Eligible activities for ordinary Patent Box and recapture mechanism

The eligible expenses for the Patent Box regime (PB) that are generally qualified as "research and development" expenses, according to the provisions of Article 6, paragraph 3 of Law Decree 146/2021, are those incurred within the scope of relevant activities as defined by the Provvedimento of 15 February 2022.

These include research and development activities (limited to industrial research and experimental development), technological innovation, and design and aesthetic ideation illustrated in the Decree of 26 May 2020 (Decree), which is the implementing decree of the tax credit regime referred to in Article 1, paragraphs 198 and following of Law 160/2019, currently in force.

The reference to the Decree seems unequivocal: the relevant activities can only be those that meet the same requirements for the allocation of the tax credit. For PB purposes, however, these must be aimed at the maintenance, enhancement, protection, and increase in the value of the intangible assets for which the five-year option is exercised.

Several operational concerns have arisen: it is not easy to fit expenses aimed at maintaining and/or increasing an asset within the definitions of research and development and technological innovation set forth by the MiSE Decree. For copyright-protected software but also, and especially, for industrial patents, the major innovative efforts usually concentrate on the creation phase: once the eligible asset comes into existence and meets the requirements for legal protection, the expenses incurred from that point onward for its maintenance and enhancement can hardly be classified as:

• R&D, given the requirement that the underlying activities must pursue progress or advancement in general knowledge or capabilities in a scientific or technological field, and not merely the knowledge or capabilities of a single company (not to mention that implementation phases are generally excluded); or
• Technological innovation, given the requirement that activities must aim at the realization or introduction of new or significantly improved products or processes compared to those already developed or applied by the company.

In both cases, the activities must be characterized by a certain degree of risk of failure, depending on whether they are classified as R&D or technological innovation—something not immediately evident in the phases of development, enhancement and maintenance of an already existing asset in use.

What has been said so far is particularly relevant to the application of the PB in its "ordinary" form, that is, the 110% increase applicable on the expenses incurred after the intangible asset has come into existence. The incentive, in fact, is intended to benefit those companies that, rather than merely economically exploiting the intangible, incur expenses to "legitimize" its possession (regardless of the legal title under which the asset is used) within the so-called DEMPE functions (development, enhancement, maintenance, protection, and exploitation) defined by the OECD.

This is the key point: if the law generally refers to research and development expenses, the Provision significantly broadens the scope (in line with the old PB regime) by also including expenses related to the protection of the asset, which, although they have nothing to do with innovative activities as defined by the Decree, nonetheless demonstrate the company's commitment to "safeguarding" its competitive advantage against third-party competitors.

Relevant activities for the recapture mechanism (meccanismo premiale)

According to the recapture mechanism, it is also allowed to benefit from the extra deduction for expenses incurred upstream, aimed at the “creation” of the asset, up to the eighth tax period preceding the one in which the industrial property right is obtained.

For its application, the point 5.2 of the Provvedimento expands the relevant activities by including:

• Fundamental research (as defined by Article 2, letter a) of the Decree);
• The conception and implementation of copyright-protected software.

The expansion of relevant activities opens up several considerations. The first, more immediate one, is that, although the law (Article 6, paragraph 10-bis of Law Decre 146/2021) refers to eligible expenses for the recapture mechanism as those eligible for the "ordinary" PB (Article 6, paragraph 3), the Provvedimento expands the boundaries by including activities in addition to those already defined in the ordinary regime.

The second issue concerns the nature of the activity of "conception and implementation of copyright-protected software", which, unlike fundamental research, lacks references to the Decree. In the absence of clarifications in Circular No. 5/E of February 24, 2023, or references to other official practices, the only option is to attempt to frame its boundaries based on the available elements.

First of all, the very fact that it is explicitly defined as an additional relevant activity to those defined for the "ordinary" PB suggests that it is something different, though complementary or related. The absence of reference to the Decree, therefore, cannot be accidental: it is clear that the intention is to include in the scope of software "creation" expenses those incurred by the company for efforts related to the conception and implementation of the software, regardless of strict adherence to what is defined in the Decree in terms of R&D (which, moreover, has already been the subject of extremely stringent interpretations by the Tax authorities) and technological innovation (which must concern products or production, distribution, and logistics processes/methods). Moreover, the activities leading to the "creation" of copyright-protected software—today increasingly based on emerging technologies such as artificial intelligence – starting from the embryonic phases of its conception, inevitably stand out for a certain degree of innovation and creativity that, rightly, deserves inclusion among the eligible expenses, on par with others.