Malta Patent Box regime – a home for your IP

Printable Version

The new Malta Patent box regime were enacted in 2019 and are effective as from the 1 January 2019. These rules apply to Income or Gains derived from Intellectual Property by a Beneficiary. These rules have been designed to attract patented intellectual property related business activity to Malta.

Qualifying intellectual property (IP)

  • A patent or patents or extensions of patent protection, whether issued or applied for, including where the issue of the patent or extension is still pending. However in the case of a patent or request for extension which has been applied for and is pending, but where the application is eventually rejected, such patent shall cease to constitute qualifying IP from the beginning; or
  • 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
  • Utility models; or
  • Software protected by copyright under national or international legislation;
  • 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 Malta Enterprise, which shall determine this through a transparent certification process in terms of guidelines issued by the Malta Enterprise. For this purpose a small enterprise shall be defined as a beneficiary that has a total turnover on a group basis amounting to not more than €50m, or equivalent and does not itself earn more than €7.5m 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.

A qualifying IP must have been granted legal protection in at least one jurisdiction.

Beneficiary (company)

The beneficiary is the owner of the qualifying IP or the holder of an exclusive license in respect of the qualifying IP. 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.

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.

Where the beneficiary is a company, such beneficiary is specifically empowered to receive such income.

Qualifying income or gains

The income or gains which shall be taken into account for the purpose of determining the income or gains derived from the qualifying IP shall comprise, in relation to the relevant qualifying IP, the total income falling within the purport of the Income Tax Act and which is derived from its use, enjoyment and employment, 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, any sum paid for the grant of a licence or similar empowerment to exercise rights, compensation for infringements whether such compensation is granted through judicial means or otherwise, gains on disposal and such other similar or related income as is derived from the said IP and as being calculated after deducting such expenditure, whether of a capital nature or otherwise, as is deductible from the income that is derived.

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.

Deductions

Costs incurred for the purpose of, planning, processing, experimenting, testing, devising, designing, development or similar activity leading to the creation, development, improvement or protection of the qualifying IP, as are 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.

Costs incurred for 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 beneficiary’s activity in relation to the qualifying IP 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 the 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;

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

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

Total IP Expenditure is 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 expenditure incurred by the beneficiary for activities subcontracted to persons which are not related to the beneficiary and (b) acquisition costs and expenditure for outsourcing activities made to related parties.

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 and (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 (as defined in the legal notice) to the beneficiary.

Also included in Qualifying IP Expenditure is expenditure that has been incurred but which has not already been taken into consideration in the previous paragraph (Primary IP Costs). This can be included to the extent of an amount equivalent to the lower of:

(i) The costs actually incurred in the acquisition, creation, development, improvement or protection of the qualifying IP, and

(ii) 30% of the total of Primary IP Costs.

In no case shall the Qualifying IP Expenditure exceed the Total IP Expenditure.

Provisos

Marketing-related intellectual property assets including brands, trademarks and trade-names shall not constitute qualifying IP.

Except for costs actually incurred in the acquisition of the qualifying IP, 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.

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 assets.

Other

More detailed rules apply where a beneficiary incurs a loss in respect of a qualifying IP.

A beneficiary should keep adequate records, documentation and evidence of computations with regards to any benefit obtained under this Patent Box Regime.

The Commissioner for Revenue has wide powers to request ongoing information and documentation from beneficiaries of qualifying IPs.

 

This article is only intended to give a general overview of the legislation. Professional advice should be separately sought on the applicability of these rules to any actual company structure or situation.

Please contact David Marinelli, DM Europe, should you wish to discuss any matter relating to Companies registered in Malta.

Please click here for Our Services page.