What is the Patent Box Regime?
The Patent Box allows eligible businesses to claim a tax deduction in respect of qualifying income and gains derived from qualifying IP. Qualifying IP may include patents, utility models, intellectual property rights regulated under international laws and agreements, copyrighted software and, for certain small entities, other patent-like assets. Marketing-related intangibles, including trademarks, brands and trade names, do not qualify.
Who can benefit from the Patent Box?
In order to benefit from the Patent Box, the following key conditions should be satisfied:
How does the Patent Box work?
The Patent Box allows the beneficiary to claim a tax deduction of up to 95% of qualifying IP income. The deduction is adjusted by the “nexus ratio”, which links the tax benefit to the proportion of qualifying R&D expenditure incurred by the beneficiary in creating, developing, improving, or protecting the relevant IP.
The deduction is calculated using the following formula:
95% × nexus ratio × Qualifying IP income
Where the full 95% deduction is available, only 5% of the qualifying IP income remains subject to tax. Assuming the standard rate of 35%, this results in an effective tax rate of 1.75% on the relevant qualifying income. The effective rate may be lower if the applicable rate before the deduction is lower.
The deduction is claimed through the beneficiary’s income tax return and must be supported by a determination issued by Malta Enterprise following the submission and successful approval of the relevant application.
What expenditure is included in the nexus ratio?
The nexus ratio compares qualifying IP expenditure with total IP expenditure and therefore links the available deduction to the R&D activity actually undertaken by the beneficiary, either directly or through unrelated parties.
Qualifying IP expenditure comprises expenditure incurred directly by the beneficiary in creating, developing, improving, or protecting the qualifying IP, together with the cost of relevant R&D activities outsourced to unrelated parties. Such qualifying expenditure includes:
- Salaries and related personnel costs of researchers, technicians, and supporting staff directly engaged on the R&D project.
- Materials and consumables used in the project.
- Utilities apportioned to the project using a recognised methodology.
- Depreciation of plant, machinery and equipment used for and during the project.
- Costs of R&D outsourced to an unrelated party.
- Costs of validating, testing, and defending the IP right, including relevant test and study reports.
- Other costs directly linked to the research activity.
Total IP expenditure captures the overall actual expenditure incurred in acquiring, creating, developing, improving or protecting the particular qualifying IP. In addition to the qualifying expenditure outlined above, it includes costs of acquiring IP or technology from third parties and any qualifying expenditure subcontracted or acquired from related parties.
How can we help?
We support businesses in assessing whether their IP, associated R&D activity and related income streams may qualify for the Patent Box. Our support includes:
Assessing whether intellectual property qualifies for the Patent Box.
Analysing qualifying and total IP expenditure.
Assisting with Malta Enterprise applications and supporting documentation.
Modelling the potential tax benefits available.
Advising on wider IP structuring and international tax considerations.
Whether you are undertaking R&D, developing new technology, or commercialising software, our team can help you assess eligibility, assist with determining the applicable Nexus Ratio, quantify the potential tax benefit and provide support during the application process.
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