Ireland is a leading location for the development, exploitation and management of intellectual property ("IP"). According to IDA Ireland, the number of global companies centralising their IP management in Ireland has made Ireland one of the largest exporters of IP in the world. One of the key drivers for this is the attractive tax regime, including the 12.5% corporation tax rate on trading income, a flexible 25% tax credit on the cost of eligible research and development activities, capital allowances on the cost of acquiring certain intangible assets and a large double tax treaty network to facilitate the flow of funds between Ireland and other countries. Ireland has signed double tax treaties with over 70 countries. The network of treaty partner countries is set out in the Appendix.
Facts and Figures
Ireland is home to eight of the top ten global technology companies, eight of the top ten global pharmaceutical companies and 15 of the top 25 medical devices firms in the world.
In recent years, Ireland has attracted a range of innovative social media companies, including Google, Facebook, Twitter and LinkedIn, all of whom have established their European headquarters here.
Corporation Tax - Rate of Tax
Ireland has two rates of corporation tax on income. The 12.5% rate applies to trading income of an Irish company. The 25% rate applies to non-trading, or passive income.
Generally, trading means the carrying on of business or the engaging in activities on a regular basis with a view to realising a profit.
The Irish Revenue Commissioners, in considering whether an activity constitutes the carrying on of a trade, look at whether there is commercial rationale for the type of situation proposed, whether there is real value added in Ireland and whether there are employees and/or directors in Ireland with sufficient levels of expertise and skill to actually carry on the trade.
In terms of a trade relating to IP, the Irish company should have employees and directors in Ireland who are genuinely involved in the operation of the business and all decisions of importance in terms of the management and control of the business (at a strategic level) are undertaken in Ireland. There should be a certain degree of activity around the promotion and management of the IP and staff with the appropriate skill and expertise would need to be located in Ireland to carry on this activity.
International IP Structures
International companies generally adopt one of two alternative structures for holding and managing IP out of Ireland.
An Irish company can hold the IP and claim a deduction for capital expenditure incurred on the acquisition or development of the IP as well as any interest expense incurred to acquire the IP. The profits of the Irish company will typically be subject to the corporation tax rate of 12.5% if the company has the requisite level of substance to be considered trading. The tax depreciation and interest expense can reduce the effective rate of tax to a minimum of 2.5%.
A foreign affiliate company can hold the IP and licence the IP to an Irish company. In the case of certain US groups, this affiliate is often an Irish incorporated, but non-Irish tax resident, company (perhaps resident in the Cayman Islands). The Irish company can take a deduction for royalty fees paid. There is also a wide range of exemptions from withholding tax on royalties paid to foreign companies as outlined below. The profits of the Irish company will be subject to the corporation tax rate of 12.5% so long as there is sufficient activity and substance in Ireland.
Tax Deduction for Intangible Assets
Companies carrying on a trade in Ireland can claim a tax deduction on capital expenditure incurred on the acquisition or development of certain "specified intangible assets" for the purposes of their trade. Intangible assets include patents, registered designs, trade marks, certain know-how, domain names and goodwill directly attributable to those intangible assets.
The allowances will typically follow the accounting write-down but the company can elect for a fixed write-down period of 15 years (7% per annum and 2% in year 15). The allowances can be offset against income generated from managing, developing or exploiting the intangible assets or income from selling goods or services that derived their value from the intangible assets.
Allowances can be claimed where the intangible asset is acquired from another party (including an affiliate, where (arm's length pricing rules apply). In the context of transfers of intangible assets between Irish group companies, allowances can be claimed where an election is made to opt out of certain capital gains tax group relief provisions.
The aggregate amount of any allowance and related interest expense (i.e. interest incurred to acquire the intangible asset) in an accounting period was previously capped at 80% of the related annual income. This restriction was removed by the Finance Act 2014 for accounting periods commencing on or after 1 January 2015 but has now been reinserted for accounting periods commencing on or after 1 January 2018 but only in respect of intangible assets purchased on or after 11 October 2017.
