Intellectual Property: Update on Deductions

A few days before the end of 2023, the Commissioner for Tax and Customs published a notice allowing for a different approach to the application of Article 14(1)(m) of the Income Tax Act with effect from Year of Assessment 2024.

The first provison to Article 14 (1) (m) of the Income Tax Act provides that expenditure of a capital nature on Intellectual Property or Intellectual Property Rights used or employed in the production of the income, shall be spread equally over a minimum period of three consecutive years.

As from Year of Assessment 2024, any such expenditure, may, at the option of the taxpayer, be deducted in full in the year in which the costs were incurred or in the year in which the Intellectual Property or Intellectual Property Rights are first used or employed in producing the income. This could be substantially beneficial for companies which realise a return on investment from Intellectual Property or Intellectual Property Rights in first two years of incurring the capital expenditure.

Moreover, to partly neutralise the treatment of the Article 14 (1) (m) deduction with respect to costs incurred pre-2023, any unclaimed costs as at the year of assessment 2023, may be claimed in full in year of assessment 2024.

Accelerated Depreciation / Immediate Deduction for MNE’s in view of the Pillar 2 Rules

It is to be noted that tax incentives such as the immediate deduction of IP costs are not expected to give rise to any additional tax liability under the EU implementation of Pillar 2 Rules.

This applies as long as no “recapture” is required. In terms of the recapture provisions, if the amount of a Deferred Tax Expense included in the Total Deferred Tax Adjustment Amount (and taken into account to adjust Cover Taxes) is not reversed within five tax years, then it would need to be recaptured. This would in turn lead to a reduction of Covered Taxes in the tax year in which the deferred tax adjustment was initially recognised. In very simplified terms, this means that for the immediate deduction to not lead to an eventual impact on the Pillar 2 minimum tax, the IP would need to be depreciated for tax purposes over a maximum period of five years.