INVESTING IN IRELAND

Irish resident Companies or individuals on making a claim are entitled to have certain income ( exempt income ) accruing from a qualifying patent disregarded for the purposes of Corporation Tax or Income Tax as appropriate. 

A qualifying patent is defined as a patent in relation to which the research, planning, processing, experimenting, testing devising, designing, developing or similar activity leading to the invention, the subject of the patent was carried out in Ireland. ⁷ The patent does not need to be an Irish registered patent.

The exempt income from a qualifying patent is any royalty or other sum paid for the use of the invention to which the qualifying patent relates and includes any sum paid for the grant of a licence to exercise rights under the patent.

Subject to one exception, the activities in respect of which the royalties are paid must be manufacturing activities or deemed manufacturing activities. However royalties paid for the purpose of non manufacturing activities are also exempt from tax, where the payer is not connected with the recipient of the royalty and no arrangements exist which have as a main purpose the satisfying of the condition that the royalty or other sum must be received from an unconnected person.  

Restrictions on the tax exemption have been introduced in the past few years and are better explained in the context in which they arise as explained below.

Patent income received from connected persons

Where the user of the patent is connected to the recipient, for the income to be tax exempt, the user of the patent must be carrying on manufacturing or deemed manufacturing and the amount qualifying for exemption in the hands of the recipient is restricted, to such amount as would not exceed the amount which would be paid by persons acting at arm's length.

Distributions

Distributions derived from royalty income received from connected persons which is specified income

In the case of distributions made by a company, which derives from royalty income received from connected persons, the amount of the distribution that can be treated as tax exempt is limited by reference to R&D expenditure incurred by the company and its group companies over three previous accounting periods ( the R&D cap ). This limit does not apply where the patent involves "radical innovation" and the invention was patented for bona fidae commercial reasons and not primarily for the purpose of avoiding liability to tax. This radical innovation will have to be evidenced to the Revenue by providing the patent certificate together with any technical literature to evidence that the product or process is radically innovative. 

The Finance Act 2006, introduces a number of additional anti-avoidance measures: Where the R&D cap applies, the company will be required to show that the patent was patented for bona fidae commercial reasons and not primarily for the purpose of tax avoidance.

Distributions derived from royalty income received from unconnected third parties

The basic rule is that distributions made out of income from a qualifying patent, which originate from an unconnected party and which are treated as tax exempt ( ie disregarded for income tax and corporation tax purposes ), are also disregarded for corporation and income tax purposes provided the distribution is made (a) to another unconnected company; or (b) is made in respect of Eligible Shares,⁸ or (c) is made to the person who was involved in the research which gave rise to the invention. 

The Finance Act 2006 also introduced a further limitation. For cases involving licensing or other similar arrangements between unconnected parties, any tax exemption for distributions of exempt patent royalty income by a company in receipt of patent royalties ( where the royalties appear to relate to a number of intellectual property rights ), is limited by reference to research and development expenditure incurred by the company, and its group companies over a three year period. This limited exemption then applies provided that the patent was taken out for bona fidae commercial reasons and not primarily for the purpose of avoiding liability to taxation.  This restriction is aimed at preventing abuses of the patent income exemption through re-categorising franchise licence fees as patent royalty payments.

These amendments apply for distributions made as and from the 2.2.2006.

Clearly it is best to apply for and hold patents in a separate company and this company should grant licences direct to unconnected parties. This is a complex area and appropriate legal and tax advice needs to be taken.