Patent Box Regime (Deduction) Rules, 2019

L.N. 208 of 2019

INCOME TAX ACT

(CAP. 123)

Patent Box Regime (Deduction) Rules, 2019

IN exercise of the powers conferred by articles 14(2) and 96 of

the Income Tax Act, hereinafter referred to as "the Act", the Minister

for Finance has made the following rules:-

(1) The title of these rules is Patent Box Regime Citation and

commencement.

(Deduction) Rules, 2019.

(2) These rules apply to qualifying income derived from

qualifying intellectual property, hereinafter referred to as "qualifying

IP" on or after the 1st day of January 2019.

(1)

In these rules, unless the context otherwise requires: Interpretation.

"beneficiary" means the person entitled to claim the deduction

referred to in article 14(1)(p) of the Act;

"Corporation" means Malta Enterprise as established in terms of

the Malta Enterprise Act;

"Patent Box Regime deduction" means the deduction referred to

in article 14(1)(p) of the Act;

"qualifying IP" means

(a)

a patent or patents, whether issued or applied for, or

where the issue of the patent is still pending and extensions of

patent protection, so however that in the case of a patent which

has been applied for and is pending, but where the application is

eventually rejected, such patent shall cease to constitute

qualifying IP ab initio; or

(b) (i) 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

(ii) utility models; or

(iii) software protected by copyright under national

or international legislation;

(c)

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

Corporation, which shall determine this through a transparent

certification process in terms of guidelines issued by the

Corporation

Provided that marketing-related intellectual property assets

including brands, trademarks and trade-names shall not constitute

qualifying IP;

"small entity" means a beneficiary which -

(a)

has a total turnover on a group basis amounting to

not more than fifty million euro (€50,000,000), or equivalent;

and

(b) does not itself earn more than seven million and five

hundred thousand euro (€,500,000) or equivalent in gross

revenue from all its intellectual property assets,

which thresholds shall be calculated in respect of each beneficiary on

the basis of the applicable figures over an average five year period.

(1) Entitlement to the deduction set out in article

14(1)(p) of the Act shall be subject to the satisfaction of all the

following conditions

(a)

subject to the provisions of rule 5, the research,

planning, processing, experimenting, testing, devising,

designing, development or similar activity leading to the

creation, development, improvement or protection of the

qualifying IP, 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

For the avoidance of doubt, any activity leading to the

creation, development, improvement or protection of the

qualifying IP or its improvement include among others

(i) 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;

(ii) 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;

(b) the beneficiary shall be the owner of the qualifying

IP or the holder of an exclusive license in respect of the

qualifying IP. For the avoidance of doubt, even 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;

(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, as is commensurate with the type and extent of

activity being carried out 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;

and

(f)

the beneficiary requests the Patent Box Regime

deduction in computing his income or gains in the return made

pursuant to article 10 of the Income Tax Management Act.

(2) 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.

(1) The Patent Box Regime deduction shall be Calculation of

Patent Box

calculated on the basis of the following formula

Regime

deduction.

(

)

Qualifying IP Expenditure

95% x

x Income or Gains derived from qualifying IP

Total IP Expenditure

(2) The income or gains which shall be taken into account for

the purpose of determining the income or gains derived from

qualifying IP referred to in sub-rule (1) shall comprise the total

income falling within the purport of articles 4 or 5 of the 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 and as being calculated after deducting such expenditure, whether

of a capital nature or otherwise, as is deductible from income derived

from the qualifying IP

Provided that in all cases, 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.

(3) "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 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, including, for the avoidance of doubt, those referred

to in rule 5(1)(b); and

(b) acquisition costs and expenditure for outsourcing

activities made to related parties.

(1) The costs which shall be taken into account for the

purpose of calculating the qualifying IP Expenditure shall be

established at the time when they are incurred and shall consist 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 expenditure has been incurred which does not

fall within paragraphs (a) and (b), an amount equivalent to the

lower of

(i) the costs actually incurred in the acquisition,

creation, development, improvement or protection of the

qualifying IP, excluding expenditure falling within the

purport of paragraphs (a) and (b), and

(ii) thirty per cent (30%) of the total of the

amounts referred to in paragraphs (a) and (b)

Provided that in no case shall the qualifying IP Expenditure

comprised in paragraphs (a), (b) and (c) exceed the Total IP

Expenditure

Provided further that, except for acquisition costs included in

paragraph (c)(i), expenditure consisting of interest payments,

building costs, acquisition costs or any costs that could not be directly

linked to a specific qualifying IP asset shall be excluded in making

the above calculation

Provided further that 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

Provided further that expenditure referred to in paragraphs (a),

(b) and (c), which is attributable to a permanent establishment of a

beneficiary situated in a jurisdiction other than that in which such

beneficiary has its head office, shall not be deductible against income

earned by that beneficiary which is attributable to its head office,

unless the permanent establishment to which such expenditure is

attributable is in operation at the time that the beneficiary earns the

said income.

