Stimulating Innovation – Malta’s New Patent Box Regime

In the middle of August 2019, Malta introduced a patent box regime, which is a regime that provides lower effective tax rates on income derived from intellectual property (IP). In truth, Malta used to have a very attractive patent and copyright box regime that when stacked with other benefits, such as a generous refund system, and a low taxation on IP income, would reduce effective taxation on royalty income arising from IP rights to 0%. However, this scheme was closed as of 2016 when the Organisation for Economic Co-operation and Development’s (OECD) in 2015 identified patent box regimes as harmful tax practices due to the very wide parameters.  In October 2015, the OECD’s Action 5 final report “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance” required “substantial activity for any preferential regime”. In the case of IP, it recommended a nexus approach that the benefits of an IP regime be conditional on a direct nexus between the income receiving benefits and the expenditures contributing to that income. As Malta is a Base Erosion and Profit Shifting (BEPS)-compliant jurisdiction, it set about to update its tax regime to achieve full compliance with the OECD’s BEPS requirements. The result is the new patent box regime of 13 August 2019 by virtue of Legal Notice 208 of 2019.

The Legal Notice defines qualifying IP, eligibility criteria, the calculation of the deduction, costs to be taken into account, loss, submission of documentation to the Commissioner for Revenue, and issue of confirmation. Qualifying IP includes patents, assets granted protection rights in terms of national, European or international legislation, IP assets that are not obvious provided that certification is obtained by Malta Enterprise. “Marketing-related” IP, such as brands, trademarks and trade-names are explicitly excluded. Deduction can be claimed by a beneficiary for qualifying IP if the qualifying IP meets all the following conditions:

  • The qualifying IP is developed by the beneficiary in whole or in part, if the beneficiary is the owner in whole or in part.
  • The qualifying IP is granted legal protection in at least one jurisdiction.
  • The beneficiary “maintains substantial substance…. Commensurate with the type and extent of activity being carried out in the relevant jurisdiction with respect to the qualifying IP”.
  • Where the beneficiary is a body of persons, it is empowered to receive income.
  • The request for deduction is included in the beneficiary’s tax return.

The deduction will be calculated on the basis of this formula:

95% x [(Qualifying IP Expenditure divided by Total IP Expenditure) x (Income/Gains derived from Qualifying IP)].

Losses can be set off, while there are some very reasonable compliance obligations.

These rules apply on qualifying IP on or after 1 January 2019. Specifically designed to meet the Action 5 standard of the OECD, and comply with the BEPS-standards, this new regime provides the support needed to encourage the further development of IP, which is so fundamental to the contemporary economy. In the same vein, it’s rigorous compliance with BEPS-standards demonstrates once more Malta’s commitment to encouraging business, research, and development without providing scope for harmful tax practices that run counter to its international obligations.

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