Patent Box Regime (Deduction) Rules
General
The Income Tax Act provides for a specific deduction, referred to as the Patent Box Deduction, which may be claimed against income derived from Qualifying IP (Qualifying Intellectual Property).
The Patent Box Regime (Deduction) Rules go a step further, expanding on the conditions required to benefit from the deduction and the mode for calculation the deduction.
The Deduction
The Deduction is calculated through the following formula:
Thus, beneficiaries may enjoy up to 95% tax relief on any income or gains derived from Qualifying IP.
Defining Key Terms
Defining Qualifying IP
Qualifying IP includes:
- Patents, whether issued or not;
- Other assets in respect of which protection rights are granted in terms of national, European or international legislation;
- Utility models;
- Software protected by copyright under national or international legislation; and
- Other intellectual property assets as are non-obvious, useful, novel and having feature similar to those of patents (only applicable to small entities).
Marketing-related intellectual property assets including brands, trademarks and trade-names are expressly excluded from the definition of Qualifying IP.
Defining Income or Gains Derived from Qualifying IP
Income or gains derived from Qualifying IP include:
- The total income derived from the use, enjoyment and employment of Qualifying IP;
- Royalty or similar income;
- Advances and similar income;
- 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;
- Gains on disposal of Qualifying IP; and
- Other similar or related income as is derived from the Qualifying IP.
Defining Total IP Expenditure
Total IP Expenditure shall include expenditure directly incurred in the acquisition, creation, development, improvement or protection of the Qualifying IP.
Defining Qualifying IP Expenditure
Qualifying IP Expenditure shall include (a) expenditure directly incurred in the creation, development, improvement or protection of the Qualifying IP, (b) expenditure incurred for activities related to the creation, development, improvement and protection of the Qualifying IP subcontracted to persons, and (c) certain other forms of expenditure.
Other Conditions
In order to be entitled to the deduction, the following conditions must be satisfied:
- The activity consists of research, planning, processing, experimenting, testing, devising, designing, development or similar activity leading to the creation, development, improvement or protection of qualifying IP;
- The activity shall be carried out wholly or in part by the beneficiary, solely or together with any other person;
- The beneficiary shall be the owner of the qualifying IP or the holder of an exclusive licence in respect of the qualifying IP;
- The qualifying IP is granted legal protection in at least one jurisdiction; and
- The beneficiary maintains sufficient substance in the relevant jurisdiction.
Procedure
In order to benefit from this deduction, the beneficiary must specifically request the Patent Box Regime deduction when computing his tax return.
Such deduction may also be requested where a patent in still pending. However, if such patent is rejected, any benefit claimed shall be reversed by making the appropriate adjustment in the year the application is rejected.
Malta’s Favourable Business Environment and Tax Regime
The Patent Box Regime compliments Malta’s favourable business environment, strengthening its position as a leading hub for intellectual property management, incentivising businesses across the globe to develop, protect and commercialise their IP within the jurisdiction.