Incentivised Royalty-Routing via Malta
Consistent with the Maltese legislator’s ongoing drive to bolster the island’s profile as an intellectual property holding jurisdiction and to motivate further investment in research and development by enterprises whilst encouraging and supporting the exploitation of intellectual property, Malta’s income tax legislation provides for an outright exemption on royalty income derived from eligible patents, in respect of qualifying inventions.
As such, Maltese law provides for attractive tax-efficient royalty-routing structures whereby taxpayers are afforded the unique possibility to secure a tax neutral position within the European Union on qualifying royalties coupled with the ability to effect outbound payments and dividends free of withholding taxes regardless of the recipient’s country of residence.
Malta’s income tax legislation provides for an outright exemption on royalty income derived from eligible patents, in respect of qualifying inventions
The scope of the incentive is clearly to protect intellectual capital and ensure that those members of society that can contribute to future development are motivated to support and seek the creation of new knowledge. Moreover, the exemption aims to encourage individual researchers to exploit intellectual property through the licensing of patented knowledge.
the exemption aims to encourage individual researchers to exploit intellectual property through the licensing of patented knowledge
In terms of the incentive, all persons (as defined in Article 2(1) of the Income Tax Act, Chapter 123 of the Laws of Malta) (individuals and undertakings) that own the rights to patented intellectual property and are receiving income in the form of royalties (or other similar income therefrom), through a licensing agreement or similar instrument, from the exploitation of knowledge protected under a qualifying patent in terms of the Exemption on Royalties Derived from Patents Rules (S.L. 123.117), may be eligible to have any such income exempt from tax to the extent that the following conditions subsist:
In the case where the owner of the patent is an individual; such individual must have been engaged in carrying out, solely or together with other person/s, 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.
At any rate, the licence must be granted to an enterprise for using the patent in a productive economic activity, such as manufacturing, software development and data processing.
The tax exemption applies regardless of the place where the patent is registered and of where any relevant research and development resulting in the qualifying patent may have been carried out and may be availed of where there is an active trade of licensing of several patents as well as in the case of passive receipt of royalties from patents.
Moreover, the distribution of dividends from any such exempt profits of a company is also exempt from tax in the hands of its shareholders, which exemption also extends to subsequent distributions to higher-tier shareholders to the extent that the exempt profits are distributed by way of dividends.
A patent granted in Malta or overseas is considered as eligible as long as the same invention is considered patentable under Maltese Law in terms of the Patents and Designs Act (Chapter 417 of the Laws of Malta) or is the result of Fundamental Research, Industrial Research or Experimental Development which terms are defined as follows:
refers to experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any direct practical application or use in view;
is planned research or critical investigation aimed at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services. Accordingly, Industrial Research comprises the creation of components of complex systems, which is necessary for the industrial research, notably for generic technology validation, to the exclusion of prototypes as covered by ‘experimental development’;
entails the acquiring, combining, shaping and using of existing scientific, technological, business and other relevant knowledge and skills for the purpose of producing plans and arrangements or designs for new, altered or improved products, processes or services.
The incentive is administered by Malta Enterprise and the Inland Revenue Department.
Application procedures to benefit from this incentive are relatively uncomplicated and broadly comprise the submission of a statutory application form (together with the applicable supporting documentation) to Malta Enterprise, whereby, summarily, the applicant is required to declare and confirm, inter alia, that:
- income shall be generated under market conditions and at arm’s length when related undertakings are involved;
- the licensor of the patent is using the licensed knowledge in a productive economic activity; and
- the patented knowledge / invention qualifies as such in terms of applicable rules.
A separate application will be required for each licensing agreement or similar agreement notwithstanding the fact that a previous approval has been granted to the relative patent holder.
an Entitlement Certificate will be issued in favour of the applicant specifically stipulating that any royalty payments received by the patent holder from the relative licensee are to be treated in terms of the incentive
To the extent that Malta Enterprise is able to corroborate that the applicant, the patent and the licensing agreement are aligned with the applicable rules, an Entitlement Certificate will be issued in favour of the applicant specifically stipulating that any royalty payments received by the patent holder from the relative licensee are to be treated in terms of the incentive.
The said Entitlement Certificate has a validity of up to three years, which period may be renewed upon a fresh application.
Context – Malta’s Strategic Offering
The royalty exemption for income derived from patents is complemented by various other aspects of Malta’s tax system which allow for the tax efficient structuring of intellectual property holding and licensing activities
The royalty exemption for income derived from patents is complemented by various other aspects of Malta’s tax system which allow for the tax efficient structuring of intellectual property holding and licensing activities through Malta, including:
- No withholding taxes on outbound dividends, interest or royalties paid from Malta;
- Potential mitigation of source country withholding taxes on royalties paid to Malta under the EC Interest and Royalties Directive or one of Malta’s 60+ tax treaties;
- An optional step-up in the base cost of assets from historic cost to fair market value for persons transferring their residence to Malta, as well as for companies formed by way of an EU cross-border merger;
- Possible exemption from capital gains derived from a disposal of intellectual property in intragroup transfers and upon the migration out of Malta of Maltese intellectual property companies.
Since its introduction into the Maltese legislative framework, the tax exemption pertinent to qualifying royalty income has proven to be especially relevant within the iGaming, software development and e-commerce sectors, but appears to have been most prolific in the pharmaceutical industry, particularly in the light of the Roche-Bolar Exemption (implemented in 2002), which allows firms to experiment on patented drugs before the patent expires such that they will then be ready to market immediately upon the expiration of the patent, allowing an efficiency which is unavailable to manufacturers in countries that do not apply the said Roche-Bolar exemption.
These incentives, coupled with a sound legal and regulatory framework, and various additional tax and non-tax considerations, clearly reinforce Malta’s position as a key jurisdiction for the channelling of royalties
These incentives, coupled with a sound legal and regulatory framework, and various additional tax and non-tax considerations, clearly reinforce Malta’s position as a key jurisdiction for the channelling of royalties and for enterprises looking to undertake research and development activities, with a potentially leading role to play in this sector.
This Article was first published on Money Magazine, 2014.