How Does the IP Tax Deduction Work?
Intellectual property can represent a significant part of the value created by innovative businesses, particularly those operating in technology, software, pharmaceuticals, life sciences and other research-driven industries.
Malta’s Patent Box Regime provides a fiscal incentive for businesses deriving income from qualifying intellectual property developed through genuine research and development activities.
The regime is established by the Patent Box Regime (Deduction) Rules, 2019, Subsidiary Legislation 123.194. It covers income arising from patents, certain similar intellectual property rights and qualifying copyrighted software, while particular provisions also apply to intellectual property developed by small entities.
Rather than providing an automatic deduction simply because a business owns intellectual property, the Patent Box links the available deduction to the relationship between the taxpayer’s qualifying IP expenditure and its total expenditure relating to the relevant intellectual property.
Let’s examine how Malta’s Patent Box Regime works, what intellectual property can qualify, how qualifying expenditure is determined, and what businesses should consider when assessing whether the regime could apply to their activities.
What Is Malta’s Patent Box Regime?
Malta’s Patent Box Regime establishes a fiscal framework for income arising from qualifying intellectual property. Under the regime, a qualifying taxpayer may deduct a percentage of relevant income from taxable income.
The deduction is adjusted according to the proportion obtained by dividing qualifying IP expenditure by the total expenditure relating to the particular IP. This link between expenditure, intellectual property and the resulting income is important.
The Malta Enterprise Patent Box Deduction Guidelines expressly state that the deduction is linked to real and substantial R&D activity carried out by the particular person generating the IP. Consequently, Patent Box eligibility requires consideration not only of the legal nature of the IP, but also of how it was created or developed, the R&D activities undertaken and the expenditure incurred.
What Intellectual Property Qualifies for Malta’s Patent Box?
Not every form of intellectual property falls within the Patent Box Regime. Qualifying IP can include the following categories.
Patents
Patents can constitute qualifying intellectual property.
The Malta Enterprise Patent Box Deduction Guidelines state that where an IP right is protected by a patent, patents issued by recognised national or international bodies may be accepted. Where there are concerns that the issuing body may not have undertaken a substantive examination of novelty and inventive step, Malta Enterprise may require further evidence or an independent review.
Utility Models and Certain Other Protected Rights
The regime can also extend to certain intellectual property rights protected under national, European or international legislation.
The official guidelines specifically address utility models, orphan-drug designations and certain protected rights relating to human and veterinary products, plants and genetic material, as well as plant or crop-protection products. Applicable evidence and R&D requirements must nevertheless be satisfied.
Copyrighted Software
Copyrighted software can constitute qualifying IP, but copyright protection alone does not make software eligible for the Patent Box.
According to the Malta Enterprise Patent Box Deduction Guidelines, the software must result from research and development activities aimed at resolving scientific or technological uncertainty.
The applicant needs to demonstrate that the creation of the relevant software or component:
- required the applicant to resolve scientific or technological uncertainty whose solution was not readily available or deducible by a competent professional working in the field; and
- constituted the applicant’s own intellectual creation developed through a systematic process of investigation, experimentation and innovation aimed at addressing that uncertainty.
The distinction is significant for software businesses.
The official guidelines provide an example in which copyright-protected software developed using existing knowledge does not qualify, while a software component involving new algorithms created to overcome scientific or technological uncertainty may qualify.
Businesses should therefore assess the underlying R&D involved in developing their software rather than assuming that proprietary or copyrighted software automatically qualifies.
Can Small Entities Qualify for Malta’s Patent Box?
The Patent Box is not restricted to businesses holding conventional registered patents.
The Rules also contain provisions under which small entities, as defined in the applicable legislation, may access the Patent Box in respect of qualifying intellectual property based on an invention that could be patented.
Where a small entity applies in respect of IP that has not been formally registered, the applicant is required to provide an independent patent search conducted by a competent third party, such as a patent agent.
The supporting documentation should demonstrate that the invention was novel, non-obvious, and useful up to and on the date when it began to be used, produced, or marketed. The applicant must also demonstrate that the IP asset was developed through a structured approach typically associated with R&D activities.
