Malta Introduces a Patent Box Regime

Rules lay down the requirements for a tax deduction

Dr. Priscilla Mifsud Parker | Published on 13 Sep 2019

Patent Box Regime

On the 13th of August 2019 Malta introduced a patent box regime through the ‘Patent Box Regime (Deduction) Rules, 2019’, Legal Notice 208 of 2019 (the “Rules”). 

The Rules lay down the requirements for and mechanism of calculation of a deduction laid down in article 14(1)(p) of the Income Tax Act (the “ITA”). The deduction may be claimed against the income derived from qualifying intellectual property (the “Qualifying IP”) arising in the course of a trade, business, profession or vocation or otherwise, subject to the satisfaction of the requirements stipulated by the Rules. The Rules are applicable to qualifying income derived on or after 1st of January 2019.  

Patent Box Regime: Qualifying IP 

The Qualifying IP comprises:  
• a patent or patents, whether issued or applied for (provided that for a pending patent the application is not rejected),  
• assets where protection rights are granted in terms of national, European or international legislation (including plants/genetic material, crop protection products, orphan drug designations), utility models, software protected by copyright under national & international legislation, or  
• with respect to small entities, other IP assets as are non-obvious, useful, novel and having similar characteristics to patents, provided that certification is obtained from Malta Enterprise; a small entity is a beneficiary  with a total turnover amounting (on a group basis) to not more than €50,000,000 who does not itself earn more than €7,500,000 in gross revenue from all its IP assets. 

Marketing-related IP assets such as brands, trademarks and trade names are not considered Qualifying IP. 

Patent Box Regime: Entitlement to deduction 

 Entitlement to the deduction is subject to the satisfaction of the following, cumulative conditions:  
a. the research, planning, processing, experimenting, testing, devising, designing, development leading to the creation, development, improvement or protection of the qualifying IP, must be carried out by the beneficiary solely or together with any other person or persons or in terms of cost sharing arrangements with other persons; 
b. the beneficiary must be the owner of the Qualifying IP or the holder of an exclusive licence with regards to Qualifying IP; 
c. the qualifying IP is granted legal protection in at least one jurisdiction;  
d. the beneficiary maintains enough substance in terms of physical presence, personnel, assets or other relevant indictors in the relevant jurisdiction in respect of the Qualifying IP;  
e. where the beneficiary is a body of persons, such beneficiary is specifically empowered to receive such income;  
f. the beneficiary’s request for such a deduction is included in respective tax return.  

Calculating the Malta Patent Box Regime Deduction  

The Rules stipulate that the following formula be used in order to calculate the deduction:  

95% x (Qualifying IP Expenditure/ Total IP Expenditure) x Income or Gains derived from qualifying IP 

“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 incurred by the Beneficiary, 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. Acquisitions costs and expenditure for outsourcing activities made to related parties.  

“Qualifying IP Expenditure”: The following costs need to be considered when calculating the Qualifying IP expenditure: 
(a) Expenditure incurred directly by the Beneficiary for or in the creation, development, improvement or protection of the Qualifying IP; 
(b) Expenditure incurred by the Beneficiary for activities related to the creation, development, improvement and protection of the Qualifying IP sub-contracted to person which are not related to the Beneficiary. 

Where expenditure has been incurred which does not fall within point a & b above, an amount equivalent to the below may be claimed:  
i. the costs actually incurred; and  
ii. 30% of the total of the amounts referred to in paragraph a & b.  

The qualifying IP Expenditure cannot exceed the Total IP Expenditure. 

“Income or gains derived from qualifying IP”

The following may be included for the purposes of calculating the income or gains derived from Qualifying IP: 
- income which is derived from the use, enjoyment and employment of the qualifying IP, in terms of the ITA; 
- royalty or similar income;  
- 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;  
- 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, as is deductible from income derived from the qualifying IP.   

Determination of the above-mentioned income or gains must be made using Transfer Pricing methodology.   

Patent Box Regime: Losses  

Where the beneficiary incurs a loss in respect of the qualifying IP where one is entitled to set-off against one’s income/gains, such beneficiary is entitled to choose one of the following benefits:  

a. In lieu of the entitlement to set out losses under rules provided for in the ITA, a deduction of 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 coinciding to the full amount of the loss which would be available for deduction subject to the following conditions: 
i. The beneficiary would no longer be entitled to claim the tax treatment mentioned in point (a) for any subsequent fiscal year; and  
ii. the loss claimed would be carried forward and deducted against the income or gains derived from the qualifying IP until it is absorbed in full.  

Patent Box Regime: Compliance 

The beneficiary claiming the deduction may be requested to submit the following to the Commissioner for Revenue; 
a. a copy of confirmation issued by the Malta Enterprise referring to the Qualifying IP; 
b. documentary evidence which shows the amount of the Malta patent box regime deduction and the basis which it was calculated on;  
c. evidence showing that profits or gains were derived from transactions between related parties that are relevant to the patent box regime deduction were calculated at arm’s length;  
d. additional supporting documentation as may be laid down in Malta Enterprise guidelines or requested by the Commissioner.  

Any beneficiary is obliged to maintain sufficient proof of the abidance of the provisions of the Rules. Additionally, where the Malta patent box regime deduction is claimed, the beneficiary must submit to Malta Enterprise a copy of any tax return filed along with all supporting documentation.  

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Dr Priscilla Mifsud Parker

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