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The Exemption on Royalties Derived from Patents Rules - Malta |
July 26, 2012
Legal Notice 429 of 2010 introduced the ‘Exemption on Royalties derived from Patents Rules’[1] (the Rules) issued (as subsidiary legislation) under the Malta Income Tax Act (Chapter 123 of the laws of Malta).
The main scope of this legislation is to create a fiscal incentive (in the form of an exemption from income tax) available to all persons[2] (individuals and enterprises) that own the rights to patented intellectual property and are receiving income in the form of royalties (or other similar income there from).
The Rules apply to royalties and similar income derived on or after the 1st day of January, 2010 from qualifying patents in respect of inventions.[3] A ‘qualifying patent’ is defined by the Rules as being “...a patent, which is registered in Malta or elsewhere, in relation to which the research, planning, processing, experimenting, testing, devising, designing, developing or similar activity leading to the relevant invention was carried out in Malta or elsewhere”. It should be noted that for a registered patent to be deemed as a ‘qualifying patent’ under these Rules, the patent does not necessarily have to be registered in Malta as long as the same invention is considered patentable under Maltese Law.[4] Moreover, it also does not matter whether or not the research leading to the relevant invention was carried out in Malta or elsewhere.
Rule 3 establishes the exemption (subject to certain exceptions) under which royalties or similar income derived by a person from such ‘qualifying patents’ are exempt from income tax in Malta. The phrase ‘royalties or similar income’ includes any sum paid for the grant of a license to exercise rights under a qualifying patent. The ‘exceptions’ to the fiscal incentive in question emerge from the two provisos in rule 3 of Legal Notice 429 of 2010 and the Authority expands on these in the Guidelines as follows: “Any person (individual or enterprise) receiving royalty payment or similar income for granting, through a licensing agreement or similar agreement, the exploitation of knowledge protected under a qualifying patent in terms of the [Rules] may opt to have any such income exempt from tax as long as all the following conditions are adhered to:
1. In the case where the owner of the patent is an individual; the individual must have been engaged in carrying out, solely or together with another persons, the research, planning, processing, experimenting, testing, devising, designing, developing or other similar activity leading to the invention which is the subject of the qualifying patent.
2. In any case, the license must be [granted] to an enterprise for using the patent in a productive economic activity, such as manufacturing, software development and data processing.”
The Rules also explain the procedure for applying for and obtaining the exemption mentioned above. Applicants must first obtain a ‘determination’ issued by Malta Enterprise (being the authority responsible for administering the law in question[5]) - the ‘Corporation ... describing the particular invention, and confirming that it has received to its satisfaction all information and documentation requested thereby relative to the particular patent and the invention to which it refers and that after making such ascertainment as it considered necessary, it is satisfied that the particular invention to which the patent refers is in existence and is not in breach of any public policy objectives of Malta[6].
The Guidelines issued by the Corporation[7] state that this determination shall take the form of an ‘Entitlement Certificate’ which is valid for up to three years after which the applicant may resubmit an application for renewal. The Guidelines also state that the applicant will be required to submit declarations that the arms length principle has been respected in the transaction and that to his knowledge the patent will not be utilized in activities which conflict with public policy.[8]
This determination or entitlement certificate shall be issued by the Corporation after receiving an application in this respect (available from the Corporation’s website[9]) by or on behalf of the person owning the patent in terms of the Guidelines issued by the Corporation, when:
1) The Corporation is satisfied that the application is a bona fide application;
2) That the patent and the invention to which it refers comply with the provisions of the Rules,; and
3) After it has obtained all such information and documentation and made such ascertainment as it has considered necessary for this purpose.[10]
Once the Entitlement Certificate has been issued by the Corporation, the applicant will need to submit to the Commissioner of Inland Revenue a copy of the same in respect of every qualifying patent relative to income in respect of which the exemption in question is claimed.[11] Evidence of the said determination (i.e. a copy of any such Entitlement Certificate) shall be submitted to the Commissioner together with the tax return, in such manner as the Commissioner may require, for every year of assessment in respect of which the exemption is claimed.[12] The Guidelines also mention that the applicant must submit to the Commissioner of Inland Revenue (on an annual basis)[13] a declaration that the documentation and information submitted to Malta Enterprise on the basis of which the Entitlement Certificate was issued are still valid and current.[14]
The Guidelines issued by the Corporation in January 2011 elaborate further on the requirements for obtaining the exemption in question.[15]
1 Subsidiary Legislation 123.117
2 As defined in Article (1) of the Maltese Income Tax Act (Chapter 123 of the Laws of Malta).
3 Rule 1(2)
4 Vide Article 2.2 of the guidelines issued by the Corporation - the ‘Guidelines’ - (available at http://support.maltaenterprise.com/Documents/R&D-Royalties/guidelines.pdf)
5 Together with the Inland Revenue Department.
6 Article 4 of the Guidelines.
7 Vide footnote No. 4.
8 Article 4.1 of the Guidelines.
9 http://maltaenterprise.com/
10 Rule 5 of the Rules.
11 Rule 4(1) of the Rules.
12 Rule 4(2) of the Rules.
13 i.e. together with a copy of the Entitlement Certificate.
14 Article 4.3 of the Guidelines.
15 Vide footnote No. 4.
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The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance. |
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