This can potentially make the Patent Box relevant to smaller innovation-driven businesses that have developed eligible inventions even where the relevant IP is not formally registered, subject to the applicable conditions and Malta Enterprise determination.
Which Intellectual Property Does Not Qualify?
An important distinction within the Patent Box Regime is between qualifying innovation-related IP and intellectual property used primarily for marketing purposes.
The current Malta Enterprise Patent Box Deduction Guidelines expressly state that marketing-related IP such as trademarks, brands and image rights, together with other intellectual property used to market goods or services, is not considered qualifying IP. Therefore, possessing commercially valuable intellectual property does not itself establish eligibility for the Patent Box.
The nature of the IP and the R&D activities associated with its creation or development must be considered.
When Must the Qualifying IP Have Been Acquired?
According to the current Malta Enterprise Patent Box Deduction Guidelines, qualifying intellectual property must have been acquired by the company after 1 January 2019.
However, the R&D activity resulting in that intellectual property may have been undertaken before this date.
Businesses with internally developed or externally acquired intellectual property should therefore assess how this requirement applies to the circumstances surrounding the particular IP asset.
Why Is Research and Development Important?
R&D lies at the centre of the Patent Box framework.
The official Malta Enterprise Patent Box Deduction Guidelines state that the allowable deduction is linked to real and substantial R&D activity carried out by the relevant person in generating the qualifying IP.
The official Maltese Government service page similarly describes eligibility in terms of an entity that has undertaken R&D and is already deriving profits from the products or services developed.
A business considering the Patent Box should therefore be able to identify the R&D activity that resulted in the IP and provide appropriate evidence regarding that activity and the expenditure associated with it.
What Is Qualifying IP Expenditure?
Qualifying IP expenditure is particularly important because it directly influences the Patent Box deduction.
According to the Malta Enterprise Patent Box Deduction Guidelines, qualifying IP expenditure consists of expenditure incurred directly by the beneficiary in the creation, development, improvement or protection of the qualifying IP, together with expenditure incurred on relevant activities subcontracted to persons who are not related to the beneficiary.
What Costs Can Count as Qualifying IP Expenditure?
Costs identified in the official guidelines include:
- wages of researchers, technicians and other supporting personnel to the extent and for the period they are directly engaged in the research project;
- materials used for the particular research project;
- utilities apportioned according to an appropriate recognised methodology;
- depreciation costs for plant, machinery and equipment incurred for and during the research project;
- qualifying research-project costs outsourced to an unrelated person;
- costs associated with validating and defending the IP right, including relevant tests and study reports; and
- other costs that can be clearly demonstrated to be directly linked to the research activity.
Correctly identifying and documenting these costs is therefore an important element when seeking a Patent Box determination.
What Is Total IP Expenditure?
Total IP expenditure is not necessarily the same as qualifying IP expenditure.
The Malta Enterprise Patent Box Deduction Guidelines state that total IP expenditure includes qualifying IP expenditure before any uplift provided for under the Rules.
It also includes qualifying expenditure subcontracted to or acquired from a related company and the acquisition costs of third-party IP assets required to develop the qualifying IP asset.
The distinction matters because the relationship between qualifying IP expenditure and total IP expenditure is used when determining the Patent Box deduction.
How Is Malta’s Patent Box Deduction Calculated?
The Patent Box provides for a deduction determined by reference to income derived from qualifying IP and the ratio between qualifying IP expenditure and total IP expenditure.
Accordingly, businesses should not interpret the Patent Box as automatically excluding a fixed percentage of all IP-related income from taxation.
In simplified terms, the calculation can be represented as:
95% × (Qualifying IP Expenditure ÷ Total IP Expenditure) × Income or Gains Derived from Qualifying IP
The expenditure ratio therefore plays an important role in determining the amount of income benefiting from the deduction.
A Simplified Patent Box Calculation Example
Assume, purely for illustration, that a business has:
- income or gains from qualifying IP of €1,000,000; and
- an applicable qualifying-to-total IP expenditure ratio of 80%.
