Revaluation of IP in the financial statements: tax benefits for companies

Revaluation of IP in the financial statements: tax benefits for companies

by PGA

Article 110 of the so-called “August Decree” (Italian Legislative Decree no. 104 of August 14, 2020, converted into Law no. 126 of October 13, 2020) allowed Italian companies to re-evaluate company assets on their balance sheets.

First, the initiative allows companies to revalue their assets for accounting purposes, allowing them to increase their capitalization. But that’s not all. The real benefits are appreciated at tax level: the positive revaluation of company assets allows to increase the value of depreciation and, consequently, to reduce the tax burden. In this case, the payment of a facilitated substitute tax is required.

There has been much discussion of the considerable advantages that this legislation can bring, and particular attention has been paid to the possibility of revaluing intellectual property rights in the balance sheet. The purpose of this guide is to provide a clear and comprehensive analysis of the opportunities offered by revaluation in the financial statements and the ways in which it can be used.

1. What does the law say?

Article 110 of the above legislation allows companies that do not adopt international accounting standards in preparing their financial statements to revalue their assets and holdings for both statutory and tax purposes.

As far as company assets are concerned, they include both tangible and intangible assets. The revaluation may also regard a single asset, therefore a single trademark, a single patent, etc.. It is not compulsory to revalue all assets belonging to the same category, as was envisaged in the past.

The revaluation can only concern the assets resulting from the financial statements of the current year as at December 31, 2019 and must be carried out in the financial statements of the following year, and therefore as at December 31, 2020. For this reason, the deadline for adhering to it is April 30, 2021 (ordinary deadline for filing the financial statements) or June 30, 2021 (for companies whose bylaws provide for deferment).

2. Who can benefit?

Having clarified the text of the rule, it is now necessary to understand who this possibility is aimed at. In particular, the parties referred to in art. 110 of the August Decree are all types of Italian company, sole proprietorships and non-commercial entities. On the other hand, companies that adopt international accounting standards are excluded.

3. What industrial and intellectual property assets?

The law speaks generically of “corporate assets”. We are interested in the category of legally protected intangible assets, particularly industrial and intellectual property assets.

These assets are often entered in the balance sheet at a value much lower than their real value. Through the August decree, companies can take the opportunity to adjust these values, taking advantage of significant incentives.

Assets eligible for revaluation are:
– patents;
– trademarks;
– design;
– copyrights;
– know-how and trade secrets.

As mentioned, to be eligible, these assets must be on budget as of December 31, 2019.

4. Why re-evaluate?

It often happens that intellectual property rights are undervaluated in the balance sheets of companies. It is not uncommon, for example, to see trademarks, even particularly famous ones, whose value is entered at a few thousand euros, corresponding only to the expenses incurred for registration. However, this is not a true representation, since the value of an intellectual property right does not correspond to the expense that the owner has incurred to obtain it, but rather to the economic return that that right is able to produce.

If undervalued, there are many negative consequences for the firm. First, the firm may show a lower net worth than it actually has, resulting in damage to its business image and more difficult access to credit and financing.

Above all, inadequate accounting in the financial statements prevents the company from benefiting from significant tax advantages. Let’s take, for example, a trademark entered in the balance sheet for 10,000.00 euros. It is therefore necessary to amortize the asset. In the case of trademarks, unlike patents, the duration of protection is potentially unlimited, since it can be renewed at any time. The asset will therefore be amortized over 18 years, according to tax regulations. Annually, therefore, we will have an amortization equal to 556,00 euros which will produce a tax saving of 155,00 euros per year, for a total of 2.790,00 euros for the entire amortization process.

Now let us consider instead that the same trademark has been revalued in an amount of 1 million Euros. In this case the annual amortization will correspond to 55.600,00 Euros. All this, for a tax saving of 15.512,00 euros per year for a total of about 250.000,00 Euro for the entire amortization process (already net of the revaluation tax).

All this is possible simply by correctly evaluating the trademark in question. Now imagine the tax savings that a company could obtain by correctly valuing all of its intellectual property assets.

5. What do you need?

If you wish to revalue patents, trademarks, designs, copyrights or other industrial property rights, you must
– provide an expert opinion supporting the correct revaluation
pay a particularly reduced substitute tax, equal to 3% of the revalued amount (in the event that the company intends to benefit from the tax effect).

The strength of the expert opinion plays a central role. In fact, it is the only element that supports the revaluation and the resulting tax benefits. For this reason, it needs to be prepared by specialized professionals who understand the peculiarities of the field. Valuing an intellectual property asset is not the same as valuing a physical asset according to the cost criterion. It has already been said that it is not possible to limit the value of the costs incurred by the company. For example, in the case of a trademark, it is necessary to understand the revenue the company earned from it. This assessment should then be combined with the legal value of the trademark, its validity and effectiveness, territorial scope, also in light of prior rights of third parties. Similar assessments should be made for the valuation of patents. For the valuation of trade secrets, on the other hand, it is necessary to consider the strength and effectiveness of the safeguards adopted by the company to keep such information secret and the conformity of the same to the law. The drafting of the valuation report is therefore a team effort. Accountants who are experts in the valuation of intellectual property are flanked by the legal assessment of IP consultants and lawyers specialized in this field.

6. Why should you choose PGA?

The valorization of IP assets is one of PGA’s main specializations: the company has a dedicated team that combines legal skills with those of various technical and fiscal disciplines.

Choosing PGA means having a single, highly qualified partner in the IP sector who, also through established partnerships, is able to follow the client from the preliminary phase of evaluation and optimization of the IP portfolio up to the correct calculation in the financial statements.