Tax law Update – Patent Box Regime (Deduction)

Kristine Attard and Dr John Caruana  -  10/September/2019

Another tax deduction was introduced recently just last month in August through legal notice 208 of 2019, in favour of patent boxes. The deduction shall be applicable to qualifying income derived from qualifying intellectual property (IP) on or after 1 January 2019. The Maltese legislators’ intention behind it is to encourage and attract local research and development (R&D) and motivate businesses to locate IP in Malta. An overview of how such deduction (as is prescribed under Article 14(1)(p) of Malta’s Income Tax Act) is going to apply shall be demonstrated hereunder

Section 1 – What shall be deemed to be as a ‘qualifying IP’?

A ‘qualifying IP’ may refer to:

  • A patent or patents, which has/have been issued; or
  • Occurrences where an application for the issue of the patent has been made but it (the issue) is still pending – notably, if the issue of the patent is eventually rejected, it shall be deemed to cease to constitute a qualifying IP ab initio and thus, from the beginning; or
  • extensions of patent protection
  • assets in respect of which protection rights are granted in terms of national, European or international legislation; or
  • utility models; or
  • software protected by copyright under national or international legislation.
  • other intellectual property assets which are non-obvious, useful, novel and having features similar to those of patents, to the satisfaction of the Malta Enterprise, which shall determine this through a transparent certification process in terms of guidelines issued by itself.


N.B. – Marketing-related intellectual property assets including brands, trademarks and tradenames shall not constitute qualifying IP;



Section 2 – Which conditions need to be satisfied in order for one to be entitled to the Patent Box Regime (Deduction)?

First Condition

The research, planning, processing, experimenting, testing, devising, designing, development or similar activity leading to the creation, development, improvement or protection of the qualifying IP, must be carried out:

  • wholly or partially by the beneficiary, solely OR
  • together with any other person or persons OR
  • in terms of cost sharing arrangements with other persons, whether these are resident in Malta or otherwise.


Shall the functions described have to be performed solely by the beneficiary’s employees?

No, functions may be performed by employees of other enterprises, if they are acting under the specific directions of the beneficiary in a manner equivalent to that of employees of such beneficiary.

Notably, functions may also be carried out through a permanent establishment (including a branch) situated in a jurisdiction other than the jurisdiction of residence of the beneficiary, IF such permanent establishment derives income which is subject to tax in the jurisdiction of residence of the beneficiary.

Other Conditions

  • The beneficiary must be the owner of the qualifying IP or the holder of an exclusive license in respect of the qualifying IP. Where the beneficiary creates, develops, improves or protects the qualifying IP together with any other person, the beneficiary must at least have a share in the ownership of the qualifying IP;
  • The qualifying IP must be granted legal protection in at least one jurisdiction;
  • The beneficiary must maintain sufficient substance in terms of physical presence, personnel, assets or other relevant indicators, as is commensurate with the type and extent of activity being carried out in the relevant jurisdiction in respect of the qualifying IP;
  • Where the beneficiary is a body of persons, such beneficiary must be specifically empowered to receive such income.


Section 3 – How shall the Patent Box Regime deduction be calculated?

The following formula shall be applicable:


Section 4 – What occurs where a beneficiary incurs a loss in respect of the qualifying IP which he is entitled to set-off against his income or gains in terms of Malta’s Income Tax Act?

If such beneficiary claims the benefit of such loss, he shall be entitled to elect to benefit from any one of the following two choices: a deduction corresponding to 5% of the loss or a deduction corresponding to the full amount of the loss; in the case of the latter deduction, a number of other conditions shall apply.


Are you interested?

Should you be interested, or you require further clarification on the intricacies of the Patent Box Regime Tax Deduction, our legal and tax team is fully equipped to answer all relevant questions. We have provided tax advice to numerous satisfied clients, and we shall take every step to achieve the result which you desire.


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