Italy: Updated, revised R&D tax credit system

Italy: Updated, revised R&D tax credit system

The 2020 Budget Law revised the Italian research and development (R&D) tax credit system.

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The new R&D tax credit system operates only for the fiscal year following that in progress on 31 December 2019 (which is 2020 for calendar-year taxpayers). The previous R&D tax credit system (that was to have applied up to and including fiscal year 2020) thus has ended one year early.


Eligible taxpayers

Taxpayers eligible for the R&D tax credit system include enterprises that are residents in Italy and by Italian permanent establishments of foreign enterprises, provided they are not involved in insolvency proceedings and have not been placed under any “bans.” The use of the tax credit is conditional on the enterprise: (1) complying with industry rules on occupational health and safety; and (2) paying its workers’ national insurance and social security contributions—these two new requirements have not yet been clearly defined.


Eligible activities

The new R&D tax credit rewards three main categories of activity:

  • Category A: Fundamental research, industrial research or experimental development in the areas of science or technology
  • Category B: Technological innovation in areas (other than those listed immediately above) that could contribute to the development of new or substantially enhanced products or production processes
  • Category C: The creation of aesthetic and other designs—with a view to planning and producing new products and samples—by firms operating in various product sectors (textiles, fashion, footwear, eyewear, gold, furniture and furnishings, ceramics)


Eligible expenses

The new R&D tax credit is predicated on specific categories of expenses, and the following types of costs are eligible:

  • Personnel costs of researchers and technicians
  • Depreciation charges and leasing of tangible assets and software
  • Contracted research
  • Depreciation on the purchase of industrial or biotech inventions from third parties (for Category A activities only)
  • Advisory and equivalent services related to the eligible activities
  • Costs of materials and supplies used in the eligible activities

These expenses must always follow the general rules—they must be the actual costs and be business-related and reasonable.


Size of the tax credit

The size of the tax credit depends on the category of research:

  • Category A activities—the tax credit is 12% of the cost base, net of any subsidies or contributions received for the same eligible expenses. The maximum tax credit is €3 million.
  • Category B activities—the tax credit, depending on the type of innovation, is 6% or 10% of the relevant cost base, net of any subsidies or contributions received for the same eligible expenses. The maximum tax credit is €1.5 million.
  • Category C activities—the tax credit is 6% of the cost base, net of any subsidies or contributions received for the same eligible expenses. The maximum tax credit is €1.5 million.


Tax credit features

The tax credit can be used to pay different kind of liabilities (e.g., income taxes, VAT, social security contributions), in three equal annual instalments, starting from the financial year subsequent to that in which it has accrued, subject to certain certification requirements.

It is excluded from the direct tax base and can be used with other forms of tax relief, on condition that the combined tax relief is not higher than the expense. In no circumstances can the tax credit be sold or transferred.


Compliance

Any taxpayer seeking to claim the R&D tax credit must obtain a certificate from an auditor, attesting that the taxpayer has actually incurred the eligible expenses and that they match those indicated in the accounting records. Enterprises that are not required by law to undergo a statutory audit can add up to €5,000 of the certification costs to the tax credit.

The taxpayer must also compile and keep a technical report illustrating the purposes, substance, and results of the eligible activities pursued in each financial year in relation to the projects or sub-projects underway.

Finally, enterprises that claim the tax credit must notify the Ministry of Economic Development of this action (merely so that it can acquire the information needed to estimate the progress, take-up and efficacy of the new measures).


Tax ruling

In the event of objective uncertainty as to how to interpret the tax measures, the taxpayer can request a ruling from the Italian tax authority. Enterprises can apply for a technical opinion from the Ministry of Economic Development if they have concerns about whether their activities qualify for the tax credit.

Read a July 2020 report [PDF 154 KB] prepared by the KPMG member firm in Italy

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