Applying the 95% factor to these simplified assumptions produces:
€1,000,000 × 80% × 95% = €760,000
The resulting illustrative Patent Box deduction would therefore be €760,000.
*This example is provided solely to illustrate the mechanics of the calculation. The actual deduction must be calculated according to the Patent Box Regime (Deduction) Rules and the particular facts, expenditure and income of the taxpayer. For this reason, it is preferable not to describe Malta’s Patent Box as automatically producing a particular effective tax rate.
What Documentation Is Required for Malta’s Patent Box?
Businesses considering the Patent Box should pay particular attention to documentation.
A taxpayer wishing to benefit from the regime must request a determination from Malta Enterprise. The application must include documentation confirming the research activity undertaken and the qualifying IP expenditure being claimed.
General Supporting Documentation
- documentation confirming the eligibility of the IP asset;
- copies of applicable IP rights;
- evidence supporting the research activity;
- CVs of employees involved in developing the IP and their respective roles;
- timesheets, invoices, progress reports and test results supporting the structured research approach; and
- a breakdown of total and eligible costs certified by an independent Certified Public Auditor as representing the actual costs incurred in creating the IP asset.
Additional requirements apply in particular circumstances. For copyrighted software, the Maltese Government’s service guidance requires confirmation from an independent system auditor approved by the Malta Digital Innovation Agency and, where relevant, from a technically competent third party addressing the relevant characteristics of the software and its development. Small entities applying in respect of qualifying IP that has not been formally registered are required to provide the independent patent-search evidence described above.
How Do You Apply for the Malta Patent Box Deduction?
A taxpayer intending to benefit from the Patent Box must request a determination of eligibility from Malta Enterprise.
The request is made using the appropriate application form and must be accompanied by documentation supporting the research activities undertaken, the eligibility of the IP and the qualifying expenditure claimed.
Malta Enterprise states that applications must be formally submitted to the Corporation through its client portal and that applications not submitted through the portal will not be processed.
Following its determination, Malta Enterprise issues a certificate confirming the eligibility of the IP and the qualifying expenditure.
How Long Is a Patent Box Determination Valid?
A determination issued by Malta Enterprise has a validity of not more than five fiscal years and cannot extend beyond the beneficiary’s legal right over the relevant IP asset.
The guidelines also provide that the certificate may be extended in the case of qualifying IP with a longer protection period, while remaining subject to the applicable limitations.
A taxpayer holding an eligibility determination may also request an annual revision of the qualifying-expenditure value where additional qualifying expenditure has been incurred in relation to the same IP or an updated version of it.
How Long Must Patent Box Records Be Retained?
Record-keeping continues to be important after an application has been determined.
The Malta Enterprise Patent Box Deduction Guidelines require information and documentation relating to the IP asset, including eligible costs, to be retained for at least ten years after the Year of Assessment in which the Patent Box provisions are last utilised in respect of that asset. Relevant information and documentation must continue to be maintained irrespective of subsequent events involving the IP asset, such as its disposal or sale.
Businesses considering the Patent Box should therefore ensure that their R&D, accounting and IP records are sufficiently robust to support both the original determination and the subsequent use of the regime.
Is Malta’s Patent Box Relevant to Software and Technology Companies?
The express inclusion of qualifying copyrighted software means the regime can be relevant to innovative technology and software businesses.
However, developing proprietary software is not sufficient in itself.
The relevant software or software component must satisfy the Patent Box requirements, including the R&D conditions concerning the resolution of scientific or technological uncertainty. The applicant must also provide the applicable evidence concerning how that software was created.
Technology businesses considering the regime should therefore identify which elements of their development activities involve qualifying R&D rather than assuming that their entire software portfolio falls within the Patent Box.
Malta’s Patent Box vs Other IP Tax Benefits
The Patent Box should be distinguished from Malta’s wider tax treatment of expenditure relating to intellectual property.
The Patent Box specifically concerns income arising from qualifying IP and links the available deduction to qualifying and total expenditure relating to that IP.
Other Maltese tax rules and incentives can be relevant to businesses acquiring, developing and exploiting intellectual property.
