Aiming to further increase its competitiveness as a jurisdiction for the holding and development of intellectual property rights, Malta has introduced a Patent Box Regime by means of Legal Notice 208 of 2019 entitled the Patent Box Regime (Deduction) Rules. The denomination “Patent Box” is perhaps misleading as the regime may be applicable to other categories of intellectual property rights and not just to patents. The rules are applicable as from 1 January 2019 (Year of Assessment 2020) and are understood to be in line with the OECD Modified Nexus Approach for IP Regimes and compliant with the requirements of the EU Code of Conduct Group.
The Rules provide a deduction in terms of Article 14 (1) (p) of the Income Tax Act (the Act) against the taxable income in terms of Article 4 and 5 of the Act derived from patents and other qualifying intellectual property rights by the beneficiaries of such rights for expenditure incurred in respect of the creation, development, improvement or protection thereof.
The deduction is calculated by means of the formula below:
95% X (Qualifying IP Expenditure / Total IP Expenditure X Income or Gains derived from Qualifying IP)
Qualifying IP includes patents that are issued, applied for or pending (provided application is eventually successful), other intellectual property assets protected by national, European or international law (including those related to plants and genetic material, plant or crop protection products or orphan drug designations but excluding marketing related IP assets), utility models or software protected by copyright under national or international law a well other non-obvious, useful or novel assets similar to patents belonging to certain smaller entities, as certified by Malta Enterprise.
Qualifying IP Expenditure consists of expenditure incurred (directly or subcontracted) by the beneficiary for or in or related to the creation, development, improvement or protection of the IP and expenditure incurred by the beneficiary. The Qualifying IP Expenditure may not exceed the Total IP Expenditure
Income or gains derived from Qualifying IP shall comprise the total income and gains derived from the use, enjoyment and employment of such IP including royalty or similar income, advances and similar income, any sum paid for the grant of a licence or similar empowerment to exercise rights connected to the IP, compensation for infringements and such other similar or related income derived from the after deducting allowable expenditure determined on the basis of a Transfer Pricing method in line with the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Total IP Expenditure comprises expenditure directly incurred in the acquisition, creation, development, improvement or protection of the Qualifying IP.
Application of the deduction is available on the request of the taxpayer subject to the satisfaction of the requirements set out in the Rules are satisfied. These requirements include that the activities (such as research, experimenting, testing, design and development) leading to the creation of the creation development, improvement or protection of the Qualifying IP must be at least partially carried out by the beneficiary who must owner in whole or in part of the IP or hold an exclusive license in respect thereof. The Qualifying IP must be granted legal protection in at least one jurisdiction. In addition, the beneficiary must maintain substance commensurate with the type of activity being carried out in the relevant jurisdiction in respect of the Qualifying IP.