In collaboration with Marco Pane, Manager of Bernoni Grant Thornton.
The many tax measures introduced over time to promote and support innovation offer some interesting opportunities to finance development projects and, more generally, to enhance companies’ intangible assets.
Following the regulation on revaluation of corporate assets and the recently published response by the Lombardy revenue head office to ruling no. 904 – 20406/2020, concerning the possibility to revaluate those fixed assets that have never been recorded in the financial statements, it is advisable to evaluate the possible effect deriving from the combined utilization of the allowances provided by the so-called patent box, by the regulation on revaluation of corporate assets under art. 110 of Law Decree no. 104/2020, and by the regulation on the tax credit for R&D activities under Law no. 190/2014.
Below is a synthesis of the main characteristics of each of the abovementioned allowances.
Patent Box
This is an “optional taxation regime concerning corporate income deriving from the use of copyrighted software, industrial patents, designs and models, as well as processes, formulas, and information relevant to industrial, commercial, or scientific experience acquired, being legally protectable”.
Due to the amendments of the existing regulations (particularly those under art. 4 of Law Decree no. 34/2019 and under the Order by the Director of the Revenue Office no. 658445/2019), circular letter dated 29.10.2020, no. 28/E of the Revenue Office provided some clarifications on the procedure to benefit from the allowance, with reference to the option for the direct definition of eligible income. The option must be exercised in the tax return relevant to the FY which the option applies to and is valid for five fiscal years, as well as irrevocable and renewable.
The allowance consists in the possibility to exclude from the taxable income 50% of revenues deriving from the (even joint) use of specific intangible assets or from their sale – if 90% of the relevant consideration is re-invested in the maintenance or development of other intangible assets before the end of the second fiscal year following that in which the sale occurred.
Revaluation of corporate assets
Art. 1, para. 83, section I of Budget Law 2021 extends the possibility to apply the revaluation of corporate assets to goodwill and to other intangible assets resulting in the financial statements being current at 31 December 2019 (this possibility is also granted to subjects whose fiscal year does not correspond to the solar year – as provided by the response to the Revenue Office ruling no. 640 dated 31 December 2020).
Specifically, by providing that the revaluation also applies to goodwill and to other intangible assets resulting in the financial statements being current at 31 December 2019, any kind of intangible assets registered in the financial statements is subject to tax realignments.
The higher value attributed to assets can be recognised for income taxes and IRAP purposes starting from the FY following that which the revaluation refers to, by paying a substitute tax equal to 3% for depreciable and non-depreciable assets.
With specific reference to the revaluation of intangibles, it is pointed out that in circular letter no. 6 dated 5 March 2021, Assonime (association of Italian joint-stock companies) commented the regulation on revaluation and, in particular, the abovementioned recent response by the Lombardy revenue head office to the ruling, requesting a reply on the possible revaluation of intangible assets not recorded among financial statements assets.
According to Assonime, in fact, there are some good reasons to allow the application of the revaluation not only to registered – and, therefore, legally protected – intangible assets (case examined by the Lombardy revenue head office), but also to non-registered intangibles having, therefore, a lower protection (such as “de facto trademarks”, used to distinguish products and services if registration lacks).
R&D tax credit
R&D tax credit has been effective since 2015 and it was reviewed in following Budget Laws. It supports businesses with their industrial research and experimental development investment, aimed to product or process innovation to ensure competitivity. New allowance rates were introduced in 2020 for technology innovation, design, and aesthetic invention costs.
The tax credit can be offset into three equal annual instalments, starting from the FY following that in which the credit accrues.
The above being said, the response by the Lombardy revenue head office to the ruling offers some interesting hints on the joint effects of the three abovementioned allowances, since the analysed case concerns a company dealing with the production of hydraulic pumps, holding corporate information and technical-industrial information, including commercial or scientific knowledge that can be protected as secret information, being legally protectable, consisting in “construction and production designs” relevant to the produced machines (so-called know-how).
Moreover, the abovementioned company filed an application for the so-called Patent Box regime and obtained it from the Revenue Office for the five-year period 2016-2020 and the confirmation that the know-how in the specific case has an actual economic value.
The specific question asked to the Revenue Office was: can intangible assets that have never been registered among financial statements items and that were only entered as costs in the income statement be revaluated based on the fact that such assets are legally protected according to the relevant regulation? And the Revenue Office answer was yes.
Synergies between Patent Box, revaluation, and R&D tax credit
The above response to the ruling suggests that, if a company holds a patent concerning continuous research and innovation, it is entitled, besides to the tax credit provided under Law 190/2014, also to the partial deduction from taxes of revenues deriving from the use of such patent and to the revaluation of the asset, adjusting its registration cost in the financial statements, recognising the higher registered values for tax purposes, and possibly deducting the higher depreciations during the patent’s useful life.
To this regard, however, it must be pointed out that a comprehensive evaluation of the different applicable favourable regimes is necessary, since the higher depreciations related to the revaluation of intangibles could impact the calculation of the Patent Box allowance when defining the profitability of the concerned intangible under the application of the residual profit split method.
Nonetheless, if an agreement for the application of the Patent Box regime has already been signed with the Revenue Office (article 1, para. 37-45, of Law no. 190/2014 and Ministerial Decree dated 28 November 2017), such circumstance could concretely be favourable for the purposes of the definition of the actual economic contribution of some kinds of intangibles.
