Intellectual Property

Patent box

Malta introduced patent box deduction rules, which allow taxpayers actively involved in the development and exploitation of IP to opt for the application of special rules on calculating deductions (“Patent Box Deduction”).

Income and expenses which fall under the definition of ‘Qualifying IP’ will be eligible for the Patent Box Deduction. Such Qualifying IP include the following intangibles (if these are granted legal protection in at least one jurisdiction):

• patents
• non-patent IP protected by legislation
• orphan drugs legislation, utility model and software protected by copyright
• IP assets that are non-obvious, useful, novel and that have features similar to those of patents (available to small entities only, i.e. entities with group turnover of up to €50 million and gross IP revenue of up to €7.5 million).

It is important to note that marketing-related IP assets such as brands, trademarks, and tradenames do not fall under the Qualifying IP definition and hence may not benefit from the patent box deduction. Furthermore, companies which activity consists solely of holding and marketing IP without development will not benefit from the patent box deduction either.

Who is eligible?

The patent deduction rules are available to taxpayers that are involved in activities of exploitation of IP, provided that they meet the following criteria:

• they should be able to demonstrate that they carry out all important functions in relation to creation, development, improvement or protection of the qualifying IP themselves solely or in cooperation under the terms of a cost sharing agreement, either directly or via;
• a permanent establishment situated in a jurisdiction other than that of the taxpayer (only if the income of permanent establishment is subject to tax in the country of residence of the taxpayer); or
• other enterprises (and employees of other enterprises) provided that such functions are performed under the specific directions of the entity claiming the benefit;
• they are the legal owners of the qualifying IP or hold an exclusive licence in respect of such IP. If the IP is developed under a cost sharing agreement, the entity must own a share in the ownership of the qualifying IP or be the holder of an exclusive licence;
• they are specifically empowered to receive income from qualifying IP; and
• they have sufficient level of substance in the jurisdictions where activities relating to the qualifying IP are being carried out.

How do the patent box rules work?

Taxpayers are allowed to deduct their expenses related to qualifying IP in terms of more favourable conditions than the terms provided under the general rules.

The patent box deduction is calculate using the following formula:

95% x (Qualifying IP expenditure/Total IP expenditure) x Income/Gains from qualifying IP