Deductions in respect of capital expenditure on intellectual property or intellectual property rights

With effect from financial years ended in 2023, the rules regulating the Malta income tax deductibility in respect of capital expenditure on intellectual property or intellectual property rights were amended.

Legal Notice 229 of 2024 provides further regulation and clarifications in respect of the application of the amended rules. A Guidance note on article 14(1)(m) of the Income Tax Act has also been published by the Malta Tax and Customs Administration.

The Budget Measures Implementation Act, 2024, amended article 14(1)(m) of the Income Tax Act, chapter 123 of the laws of Malta (the ‘ITA’) by introducing a new proviso to allow for an accelerated amortisation of qualifying intellectual property capital expenditure. In terms of the general rule, a deduction for the amortisation of expenditure of a capital nature on intellectual property or any intellectual property rights (‘Qualifying IP’), may be claimed over a period of not less than three consecutive years.

New proviso to article 14(1)(m) of the ITA

In terms of the new proviso to article 14(1)(m) of the ITA, with effect from financial years ended in 2023 (year of assessment 2024), any expenditure of a capital nature on Qualifying IP, which is used or employed in the production of the income, may now be deducted for Malta income tax purposes in full in the first year, which year is determined as being the later of:

• The year in which the said expenditure has been incurred; or
• The year in which the Qualifying IP is first used or employed in producing the income.
  
  

Amendments to the Income Tax (Deductions) Rules

On 13 September 2024, Legal Notice 229 of 2024 was published, amending the Income Tax (Deductions) Rules, subsidiary legislation 123.07 of the laws of Malta. The Legal Notice provides additional rules regulating the deduction of capital expenditure on Qualifying IP in full in the first year.

Standard Amortisation and Accelerated Amortisation

In terms of such rules, it has been clarified that taxpayers applying the new proviso to article 14(1)(m) of the ITA must distinguish between:

• Standard Amortisation: The Standard Amortisation refers to the deduction in respect of capital expenditure on Qualifying IP which was available as a deduction in terms of article 14(1)(m) of the ITA prior to the above-noted amendments (i.e. a deduction equivalent to the qualifying capital expenditure spread equally over a minimum period of three years). The Standard Amortisation may be deducted in full by the taxpayer in the first year, even in the case where the taxpayer does not have sufficient chargeable income to give full effect to the entire Standard Amortisation; and
• Accelerated Amortisation: The Accelerated Amortisation refers to the difference between: (i) the total capital expenditure incurred in a year on Qualifying IP; and (ii) the Standard Amortisation. The Accelerated Amortisation may only be deducted against income produced through the use or employment of the Qualifying IP, subsequent to the utilisation all other available deductions, with the exception of the notional interest deduction and the Accelerated Amortisation itself (the ‘Qualifying Income’). In the event that the Accelerated Amortisation for the year exceeds the Qualifying Income for that same year, the unutilised Accelerated Amortisation shall not be available as a deduction for that year and shall be carried forward as a separate attribute for Malta income tax purposes.
  

The rules also specify that:

• The aggregate of the Standard Amortisation and the Accelerated Amortisation shall in no case exceed the amount of capital expenditure on Qualifying IP; and
• Any portion of the Accelerated Amortisation that is carried forward would not constitute a trading loss for Malta income tax purposes.

Transition rules applicable to year of assessment 2024

For year of assessment 2024 only, a deduction shall also be allowed with respect to any capital expenditure on Qualifying IP which was incurred in earlier years and which qualifying capital expenditure has not yet been fully claimed as a deduction for Malta income tax purposes.

The classification of the deduction for the year between Standard Amortisation and Accelerated Amortisation, as outlined above, also finds application with regards to deductions claimed in respect of capital expenditure on Qualifying IP acquired prior to year of assessment 2024.

Guidance Note on article 14(1)(m) of the ITA

On 24 September 2024, the Malta Tax and Customs Administration also published a Guidance Note, providing clarifications in relation to the new proviso to article 14(1)(m) of the ITA.

Deductions for multiple Qualifying IP assets

The Guidance Note confirms that a taxpayer may elect to deduct capital expenditure on Qualifying IP in full in the first year with respect to each asset independently. As a result, it would be possible for a taxpayer with multiple Qualifying IP assets to:

(i) Elect to claim a deduction of the capital expenditure incurred on some of the Qualifying IP assets equally over a minimum period of three years; and
(ii) Elect to claim a deduction of the capital expenditure on other Qualifying IP assets in full in the first year.

Allocation of unutilised Accelerated Amortisation

The Guidance Note also states that the taxpayer has the discretion to determine against which Qualifying IP any deduction of Accelerated Amortisation shall be allocated.

Future classification of unutilised Accelerated Amortisation

The Guidance Note reflects that any unutilised Accelerated Amortisation shall be re-classified as Standard Amortisation accordingly in future years. The amount of unutilised Accelerated Amortisation that would need to be re-classified shall be determined by reference to the deduction for capital expenditure on Qualifying IP which would have been claimed equally over the minimum three-year period (i.e. the deduction that would have been available to the taxpayer in the absence of the new proviso to article 14(1)(m) of the ITA).t

How can we assist?

Deloitte Malta can assist with regards to transfers, transactions and group or operational restructuring exercises involving intellectual property.

Please reach out for further guidance.