by Danny Cox
Ireland offers many advantages to companies seeking to establish a base in Ireland to exploit intellectual property. There is a low corporation tax rate in Ireland and it has what is considered to be a business-friendly taxation regime.
Ireland is a common law jurisdiction with an independent and efficient court system, a wide range of legal protections for the creators/owners of Intellectual Property Rights and the possibility of obtaining generous state grant assistance with research and development projects.
A long-standing member of the European Union, it has strong trading links both in Europe and with the rest of the world. It also boasts a unique relationship with the USA, which has resulted in significant rates of foreign direct investment and research and development over recent decades.
We have set out below a brief overview of some of the main advantages that Ireland has to offer companies looking at locating in Ireland to exploit or develop intellectual property.
The Rate of Corporation Tax
One of the primary advantages that Ireland has to offer is its low rate of corporate tax. The standard rate of corporation tax on trading profits in Ireland is 12.5%. A rate of 25% applies to non-trading and foreign source income. As a result of recent legislative changes an Irish resident investment company in receipt of certain trading
dividends can elect to treat such dividends as also being subject to tax at the 12.5% rate of tax.
In order to avail of the 12.5% rate of corporation tax that applies to trading income, a company would have to derive income from a trade that is actively carried on in Ireland. It is generally essential therefore that the profit making apparatus of the trade is located in Ireland and that the activity is controlled in Ireland. It is generally feasible for a company established in Ireland to exploit intellectual property to avail of the 12.5% rate if the company has sufficient personnel located in Ireland with the appropriate expertise and skills required to be in a position to manage the relevant portfolio of intellectual property. If a company is established in Ireland and it is actively involved in developing intellectual property and in promoting and
licensing out the rights for its use to multiple third party users then invariably this company should be regarded as carrying on a trade that should qualify for the 12.5% rate of corporation tax.
Whilst company capital gains are generally subject to corporation tax, the gains are re-worked to ensure that the tax is charged at an effective 33% rate. Ireland has a
participation exemption which exempts disposals of shares in certain companies provided certain conditions are met.
Tax Relief for Capital Expenditure on Intangible Assets
Since 2009 capital allowances can now be claimed on capital expenditure incurred by companies on the provision of certain “specified intangible assets”. The definition of
specified intangible assets as originally enacted was widely drafted and includes, inter alia, the acquisition of or the licence to use:
1. patents and registered designs;
2. trademarks, brands, brand names, domain names and services marks;
3. certain plant breeders rights;
4. copyright or related rights;
5. know-how, generally related to manufacturing or processing;
6. any authorisation required in order to sell a medicine or product or any design, formula, process or invention for the purpose it was intended;
7. any rights derived from research prior to authorisation on the effects of items covered directly at point 6 above; and
8. goodwill to the extent that it is directly attributable to specified intangible assets;
9. computer software or a right to deal in or use such software; and
10. applications for grant or registration of patents, trademarks, copyrights etc.
In addition, the definition of know-how has been broadened to include know-how related to industrial, commercial or scientific experience whether protected or not. This ties in more closely with the OECD definition in Article 12 of its Model Tax Convention.
The tax write off will be granted as a capital allowance and the write off will be available in line with the depreciation or amortisation for accounting purposes.
Alternatively, a company can elect to take the write off against its taxable income over a 15 year period. Here a rate of 7% will apply for years 1-14 and 2% for year 15. There will be a clawback of the capital allowances claimed if the intellectual
property is sold within 10 years of its acquisition.
The capital allowances that are available can only be offset against income generated from exploiting intangible assets or as a result of the sale of goods or services that derive the greater part of their value from the intangible assets (referred to as a “relevant trade”). The aggregate amount of deductible allowances that are available will be capped at 80% of profits from the relevant trade in a given accounting period.
Unused allowances can be carried forward and treated as an allowance in succeeding accounting periods. The new provisions will not apply where the expenditure incurred on the asset exceeds an arm’s length amount.
The introduction of this relief coupled with the 12.5% rate of corporation tax helps to provide a valuable incentive to companies looking at locating in Ireland to exploit intellectual property given that they have the effect of reducing the effective rate of tax on income from intellectual property. In optimum situations the effectivecrate of corporation tax can be reduced to as low as 2.5%.
Research & Development Expenditure
Ireland also offers significant incentives to companies looking at locating their research and development (“R&D”) activities in Ireland. There are two major incentives granted to companies that engage in expenditure on R&D within
Ireland and within the EEA generally (subject to certain conditions and limitations).
Firstly, a company that incurs expenditure on R&D may avail of a tax credit of 25% on R&D in excess of base year expenditure, which base year is 2003. For companies
establishing in Ireland after 31 December 2003 the base year expenditure would be zero and therefore all qualifying R&D expenditure incurred by such companies should qualify for the R&D credit.
The R&D credit reduces a company’s corporation tax liability for the current year. The tax credit is in addition to the corporation tax deduction available at 12.5% for qualifying expenditure. The combined effect of these provisions is that it is possible to obtain tax relief at an effective rate of 37.5% for incremental expenditure on R&D.