For a broader overview of these considerations, including deductions for expenditure relating to IP and other incentives associated with intellectual property and R&D, read our separate guide on Maltese Tax Benefits for Patents in Malta.
How Can We Assist?
Navigating Malta’s IP tax incentives requires a strategic approach that maintains regulatory compliance while maximising available benefits. Our expertise can guide you through this process.
We support businesses throughout the patent registration process in Malta and help assess whether their IP may qualify under the Patent Box Regime. Our services may include advising on eligibility for Maltese tax incentives, managing patent applications and registrations with the Maltese authorities, and overseeing the validation of European patents.
If your business develops proprietary technology, software, patented inventions or other innovative intellectual property and you would like to assess whether Malta’s Patent Box Regime may be relevant, contact us today to discuss your circumstances.
Frequently Asked Questions (FAQ) About Malta’s Patent Box Regime
What is Malta’s Patent Box Regime?
Malta’s Patent Box Regime is a fiscal regime established under the Patent Box Regime (Deduction) Rules, 2019 for income arising from patents, certain similar intellectual property rights and qualifying copyrighted software. The amount of the deduction is linked to qualifying IP expenditure relative to total expenditure associated with the particular IP.
What intellectual property can qualify for Malta’s Patent Box?
Qualifying IP can include patents, utility models, certain protected intellectual property rights and qualifying copyrighted software. Specific provisions also exist for qualifying IP developed by small entities.
Does copyrighted software qualify for Malta’s Patent Box?
Copyrighted software can qualify, but copyright protection alone is insufficient. The Malta Enterprise Patent Box Deduction Guidelines require the relevant software to result from R&D aimed at resolving scientific or technological uncertainty and to satisfy the other applicable conditions.
Do trademarks and brands qualify?
No. The current Malta Enterprise Patent Box Deduction Guidelines state that marketing-related IP, including trademarks, brands, image rights and other intellectual property used to market goods or services, is not considered qualifying IP.
Does having a registered patent automatically qualify a company?
No. Eligibility depends on more than owning a patent. The regime links the available deduction to real and substantial R&D, qualifying IP, relevant expenditure and associated income. A taxpayer seeking the benefit must also obtain the applicable determination from Malta Enterprise.
How is the Patent Box deduction calculated?
The deduction is determined by reference to income or gains from qualifying IP and the proportion between qualifying IP expenditure and total expenditure associated with that IP, applying the factor specified under the Patent Box Rules. Consequently, the maximum percentage should not be interpreted as automatically applying to all of a company’s IP-related income.
Can a small entity qualify without a registered patent?
The regime contains provisions for qualifying IP developed by small entities. Where the IP is not formally registered, the current official guidance requires an independent patent search demonstrating that the invention is novel, non-obvious and useful, together with evidence of the structured R&D approach used to develop the asset.
Which countries account for the largest number of foreign-controlled enterprises in Malta?
The largest number of foreign affiliates operating in Malta were ultimately controlled by residents of the United Kingdom, Italy, the United States, and Germany.
Who determines whether IP is eligible?
A taxpayer wishing to benefit from the Patent Box must request a determination from Malta Enterprise. Supporting information regarding the IP, research activity, and qualifying expenditure must accompany the request.
How long is a Patent Box determination valid?
A determination is valid for no more than five fiscal years and cannot extend beyond the beneficiary’s legal right over the relevant IP asset. The official guidelines also provide for possible extension where the IP has a longer protection period, subject to the applicable limitations.
How long must Patent Box documentation be retained?
The official guidelines require relevant information and documentation concerning the IP asset and eligible costs to be retained for at least ten years after the Year of Assessment in which the Patent Box provisions are last used in respect of that asset.
Disclaimer
*This article is intended for general information purposes only and does not constitute legal, tax or professional advice. Eligibility for, and the tax consequences of, Malta’s Patent Box Regime depend on the taxpayer’s particular circumstances, the relevant intellectual property, applicable expenditure and the legislation and guidance in force. Appropriate professional advice should be obtained before taking or refraining from any action based on this information.
