On 13 August 2019 Malta introduced a patent box regime by virtue of the ‘Patent Box Regime (Deduction) Rules, 2019’, Legal Notice 208 of 2019 (the ‘Rules’). The Rules provide a basis on which the deduction laid down in article 14(1)(p) of the Income Tax Act (the ‘ITA’) may be claimed and shall apply in relation to qualifying income derived from qualifying intellectual property (‘Qualifying IP’) on or after 1 January, 2019.
In terms of the Rules, Qualifying IP generally comprises the following:
(a) Patent(s) whether issued or still pending, provided that where a pending patent is eventually rejected such patent shall be deemed to have never constituted Qualifying IP; or
(b) Assets in respect of which protection rights are granted in terms of national, European or international legislation; utility models; or software protected by copyright under national or international legislation; or
(c) In the case of a small entity (as defined in the Rules), other IP assets which are non-obvious, useful, novel and having similar features to patents, provided that certification is obtained by Malta Enterprise.
The Rules specifically exclude marketing-related IP assets such as brands, trademarks and trade names from Qualifying IP.
A person would be entitled to claim the deduction in terms of article 14(1)(p) of the ITA (hereinafter the ‘Beneficiary’) only upon the satisfaction of the following cumulative criteria:
(a) The research, planning, processing, experimenting, testing, devising, designing, development or similar activities leading to the creation, development, improvement or protection of the Qualifying IP is carried out wholly or in part by the Beneficiary, alone or with any other person(s) or in terms of cost sharing arrangements with other persons, whether these are resident in Malta or otherwise.
Such activities inter alia include: (i) functions performed by employees of other enterprises, which employees are acting under specific directions of the Beneficiary (in a manner equivalent to that of employees of such Beneficiary), and (ii) functions carried out through a permanent establishment (including a branch) situated in a jurisdiction other than the jurisdiction of residence of the beneficiary, to the extent that such permanent establishment derives income which is subject to tax in the jurisdiction of residence of the Beneficiary;
(b) The Beneficiary is the (co-)owner of, or holder of an exclusive license in respect of, the Qualifying IP;
(c) The Qualifying IP is granted legal protection in at least one jurisdiction;
(d) The Beneficiary maintains sufficient substance in terms of physical presence, personnel, assets or other relevant indicators in the relevant jurisdiction in respect of the Qualifying IP;
(e) Where the Beneficiary is a body of persons, it is empowered to receive such income; and
(f) The request for such deduction is included in the Beneficiary’s tax return.
Calculation of the Patent Box Regime deduction
The Patent Box Regime deduction is calculated on the basis of the following formula:
95% x ( Qualifying IP Expenditure divided by Total IP Expenditure x Income/Gains derived from Qualifying IPf)
1. Qualifying IP Expenditure shall consist of:
(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;
(c) Where expenditure has been incurred in the acquisition, creation, development, improvement or protection of the Qualifying IP but does not fall within the above-mentioned paragraphs (a) and (b), an amount may be claimed which is limited to the lower of:
- The costs actually incurred; and
- Thirty per cent (30%) of the total of the amounts referred to in the paragraphs (a) and (b) above.
Provided that in no case shall the Qualifying IP Expenditure exceed the Total IP Expenditure.
2. Total IP Expenditure shall comprise expenditure directly incurred in the acquisition, creation, development, improvement or protection of the Qualifying IP, being the sum of:
(a) 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
(b) Acquisition costs and expenditure for outsourcing activities made to related parties.
3. Income or Gains derived from Qualifying IPshall include the total income or gains (in terms of the ITA) which are derived from the use, enjoyment and employment of Qualifying IP, including royalty or similar income whether this is embedded in the consideration for the sale of goods, or services or otherwise, any advances, royalties or other similar income derived from Qualifying IP as well as any compensation for infringements in respect of Qualifying IP, gains on disposals of Qualifying IP with such amount being calculated after deducting any such expenditure as may be deductible.
Where the Beneficiary incurs a loss in respect of the Qualifying IP, which loss would otherwise be allowed to be set-off against its income or gains in terms articles 5 and 14 of the ITA, such Beneficiary may opt to benefit from the following:
(a) In lieu of the entitlement set out in articles 5 and 14 of the ITA, a deduction amounting to five per cent (5%) of the loss incurred which would have otherwise been available as a deduction in terms of the ITA in respect of the Qualifying IP; or
(b) A deduction corresponding to the full amount of the loss incurred which would have been available as a deduction in terms of the ITA. Provided that in this case:
- the Beneficiary will not be entitled to claim the deduction provided for in paragraph (a) in subsequent years; and
- the amount of loss claimed as a deduction in terms of paragraph (b) shall be set-off against any Income or Gains Derived from Qualifying IP in any subsequent year.
Whenever so requested by the Commissioner for Revenue (the ‘Commissioner’), for every item of Qualifying IP in relation to which income is derived and against which the Patent Box Regime deduction is claimed, the Beneficiary shall submit to the Commissioner:
(a) A copy of a confirmation issued by Malta Enterprise;
(b) Documentary evidence demonstrating the amount and method of calculation of the Patent Box Regime deduction;
(c) Evidence demonstrating that any transactions between related parties were carried out at arm’s length;
(d) Any additional supporting documentation as may be required by guidelines or requested by the Commissioner.
In addition, any Beneficiary shall maintain at all times sufficient proof of the continued satisfaction of the provisions of the Rules and of any guidelines issued thereunder.