Ireland has significant tax incentives for Irish tax resident companies carrying on a trading activity involving the acquisition, development and licensing/exploitation of intellectual property (“IP”). In this article we set out an overview of some of these benefits.
Low Rate Of Irish Corporation Tax
Ireland has a standard rate of corporation tax for Irish companies of 12.5% for all trading income. A higher rate of 25% applies to foreign income, passive income such as interest, rental and other non-trading income.
The corporation tax rate of 12.5% will apply to the trading profits generated by an Irish company where the required level of substance in Ireland is met by the company. The expenses incurred wholly and exclusively for the trading purposes are tax deductible in calculating the taxable trading profits.
Acquisition Of IP For Trading Purposes
The Irish tax regime provides a tax deduction for the capital cost of acquiring specified intangible assets which are used for the purposes of a company’s trade. The scheme applies to a broad range of specified intangible assets. Example of specified intangible assets include patents, copyrights, trademarks, licences, copyrights, computer software, brands, know-how, and goodwill directly attributable to any of these intangible assets.
Specified intangible assets are treated as plant and machinery for the purposes of capital allowances. The tax deduction can either be in line with the accounting impairment or amortisation of the specified intangible asset, or over a fifteen year period. The tax deduction will reduce the company’s trading profits arising from exploitation of the IP that are liable to corporation tax but the deduction is limited to 80% of the income arising from exploitation of the IP.
Irish tax legislation provides for a Stamp Duty exemption on the acquisition of IP by an Irish company.
Knowledge Development Box
The Knowledge Development Box was recently introduced into Irish tax legislation. Under the knowledge development box, trading profits earned by an Irish company from patented inventions and copyrighted software are to be taxed at a rate of 6.25% to the extent that those profits are related to any research and development undertaken by the company.
The profits taxable at 6.25% are determined by the proportion that the Irish company’s qualifying expenditure on qualifying assets bears to the Irish company’s overall expenditure on qualifying assets.
A company which qualifies for the relief will be entitled to an allowance equal to 50% of its qualifying profits in computing the profits of its specified trade. In effect, the taxable profits arising from the qualifying assets are taxed at 6.25% rather than 12.5%.
Research & Development Tax Credit
Where a company carrying on a trade in Ireland incurs expenditure on research & development activities within Ireland (or within the EEA) it shall be entitled to a tax credit of 25% in respect of that expenditure. This is in addition to the normal tax deduction of 12.5% obtained for the research & developmentexpenditure, i.e. the company effectively obtains an overall 37.5% tax deduction for the research & development expenditure.
In circumstances where the company does not have a sufficient tax liability to absorb the credit then the excess credit is repayable by the Revenue over a three year period.
Research & development for the purposes of the relief includes basic research, applied research and experimental development. These R&D activities must seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty.
Additional Tax Benefits For An Irish Resident Company
An exemption from dividend withholding tax can be claimed where:
- Dividends are paid to companies tax resident in a jurisdiction which has entered into a tax treaty with Ireland; or
- Dividends are paid to companies in any jurisdiction which are ultimately controlled by tax residents of a jurisdiction which has entered into a tax treaty with Ireland; or
- Dividends are paid to individuals tax resident in a jurisdiction which has entered into a tax treaty with Ireland.
- It is possible to obtain an exemption from operation of Irish payroll taxes on the remuneration of non Irish resident employees.
- Most of Ireland’s tax treaties provide for nil or low rate of foreign withholding tax on royalties paid from another country to Ireland provided certain conditions are met.