The eligibility of the pass through costs for the patent box

Costs incurred vis-à-vis third parties and recharged to the investor by a related company (so-called pass through) are eligible for tax relief under the patent box regulation currently in force (Article 6 of Law Decree No. 146/2021). In more detail, in the tax ruling no. 159/2023 the Internal Revenue Service examines the case of the petitioning company which is part of a group where, through its “digital hub”, it carries out the research and development activities necessary for the creation of the software underlying the digital platform that the company itself provides other subsidiaries with. Through its digital hub, it also makes use of consulting services provided by third parties, to whom the digital hub provides all necessary information about the service to be administered. The group's digital hub identifies suppliers and also handles the signing of contracts. Once the service is completed, the digital hub pays the supplier for the service performed and it charges the relevant cost to the petitioning company, without charging a mark - up. The applicant company represents that it bears itself the risk of the activity performed, the main one being the possibility that the platform development and improvement activities it carries out will not lead to the achievement of the target results. In such a case, being the entity responsible for the investment and its management, the company would bear the subsequent occurrence of an economic prejudice, which is the non-conformity of the investments made to the results achieved. The eligibility of pass through costs for the patent box regime The Internal Revenue Service observes that since the patent box regime currently in force and the one previously in force share the same rationale, i.e. the granting of the benefit in favor of the enterprises that have carried out the research and development activities, the benefit also extends to pass through costs, in accordance with the provisions of Action 5 of the BEPS Project (“Action Plan on Base Erosion and Profit Shifting”), which provided for the possibility of recharging, within the framework of intra-group agreements, costs incurred by group parties without producing a negative effect on the relief. This can happen as long as the condition that the costs incurred through a related party towards a third party are a mere chargeback, is met. Such condition is in compliance with the aforementioned Action 5, which states that “when a payment is made through a related party to an unrelated party without any margin, the payment will be included in qualified expenses” (see Letter F, para. 50 of Action 5). The answer would seem to lead to the conclusion that, otherwise, in the scenario where, in addition to the cost, a mark - up is charged, the former could not be considered to relate to an eligible activity under Article 6(4) of the Law Decree No. 146/2021. It should be said that, in the definition of “relevant activities” for the purposes of the benefit at stake, the patent box would seem to have similarities with the research and development tax credit: indeed with regard to the former, paragraph 4 of Art. 6 of the Law Decree no. 146/2021 clarifies that the provisions of paragraphs 1, 2 and 3 apply on the condition that the persons exercising the option under paragraph 1 carry out the research and development activities, including research contracts entered into with companies other than those that directly or indirectly control the company, are controlled by it or are controlled by the same company that controls the company or with universities or research organizations and equivalent bodies, aimed at the creation and development of the goods referred to in paragraph 3 (i.e. copyrighted software, industrial patents, designs and models used directly or indirectly). The paragraph 3.2 of the February 15, 2022 Provision of the Internal Revenue Service specifies that “relevant activities also include those carried out by the investor through research contracts entered into with universities, research organizations and similar bodies, as well as with companies other than those that directly or indirectly control the company, are controlled by it or are controlled by the same company that controls the company”. Point 3.4 below, in the version in force after the amendments made by Measure No. 52642 of February 24, makes the eligibility of the expenses in question on the condition that they are carried out “in laboratories, or facilities, located in the territory of the Italian state, in states belonging to the European Union, in states belonging to the European Economic Area with which Italy has entered into an agreement that ensures an effective exchange of information, or in countries that allow an adequate exchange of information pursuant to the Ministerial Decree of September 4, 1996. If the research and development activity is carried out by a commissionaire, the latter, as well as any sub-commissionaire, if any, must be tax resident in the states referred to in the previous sentence”. As for the research and development tax credit, with regards to the benefit regulated by Law No. 160/2019 (Paragraphs 198 - 209, amending the research and development tax credit referred to in Article 3 of the Law Decree No. 145/2013) “the expenses for extra muros research contracts having as their object the direct performance by the commissioning party of research and development activities eligible for the tax credit” are brought under the scope of the costs eligible for the tax credit. The same lett. c) specifies that the contracts in question (extra muros) can be stipulated “with universities and research institutes as well as innovative start-ups, based in the territory of the State”. The same provision also specifies that, in the case of contracts entered into with foreign entities, these expenses are eligible on the condition the entities commissioned to carry out the projects related to the research and development activities eligible for the tax credit, even if they belong to the same group as the commissioning company, are tax resident or located in other EU member states or in states party to the EEA agreement or in states included in the list referred to in the Ministerial Decree of September 4, 1996 (so-called white list). It should be mentioned that the new Circular on the patent box (No. 5/E, published on Feb. 24) takes up the answer to the interpellation request at issue, explaining that, for the purposes of the patent box relief, it is necessary that the research and development activities are carried out under the technical direction of the investor, using the latter's personnel. Given that, within the context of the legislation currently in force, with the Budget Law 2022 (Article 1, paragraph 10, Law no. 234/2021), the prohibition on the cumulation of the current patent box regime with the research and development tax credit has disappeared, guaranteeing towards the investor - for the same investment in relevant and eligible activities - access to both benefits, it would not seem clear whether, in the situation described above, pass-through costs are eligible to access not only the patent box but also the research and development tax credit.