(2) For the purposes of sub-rule (1)

(a)

an individual is deemed to be related to a body of

persons, if that body of persons is directly or indirectly

controlled or beneficially owned as to more than twenty-five per

cent (25%) by the said individual;

(b) an individual is deemed to be related to another

individual, if the relationship between the said individuals falls

within the purport of article 5(2)(e)(i) of the Act;

(c)

two bodies of persons are deemed to be related if

they are, directly or indirectly, controlled or beneficially owned

as to more than twenty-five percent (25%) by the same

individuals.

(3) A beneficiary shall maintain appropriate records

(including any relevant underlying documentation) to prove the total

expenditure and the qualifying IP expenditure incurred in respect of

any qualifying IP, the years in which such expenditure is incurred,

income and gains derived from any qualifying IP and such other

details as may be required in terms of guidelines which may be issued

by the Corporation.

(1) Where a beneficiary incurs a loss in respect of the

qualifying IP which he is entitled to set-off against his income or

gains in terms of article 5 or article 14 of the Act and such beneficiary

claims the benefit of such loss, he shall be entitled to elect to benefit

from any one of the following

(a)

in lieu of the entitlement set out in article 5 and

article 14 of the Act, a deduction corresponding to five per cent

(5%) of the loss which would otherwise be available for

deduction in terms of the said provisions of the Act in respect of

the qualifying IP; or

(b) a deduction corresponding to the full amount of the

loss which would be available for deduction in terms of the

provisions of article 5 or article 14 of the Act, so however that

the following conditions shall apply where the beneficiary

elects for this treatment

(i) he shall not be entitled to claim the tax

treatment referred to in paragraph (a) for any subsequent

year of assessment; and

(ii) where in any basis year following that in

which a loss is claimed in terms of this paragraph, the

beneficiary derives income or gains from the qualifying IP

in respect of which he has claimed such loss, the amount of

the deduction claimed in terms of rule 4 in that basis year

shall be determined as if the term "Income or Gains

derived from qualifying IP" was a reference to the income

or gains derived from the qualifying IP in that basis year

less the amount of losses claimed in prior years in respect

of the qualifying IP and where the amount of losses

incurred in prior years is such that it cannot be wholly set

off against the income or gains for that basis year, it shall,

to the extent to which it cannot be so set off against income

or gains for the said year, be carried forward and set off

against what would otherwise have been the income or

gains derived from the qualifying IP in subsequent years.

(2) An election in terms of sub-rule (1) shall be made in such

form and manner as the Commissioner may determine and shall be

irrevocable.

(1) Whenever so requested by the Commissioner, for Submission of

every item of qualifying IP in relation to which income is derived and documentation

to the

against which the Patent Box Regime deduction is claimed, the Commissioner.

beneficiary claiming such deduction shall submit to the

Commissioner in such form and manner as the latter may deem fit to

request

(a)

a copy of a confirmation issued by the Corporation

describing the particular qualifying IP, confirming that the

qualifying IP is actually in existence and confirming the amount

of qualifying expenditure to which the Patent Box Regime

deduction is applicable and the Total IP Expenditure;

(b) documentary evidence which demonstrates to the

satisfaction of the Commissioner the amount of the Patent Box

Regime deduction and how it was calculated for the particular

year of assessment as well as the income or gains derived from

qualifying IP and the costs and expenditure constituting the

qualifying IP Expenditure and the Total IP Expenditure;

(c)

evidence which demonstrates to the satisfaction of

the Commissioner that profits or gains derived from

transactions relevant in the context of these rules and carried out

between parties who are related in the sense set out in rule 5(2)

are calculated as if the parties to the relevant transactions are

independent enterprises operating in similar conditions and at

arm’s length; and

(d) such additional supporting documentation as may be

laid down in guidelines issued by the Corporation or as may be

otherwise requested by the Commissioner in respect of each

year of assessment in which the Patent Box Regime deduction is

claimed.

(2) Without prejudice to the provisions of sub-rule (1), the

Corporation shall forward to the Commissioner such information as

may be in possession of the Corporation and as may be requested by

the Commissioner for the purpose of the performance of his duties

under the Income Tax Acts.

(3) Any beneficiary shall maintain at all times sufficient proof

of the continued satisfaction of the provisions of these rules and of

any guidelines issued thereunder by the Corporation and shall make

such proof available to the Commissioner and to the Corporation

whenever so required.

(4) Any beneficiary shall furnish to the Corporation a copy of

any tax return and of all supporting documentation filed with the

Commissioner in respect of any year of assessment in which a Patent

Box Regime deduction is claimed.

(5) The Commissioner shall spontaneously exchange

information on beneficiaries claiming the Patent Box Regime

deduction in respect of assets referred to in paragraph (c) of the

definition of "qualifying IP" in rule 2.

The confirmation referred to in rule 7(1) shall be issued by

the Corporation in terms of guidelines issued by the Corporation,

when the Corporation is satisfied that the qualifying IP complies with

the provisions of these rules and after it has obtained all such

information and documentation and made such ascertainment as it has

considered necessary for this purpose.

€0.81