Over recent years Ireland has become increasingly popular as a location for holding and exploiting intellectual property (“IP”). 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.

12.5% Corporation Tax

To avail of Ireland’s 12.5% corporation tax rate the income earned by a company must be active (“trading income”).  A company whose only activity is the licensing of IP is unlikely to be regarded as trading.  However, provided that sufficient management, sales and/or enforcement activities are carried out in Ireland, an IP holding company can qualify for the 12.5% rate.  There must be substance in Ireland, sufficient and credible personnel and strategic and operational exploitation of management of IP.  Where the holding of IP can be combined with research and development work carried on in Ireland, the licensing of the IP should generally be viewed as a trading activity.  It is possible to apply for an advanced ruling from Revenue to determine if the activities of the company would be regarded as trading.  Previously there was an exemption available for patent royalties received (capped at €5 million) by an Irish resident company, however as of 24 November 2010 this exemption is no longer available.

Transfer Taxes

Irish tax law provides an exemption from stamp duty (transfer tax) on the sale, transfer or other disposition of IP including any patent, trademark, copyright, invention or brand.  Goodwill that is directly attributable to such IP is also included in the exemption.  This is an important exemption, as transfers of assets exceeding €80,000 could attract Irish stamp duty at a rate of 6%. 

R&D Benefits

Ireland offers a very favourable Research & Development tax credit (“R&D Credit”) which results in an effective corporation tax deduction of 37.5%. This is achieved by way of a 25% R&D Credit and a trading deduction of 12.5% for R&D expenditure. The 25% R&D Credit is available on the incremental R&D expenditure calculated by reference to the R&D expenditure incurred in the base year 2003.  To qualify the expenditure must be incurred in respect of R&D activities in the EEA and must not qualify for tax relief in any other country.  R&D activities are defined as meaning systematic, investigative or experimental activities in a field of science or technology. Activities will not be regarded as being R&D activities unless they seek to achieve scientific or technological advancement and involve a resolution of scientific or technological uncertainty.  The activities must fall within one of the categories set out in published regulations.  The R&D credit can be carried back to be offset against the preceding period’s corporation tax liability.  The excess can then be carry forward to set against the corporation tax liability of subsequent accounting periods.  Depending on the amount of corporation tax paid in the previous 10 years and the PAYE / PRSI liability of the company in the current year it may be possible to have some of the excess refunded to the company. This is useful if, for example, a company is in a loss making position.

Capital Allowances on IP

Capital allowances are available for capital expenditure incurred in the creation and acquisition of intangible assets, including the acquisition of IP.  The scheme provides for a ‘wear and tear’ allowance against the taxable income of the IP trade.  The cost of the intangible asset can be written down in line with the accounting treatment (i.e. depreciation) or over a period of 15 years (7% write down for 6 years, 2% write down in final year).  No clawback of capital allowances will arise if the assets are sold after a period of 10 years.  The allowances granted may not reduce the income of the IP trade by more than 80%.   

The scheme is subject to some restrictions, particularly if the intangible assets are acquired intra group or the intangible assets were purchased or created using borrowed funds on which interest is payable. It is no longer possible to claim both capital allowances for expenditure on specified intangible assets and to claim R&D credits on the same expenditure. 

Withholding Taxes

Under domestic legislation, Ireland does not impose withholding taxes on dividend payments made by an Irish resident company to a foreign parent company in either an EU or Tax Treaty jurisdiction.  It also has limited thin capitalisation rules that would limit the tax deductibility of interest paid to a parent company in these jurisdictions. While transfer pricing rules have now been introduced in Ireland they seek only to ensure profits are not understated in Ireland.

Legal Protection of IP

Ireland is also a favourable location in which to hold or exploit IP from a legal perspective. It has the necessary legal framework in place to offer sufficient legal protection for IP rights which can be lacking in other jurisdictions.  Commercial entities that find themselves in IP litigation may also benefit from Ireland’s commercial court system which provides a fast and efficient method of resolving disputes.