The tax credit is available for offset against the current year corporation tax liability of the company and any unused credit can be carried forward indefinitely to future periods. Excess credits can also be carried back against corporation tax paid in the previous period. Alternatively, a company may, provided certain conditions are satisfied, claim to have any remaining excess credit paid to it by the Revenue.
The amount of money that a company can claim to have repaid from the Revenue is limited to the greater of:
(a) the corporation tax paid by the company for the preceding 10 accounting periods; or
(b) the payroll liabilities (i.e. PAYE, PRSI and levies) accounted for by the company in the accounting period in which the qualifying R&D expenditure was incurred.
The tax credit is available on a group basis in respect of group expenditure on R&D.
There are two situations where the law provides for relief for a company that has not
carried on the R&D itself:
1. A company which incurs expenditure on R&D can claim credit for certain amounts paid to a university to carry out R&D activities on its behalf. Relief in this case will be restricted to so much of the payment to the university as does not exceed 5% of the expenditure incurred by the company itself on R&D activities; and
2. A company which incurs expenditure on R&D can claim credit for certain amounts paid to another unconnected person (a person other than a university) to carry out R&D activities on its behalf. Relief in this case will be restricted to much of the payment to the other person as does not exceed 10% of the expenditure incurred by the company itself on R&D activities.
Recent amendments to tax legislation provide additional benefits to companies seeking to establish a base in Ireland to exploit intellectual property.
Credit Relief for Foreign Royalty Income
Unilateral credit relief has been extended in respect of foreign withholding taxes on royalty income from non-treaty countries to all trading companies in respect of royalties which are taxable as trading income
Withholding Tax on patent royalty payments
With effect from 4 February 2010, a company may make patent royalty payments to a foreign company free of withholding tax.
In order for the relief to apply:
The recipient must not be resident in Ireland; and
The recipient must be resident for the purposes of tax in a relevant territory (another EU Member State or in country which has entered into a double taxation agreement with Ireland)which imposes a tax that generally applies to royalties receivable in that territory from outside sources.
In addition to being exempt from withholding tax if the above conditions are met, the recipient of the payment will not be subject to Irish income tax on the amount received provided it is not received in connection with a trade carried on by that recipient through a branch or agency in Ireland.
The introduction of these changes highlights the continued commitment of the Irish Government to making Ireland a destination of choice for entities looking to establish operations to exploit and develop intellectual property.
Although Irish resident companies must deduct withholding tax at 20% on dividends there are numerous domestic exemptions from the requirement to withhold dividend withholding tax. In particular provided certain declarations are filed with an Irish resident company the following categories of shareholders will be entitled to receive dividends free from dividend withholding tax from an Irish resident company:
1. Individuals who are residents of an EU Member State (other than Ireland) or a territory with which Ireland has a double tax agreement in force or that is signed and which will come into force once all ratification procedures have been completed (hereinafter referred to as a “Relevant Territory”) provided that the individual is neither resident nor ordinarily resident in Ireland. (A declaration of entitlement to the exemption sworn by the individual is also required.);
2. Companies which are resident in a Relevant Territory and which are not ultimately under the control of Irish residents;
3. Non-resident companies which are ultimately controlled by persons who are resident for tax purposes in a Relevant Territory 4.Non-resident companies that are quoted and traded on a recognised stock exchange in Ireland, a Relevant Territory or on such other approved stock exchanges (or whose 75% parent, or, if owned by two or more companies, each of its 100% parents, are so quoted and traded).
As a result of the above exemptions it is generally possible to extract profits from an Irish resident company without suffering dividend withholding tax.
Transfers of intellectual property are specifically exempted from stamp duty in Ireland. This exemption makes it feasible to transfer intellectual property to an Irish resident company without incurring a documentary tax.
Provisions for the application of international transfer pricing norms are in effect which require that transactions between associated entities be entered into “at arm’s length.” The provisions largely implement the OECD Transfer Pricing Guidelines and are relevant to IP trading companies to the extent that they are licensing IP to group companies or connected persons. The regime only applies to trading transactions and there is an exemption for small and medium sized enterprises, specifically companies with fewer than 250 employees and either turnover of less than €50 million or assets of less than €43 million.
Controlled Foreign Company (“CFC”) and Thin Capitalisation Rules
Unlike many jurisdictions Ireland does not have any CFC or thin capitalisation rules.
Over recent years Ireland has become increasingly popular as a location for holding and exploiting intellectual property. This is due to a number of factors including the potential application of the 12.5% corporation tax rate, generous R&D credit relief, the availability of capital allowances on intangible assets and the ability of Irish resident companies to pay dividends to their foreign parents without the imposition of withholding taxes.
Ireland also has the necessary legal framework in place to offer sufficient legal protection for IP rights which can be lacking in other jurisdictions.
This article is for information purposes only and does not purport to represent legal or tax advice. If you have any queries or would like further information relating to any of the above matters, please contact Michael Treacy at firstname.lastname@example.org