In fact, the ruling agreement could provide some elements to quantify the economic contribution of those non-registered intangible assets, which could create a synergy with the substantial legal protection requirement – as the essential condition to ensure the actual presence of these assets among the company’s total assets.
On the other hand, if the company has not yet benefitted from the Patent Box regime, the analyses to be carried out to identify the concerned intangible would be useful for the application of both the revaluation and the tax credit under Law 190/2014, thus with a joint initial organizational and evaluative effort.
Art. 1, para. 204 of Budget Law 2020 (Law dated 27 December 2019 no. 160), provides that the R&D tax credit can be combined wth other allowances referring to the same costs, as long as this combination does not lead to a higher value than the cost borne – also considering the exemption from taxation for IRAP purposes.
Limits and need for an expert’s opinion for an exact assessment of the intangible asset
Once the possible cross-effects of the abovementioned measures are defined, it is then important to consider how to proceed to jointly benefit from such measures, avoiding any objections by the Tax Authorities.
First of all, it is pointed out that the combined provisions under articles 10 and 11 of Law no. 342 of 2000 and under art. 110 of Law Decree no. 104/2020 requires, for the purposes of the revaluation of intangible assets that are not registered among balance sheet assets but whose existence can be inferred from the financial statements, that the concerned intangible assets be in any case recordable among balance sheet assets, according to the ordinary rules provided under national and international accounting standards.
Therefore, if there are the conditions for the potential registration of intangibles pursuant to the indications provided under the accounting standards, particularly OIC accounting standard no. 24 and IAS no. 38, and of the actual incurrence and quantification of the related cost, the revaluation of the concerned intangibles cannot be prohibited nor denied.
It must be noted that an asset can be independently identified when it can be separated from the rest of the business (i.e. if it can be sold separately as independent asset), when it is “controlled” by the business due to the law provisions that protect the legal property of the intangible, and when such intangible right can certainly generate future economic benefits for the company that holds it.
In addition, when there is evidence of the actual incurrence of a cost for the purchase of such right – and, subsequently, an “exchange” with third parties – and of the reliable quantification of the cost incurred for the purchase of the right – documented through a proper expert’s assessment, the right to revaluation cannot be denied.
The opportunity to obtain an expert’s assessment and the considerations on the actual possibility to separate an intangible are also valid also in case of application of the Patent Box regime and of utilization of the R&D tax credit, specifically in the current emergency situation, where the actual recoverable value of intangible assets must be rigorously evaluated when preparing the financial statements.
Some practical cases
In the light of the above, this section analyses some concrete practical applications of the above-described principles, focusing on the case of companies operating in the pret-à-porter fashion industry which internally developed different trademarks.
It often happens that trademarks can have a considerable value, despite the fact that such brands were developed internally and that such companies incurred quite low costs to obtain them, which are generally related to brand registration costs accounted based on the historical cost method and, generally, totally depreciated.
Therefore, are the new regulations on revaluation, Patent Box, and R&D tax credit also applicable to such cases?
Although the new regulations on revaluation described above expressly refer to the possibility to revaluate intangible assets, even if totally depreciated, it must be pointed out that in these cases there would be the prohibition to enter such assets in the balance sheet, even after revaluating them.
In fact, the prohibition to enter such self-developed intangibles in the balance sheet is due to the fact that they are not related to the incurrence of an actual cost, or, in other words, that the acquisition of such assets – which should imply the registration in the balance sheet – is not linked to an exchange in the market (i.e. an exchange with third parties, even through M&A operations), which could recognise the value of the asset as “autonomous entity”.
Therefore and in compliance with accounting standards, the self-developed trademark and patents could not be separated from the goodwill internally generated by the company.
With specific reference to the case of self-developed trademarks and to the application of the Patent Box regime, it is specified that, although the trademarks allowed many companies to realize considerable tax advantages in the first five years, the Patent Box now cannot be further replicated following the exclusion provided for these assets under Law Decree 50/2017, which aligned the Italian regulation to OECD provisions.
In any case, on the other hand, all information collected in the discussion with the Tax Authorities for the determination of the value of the intangible asset could be legitimately be taken into account to benefit from the revaluation.
Lastly, with regard to the R&D tax credit, depreciation charges relevant to intangible assets are considered – in compliance with the conditions and limits provided by the reference regulation – within the maximum limit of the amount deducted from taxes in the fiscal year concerned by the benefit. However, it must be specified that costs for the purchase – even under a license agreement – of such intangibles deriving from transactions carried out with companies belonging to the same group cannot be relevant for the purposes of the benefit.
With response to ruling no. 86 dated 27.3.2019, amending response no. 73 dated 13.3.2019, the Revenue Office clarified that while the cost of the patent is taken into account for the definition of the incremental cost proportionally to the use of the same in the performance of eligible activities, the trademark does not meet the “industrial invention” requirement, as it is just a sign that allows distinguishing products or services realized or distributed by a company from those of other companies. Therefore, the relevant cost cannot be considered for the definition of the benefit.
Conclusions
The R&D tax credit, the Patent Box regime and the possibility to revaluate corporate assets – including intangible assets – are generally benefits that can be combined and used at the same time.
Nevertheless, in order to avoid any objection by the Tax Authorities, it is important to ensure the existence of the law requirements to obtain such benefits, as well as – if possible – to provide the proper supporting documentation.
The preventive analysis of interrelations between these three benefits in each specific practical case is also crucial, in order to benefit from all synergies and to avoid that the positive impact of one benefit could be reduced or nullified by the concurring utilization of other allowances.
