By Anna Silvia Tinelli & Teresa Gasparre (DLA Piper Rome).
For an idea or design to become a season’s complete and successful collection it takes much more than one would think. The process takes time and money, and not always the efforts and expenses for such industries are acknowledged under a fiscal point of view.
A tax credit on industrial and precompetitive Research & Development (R&S) activities had already been introduced in Italy’s law system with Law n. 296 of 2006 as an incentive to encourage investments, specifically in relation to the scientific and technological sectors. In 2008, a ruling of the Italian Revenue Agency triggered the issuance of a circular by the Ministry of Economic Development (circular n. 46586/2009) recognizing the eligibility also for R&S expenses of fashion and textile industries. This extension of the R&S tax credit represents a great achievement considering that some of the major industries in Italy operate in this sector.
Recently, Law n. 190 of 2014 further extended the existing tax credit on R&S to an even wider group of beneficiaries. By removing the limit of 500 million euro of maximum income, many more subjects of bigger dimension are now eligible for the grant of the tax credit.
In particular, the tax benefit currently consists in a tax credit of 25% on R&S expenses sustained in the period 2015-2019 that exceed the average of R&S costs of the preceding three years. The credit is further increased to 50% when the costs regard highly qualified personnel and research contracts with universities, innovative start-ups and other entities. The credit is granted up to a maximum annual amount of 5 million euro for each beneficiary, holding that the expenses are at least equal to 30.000 euro. The Implementation Decree n. 174 of 2015 provides for all necessary provisions regarding the functioning and application of the incentive, as well as the approaches to determine and verify the effectiveness of the expenses, and finally, the causes for revocation of the benefit and restitution in case of undue benefit.
The latest circular n. 5/E of 2016 the Italian Revenue Agency ultimately confirms the extension of the tax benefit to all industries, regardless of the amount of income, form, accounting method adopted and sector, including a direct reference to the principles expressed in the mentioned Ministry’s circular with regards to the application of the tax credit to R&S in the fashion and textile industries.
By analyzing the realization process of samples and collections in the textile and fashion sector with the help of various empirical and theoretical studies, the Ministry outlined the following five phases of the process:
- Creative brainstorming and research;
- Realization of prototypes;
- Preparation of samples or collections;
- Promotion/marketing of the samples or collections;
- Management of the sample warehouse.
Therefore, all activities that can in abstract be considered industrial and precompetitive R&S are, in the textile and fashion sector, all the activities that precede the realization of the sample or collection, and are linked to the idea development phase of prototypes. Consequently, all necessary expenses for the realization of the innovative element of a sample or collection and prototypes are granted a tax benefit. These include, for example, the costs of resources such as internal personnel (designers and technicians), professional services (i.e. designers, external consultants, etc.), raw materials and machinery, specific technical instruments, real estate, all used in the realization process of an idea.
In specific, the circular n. 5/E of 2016 takes in consideration any R&S activity which may, generally, be considered finalized to acquire new or existing knowledge that can be used to inspire new applications.
However, not all variations to a product can be classified as R&S. In fact, insignificant variations to products or processes are excluded from the application of the tax benefit (i.e. seasonal or design variations, mere substitution of machinery, qualitative and quantitative corrections deriving from the use of new production methods that do not differ much from the ones used in the past).
The product or process variations that change or significantly improve the design of production technique or products are instead included in the tax benefit (i.e. experimental production line, variation of the technical and functional characteristics of the product).
These indications are based on articles 3, par.5 and 2, par. 2 of the Implementation Decree which does not consider as R&S activity any ordinary or periodic variation to products, product lines, fabrication processes, existing services and other operations, even when the variation represents an improvement.
Industries that benefit from this new incentive must conserve all the documentation necessary to prove the eligibility and effectiveness of the expenses.
The circular outlines the different aspects of the tax benefit to help the industries recognize which activities can be classified as R&S. However, being the benefit granted automatically, the industries risk to consider an activity as R&S and then to find the benefit contested by the Revenue Agency in the future. To avoid this risk, the circular has explicitly presented the possibility for subjects interested to request a ruling from the Revenue Agency on the matter. The ruling will deliver the opinion of the Ministry of Economic Development as entity responsible for any technical issues regarding the application of the tax credit on R&S.
The extension of the tax credit to the R&S activities carried out by the fashion and textile industries is certainly an important measure that duly acknowledges the value of research and development in the creative productive process typical of the Made in Italy sectors. Together with the “patent box” regime (also introduced by Law n. 190 of 2014) which gradually reduces the taxation of profits deriving from the use of intellectual property assets (i.e. designs, models and trademarks) resulting from the R&S activities, the R&S tax credit represents a measure that will most certainly excite and support the Italian fashion and textile industries renowned worldwide.
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