Where the intangible asset is held for more than 5 years there is no clawback of the allowances on a disposal (unless the asset is sold to a connected company who wishes to claim allowances). This is an important measure as traditionally the risk of a future "recapture" of capital allowances can be problematic for companies with a high spend on capital.
There is an exemption from Irish stamp duty on the transfer of specified intangible assets.
Research and Development (R&D) Tax Credits
R&D tax credits allow qualifying companies involved in the carrying on of R&D activities to benefit from a tax credit of 25% of R&D expenditure. The tax credit is in addition to the corporation tax deduction at 12.5% for qualifying expenditure.
The tax credit is used to reduce the company's corporation tax liability and any unused portion can be carried forward indefinitely. In certain circumstances the tax credits can be converted into cash payments from the Revenue Commissioners (this is useful for start-up or early stage companies that are in a loss making position). The amount of money that can be claimed back is limited to the greater of (i) the corporation tax paid by the company for the preceding ten accounting periods and (ii) the payroll liabilities for the period in which the expenditure on R&D activities was incurred. For a start-up company the limit will be the payroll taxes for the period in which the expenditure was incurred.
Tax credits are available to companies within the charge to Irish tax that undertake R&D activities within the European Economic Area. The relief is generally available for R&D activities carried out in areas such as software development, engineering, medical sciences, pharmaceuticals, agriculture and horticulture.
Patent Royalties – Payments to Foreign Companies
Payments of patent royalties by an Irish resident company are typically subject to withholding tax at 20%. Patent royalties paid to associated companies resident in another EU Member State, or paid in the course of a trade or business to a company resident in a country with which Ireland has a double tax treaty are generally exempt from withholding tax. The Revenue Commissioners issued a Statement of Practice in 2010 which effectively extends the relief from withholding tax on certain patent royalties paid to non-treaty countries. To avail of the exemption, certain conditions apply which include the fact that the royalty must be paid in respect of a foreign patent and the payment must be made in the course of the Irish paying company's trade. Prior approval of Irish Revenue will be required.
Knowledge Development Box
The Irish Finance Act 2015 introduced a 'knowledge development box' ("KDB"), which brought in an effective reduced rate of corporation tax of 6.25% for qualifying income derived from 'qualifying expenditure' in the EU by an Irish tax resident company. This relief applies to accounting periods which commence on or after 1 January 2018 and before 1 January 2021. A claim must be made within 12 months of the end of the relevant accounting period and should be made in the corporation tax return of the claimant company for the period.
The KDB was described when introduced as the first OECD-compliant KDB in the world, which means that it is in line with international guidelines, the OECD Action 5 Report published on 5 October 2015 and specifically the OECD's ‘Modified Nexus Approach’. Under the Modified Nexus Approach, only the expenditure incurred developing the intellectual property asset after it was acquired should qualify as qualifying expenditure.
Qualifying assets for the KDB include certain patented inventions and copyrighted software will be 'intellectual property' for the purposes of the definition of 'qualifying asset'. The definition also includes supplementary protection certificates for medicinal products, supplementary protection certificates for plant protection products and plant breeders’ rights. The intellectual property must be the result of R&D activities.
Qualifying income for the KDB constitutes income derived directly from the qualifying asset. The qualifying profit will be determined by reference to a formula, set out below. A deduction of 50% of the qualifying profit from the specified trade will be allowable, resulting in an effective KDB tax rate of 6.25%. The greater amount of R&D that takes place by the Irish entity, the greater the proportion of income that may qualify for the KDB tax rate.
(Qualifying Expenditure + Uplift Expenditure)/Overall Expenditure
x Qualifying Assets
= Qualifying Profits
Qualifying expenditure on the qualifying assets, for the purposes of the KDB, means bona fide expenditure incurred by a company wholly and exclusively in the carrying on by it of R&D activities, where such activities lead to the development, improvement or creation of the "qualifying asset". Where expenditure on qualifying assets, carried out by a group company, will not be qualifying expenditure for these purposes, it may be deemed as uplift and qualify as 'uplift expenditure', up to 30% of the qualifying expenditure.
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