where a benefit under these rules 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 by making the appropriate adjustment in the year in which it is ascertained that the particular patent is not being issued.

Calculation

Formula to be used for the calculation of the allowable deduction:

Qualifying IP Expenditure

The following items are considered as Qualifying IP Expenditure:

• 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
• other expenditure which has been incurred for the acquisition, creation, development, improvement or protection of the qualifying IP, which does not fall within paragraphs (a) and (b), can be allowed up to a limit. Excluding expenditure consisting of interest payments, building costs, acquisition costs or any costs that could not be directly linked to a specific qualifying IP.

 

Expenditure for general and speculative research and development 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 the creation, development, improvement or protection of such qualifying IP.

Total IP Expenditure

Total IP Expenditure consists 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 out sourcing activities made to related parties.

 

Important Note: The qualifying IP Expenditure cannot exceed the Total IP Expenditure.

Income or gains derived from qualified IP

The following items fall under the definition of qualified income or gains derived from qualified IP for the purpose of the calculation of the allowable deduction:

• Income and gains in terms of articles 4 or 5 of the Income tax Act 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 qualified income or gain is calculated after deducting such expenditure, whether of a capital nature or otherwise, as is deductible from income derived from the qualifying IP.

The determination of the above-mentioned income or gains shall 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.

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