Patent Box Regime

On 13 August 2019, Malta introduced a Patent Box Regime by virtue of legal notice 208 of 2019 (the “Rules”). On the strength of the enabling provision contained in Article 14(1)(p) of the Income Tax Act, the Rules provide for a deduction in relation to qualifying income derived from qualifying intellectual property (“qualifying IP”) on or after 1 January 2019. The Rules have been drafted in a manner so as to be compliant with the OECD modified nexus approach and the EU Code of Conduct on Business Taxation.

What is a qualifying IP?

In terms of the Rules, qualifying IP means:

a) Patents that have been issued or are in the process of being applied for.

b) Assets in respect of which protection rights are granted in terms of national or international legislation including those relating to plants and genetic material, plant or crop protection products and orphan drug designations; or utility models; or software protected by copyright under national or international legislation; or

c) In the case of a small entity (defined in the Rules), other intellectual property assets as are non-obvious, useful, novel and having features similar to those of patents, and as are certified for this purpose by Malta Enterprise.

Marketing-related intellectual property assets such as brands, trademarks and trade names do not constitute qualifying IP.

What are the conditions to claim a deduction?

The Beneficiary is entitled to claim a deduction upon the satisfaction of all the following criteria:

The research, planning, processing, experimenting, testing, devising, designing, development or similar activities leading to the creation, development, improvement or protection of the qualifying IP must be carried out wholly or in part by the beneficiary.

These activities also include among others:

(i) functions performed by employees of other enterprises, provided that such employees are acting under the specific directions of the beneficiary in a manner equivalent to its employees;

(ii) functions carried out through a permanent establishment 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.

b) The Beneficiary is required to be the qualifying IP’s owner or the 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.

How is the deduction calculated?

The Patent Box Regime deduction is calculated on the basis of the following formula:

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

Qualifying IP Expenditure is established at the time when incurred and consists of the following:

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 subcontracted to persons which are not related to the beneficiary; and

c) Where other expenditure not falling within (a) and (b) above has been incurred, that expenditure may also be included as part of Qualifying IP Expenditure, however the amount of this expenditure is capped at 30% of the amounts referred to in (a) and (b) above.

Total IP Expenditure comprises 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.

What documents must be submitted to the Commissioner for Revenue in connection with a claim under these Rules?

For every item of qualifying IP in terms of which a benefit is claimed under the Rules, every beneficiary is required to submit to the Commissioner for Revenue certain documents on an annual basis.

How can we help?

Our team is willing to assist you in determining the extent to which these new Rules may impact your business. For further assistance please contact any of the below.