IP-friendly tax regime is expanded
Legal updates: case law analysis and intelligence
The Finance Bill 2010, which was published on February 4 2010, proposes a broadening of the tax relief available for IP income and expenditure.
A wide-ranging scheme of tax allowances was introduced in 2009 for capital expenditure incurred on the acquisition of IP rights and, in particular, on "managing, developing or exploiting" those rights (Section 291A of the Taxes Consolidation Act 1997, as inserted by the Finance Act 2009). The rights covered by the scheme, termed ‘intangible assets’, include:
- copyright and related rights;
- design rights;
- know-how related to manufacturing or processing;
- product and medical authorizations;
- licences; and
- goodwill deriving its value from any of these categories.
The Finance Bill proposes to:
- include specifically applications for, and registrations of, the applicable rights; and
- extend the types of know-how to industrial, commercial or scientific know-how (eg, secret processes, formulae and information).
These provisions are not limited to Irish rights, but extend to rights in any country. Moreover, the ability to benefit from these provisions is not limited to Irish companies, but extends to any companies which trade in Ireland. The concept of 'trade' is broadly interpreted.
There is no definition of what is meant by 'provision', 'management', 'development' or 'exploitation' of rights. The important issue is that the allowances are available only where the IP is used for trading activities, and not held as an investment. The Revenue Commissioners have indicated that the criteria set out in Noddy Subsidiary Rights Company Ltd v IRC ( 43 TC 458) are important in determining whether an activity constitutes a trade.
The tax allowances can be set against 80% of the annual trading income arising from that part of the activities which consists of the management, development or exploitation of intellectual property, or the sale of goods or services deriving the greater part of their value from the IP rights. The Finance Bill proposes to expand the qualifying income to the whole of any such activities, rather than the part which is attributable to the IP rights.
Where the asset is not the type which depreciates (eg, a trademark which has a potentially unlimited lifespan), the value of the expenditure can be written off over 15 years. In all other cases, the value is written off in line with standard accounting procedure in the same manner as plant and machinery, unless the IP owner opts for the 15-year write-off.
The scheme also includes the usual types of anti-avoidance provisions concerning arm’s length transactions, good-faith commercial reasons and transactions with related companies, including a limited ability to claim tax relief on interest on intra-company loans for the provision of intellectual property. There is also a claw-back period for sale of the rights, which the Finance Bill 2010 proposes to reduce from 15 years to 10 years. The legislation does not allow a double deduction to be claimed on the same expenditure, so the IP owner must make a choice between:
- writing the expenditure off over the life of the asset; or
- taking the cost as a deduction in the year in which it is incurred (eg, in the case of trademark registration and renewal costs).
The bill also proposes:
- the extension of the credit for foreign IP royalty income received from non-EU and non-tax treaty countries to cover all trading companies; and
- the abolition of Irish withholding taxes on payment of patent royalties and 'pure income' royalties (earned without incurring any expense) paid to entities in the European Union or tax treaty countries.
IP owners will also welcome the fact that the valuable tax exemption for patent royalty income has been retained, contrary to speculation.
These changes, in conjunction with the low corporate tax rate of 12.5%, the tax credits for research and development and the abolition of stamp duty on IP transactions, ensure that Ireland remains attractive to IP owners as a location for trade and for IP centralization.
Niamh Hall, FRKelly, Dublin and Belfast
Copyright © Law Business ResearchCompany Number: 03281866 VAT: GB 160 7529 10