We reported last month on the Irish Government's plans to introduce additional IP tax incentives arising from its April emergency budget. Details of those incentives have now been published in the Finance Bill, which is the Government's legislative mechanism for introducing its budgetary measures. Two incentives are proposed. The first provides for tax reliefs for the acquisition of IP assets. The second expands the group of assets which are entitled to benefit from the current exemption from stamp duty for the transfer of IP assets. We provide an outline of each below.

Features of the new tax relief for the acquisition or licensing of IP

From 7 May 2009, companies will be permitted to claim capital allowances in respect of capital expenditure they undertake in acquiring "intangible assets". This means that the acquiring company may deduct from its future taxable income an enhanced percentage of the expenditure it has made in acquiring or licensing IP.

"Intangible assets" are broadly defined to include:-

  • Inventions
  • Patents and Supplementary Protection Certificates
  • Registered designs and design rights
  • Trade marks, trade names, trade dress, brands and domain names
  • Copyright, related rights and performers' rights
  • Plant breeders' rights
  • Marketing authorisations for human or veterinary medicines and medical devices
  • Certain know-how, and
  • Goodwill, to the extent it is directly attributable to the IP rights which are listed in the Bill

The deductions are ring-fenced, in that the company may only set-off its IP expenditure against that part of its income which is derived from exploiting the IP1 or which comes from the sale of goods or services which derive the greater part of their value from the IP. The company may not apply the deductions against any income it has from other activities in which it is involved.

The allowable deductions in any given year are capped at 80% of the company's taxable profits (calculated before capital allowances and interest) derived from the exploitation of the IP. Taking into account Ireland's corporate tax rate of 12.5%, this can result in a net corporate tax rate for the company of as low as 2.5%. However, the company is also entitled to carry forward any excess allowances and interest to apply against taxable income in later years, but subject to the application of the same 80% rule in those years.

The reliefs are also subject to the application of a write down period, which may either follow the existing accounting treatment which is applied to the relevant asset, or (in the case, for example, of infinite life assets) can be a 15 year fixed write down period at a rate of 7% per annum for the first 14 years and 2% in the final year.

Using the latter write down as an example, this effectively means that if a company buys an IP asset for €1 million, it can deduct €70,000 against its taxable income for each of the first 14 years it owns that asset and €20,000 in the final year, subject to the 80% rule described above. If the IP is sold or re-licensed after 15 years, there will be no claw-back of the relief, but this is subject to certain anti-avoidance provisions.

Ireland provides for existing reliefs for expenditure on patents and know-how. In light of the new broader reliefs which are proposed by the Finance Bill, these existing reliefs are to be phased out. Companies may elect to continue with them for a further two years, but thereafter they must claim under the new regime.

The Bill also seeks to prevent against the double-claiming of reliefs in respect of intra-group IP transactions, in that the company selling or licensing the IP will not be additionally entitled to claim certain capital gains tax group reliefs currently available on such disposals. There are also certain anti-avoidance measures included in the Bill in respect of connected company transactions.

Extension of the scope of the stamp duty exemption for the acquisition of IP

Ireland's tax laws already provide for an exemption from stamp duty for the transfer of certain IP assets. The assets which benefit from this exemption have now been expanded to mirror the definition of "intangible assets" contained in the new capital expenditure relief. This specifically includes for the first time assets such as trade names, brands, trade dress and marketing authorisations for human or veterinary medicines and medical devices

Implementation

The fine detail of the reliefs may be tweaked before the Finance Bill is adopted into final legislation. Nonetheless, the proposed provisions are a welcome addition to Ireland's IP-friendly tax regime, which also already includes a 12.5% corporation tax rate and reliefs available for expenditure on a wide breadth of R&D activities. We anticipate that the Finance Bill will be enacted into law within the month, noting that the reliefs will be available in relation to expenditure and transactions undertaken from 7 May onwards.

Footnote

1 The Bill describes the relevant activities as the management, development or exploitation of the IP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.