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Italy Issues Ruling on Co-Development Agreement Fees Eligible for Patent Box Regime

The Italian Tax Authority has issued Ruling No. 120 of 24 April 2020 concerning whether certain payments received under an IP co-development and license agreement qualify as payments for the right to use IP, which could qualify for the 50% exemption provided under Italy's patent box regime.

The particular case for the Ruling involves a co-development and license agreement between two companies, Company Y and Company X, regarding a patented molecule used in pharmaceuticals.  Under the agreement, Company X is entitled to receive several payments, including:

  • a payment in consideration for an exclusivity right connected to the patented molecule;
  • an up-front license fee to be paid upon the granting of the relevant regulatory authorization;
  • an up-front license fee to be paid upon the sale of the first product containing the patented molecule; and
  • a lump-sum cost contribution payment for R&D activities carried out by Company X to co-develop a protocol for pre-clinical and clinical trials for the purpose of obtaining two international regulatory authorizations.

In exchange for the R&D contribution, Company Y is granted, under the agreement, a perpetual, irrevocable, exclusive, worldwide, transferable, royalty-free license to use the intellectual property rights that may result.

The Ruling clarifies that the first three payments under the agreement can be classified as royalty payments and would be eligible for the 50% exemption under the patent box regime because payments are for the use of an existing IP. The R&D contribution, however, would not be eligible because the R&D contribution is not a payment for the right to use an existing IP and only represents a contribution for the development of new IP.

Further, the ruling clarifies that the R&D costs incurred by Company X and recharged to company Y as the R&D contribution should not be taken into account when determining the nexus ratio for the income amount eligible for the patent box regime.

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