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Patent Income - Tax Treatment in Ireland

In general, profits or gains arising from a patent (whether received in the form of royalties or as a capital sum) are taxed as income. However, Irish legislation provides a tax exemption (limited to €5 million per annum) for income derived from “qualifying patents” when received by an individual or company resident in Ireland.

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 relevant invention was carried out in the European Economic Area. It is not necessary that the patent itself be registered in Ireland or indeed in another country of the EEA. However, the recipient of the royalty income must be Irish resident.

The exemption is generally available from the date on which the patent is granted. A retrospective exemption may be available for income arising in the period between the date of filing of the final patent specification and the date on which the patent is granted.

Where the patent holder is a company, Irish legislation also provides for a tax exemption in respect of dividends paid by a company which is in receipt of tax-free patent income, subject to certain restrictions where the royalty income is received from a related company.

One of the main advantages of holding patents in Irish corporate structures is this ability to provide an opportunity to persons other than the “original inventors” to share in tax free dividends. As there is no requirement that the patent royalty be payable in respect of an invention used for an activity located in Ireland, this exemption has been traditionally very attractive to large international groups, making Ireland a popular location for IP holding companies.

Stamp Duty Exemption

Irish tax law also provides an exemption from stamp duty on the sale, transfer or other disposition of intellectual property, including patents, trade marks, copyright, designs, inventions, domain names, supplementary protection certificates and plant breeder’s rights. 

Goodwill is also expressly included in the exemption to the extent that it is directly attributable to IP. This represents a huge tax saving for companies engaged in the licensing of IP or other hi-tech business and therefore acts as a further incentive to locate IP rights in Ireland.

Research and Development Tax Credits

Tax credits are available on research and development on up to 25% of qualifying expenditure. The credits can be carried back one year as well as forward. Where a company has insufficient corporation tax to absorb the credits, they can instead be set off against payroll taxes over three years.

Distribution of Dividend Income

Dividends from one Irish tax-resident company to another are exempt from tax in the hands of the recipient. Dividends received by an Irish company from a company resident in a country with which Ireland has a tax treaty or which is an EU country may be sheltered by a tax credit for withholding or underlying taxes suffered; this is under either the terms of each particular treaty or the EU Parent/Subsidiary Directive.

Ireland has a system of unilateral credit relief for withholding and underlying tax suffered on dividends received from countries with which Ireland does not have a tax treaty. This relief also includes a credit for many state, local and municipal taxes suffered in countries with which Ireland has a tax treaty but which taxes are not covered by the treaty (for example, US state taxes).

 The holding company regime adds one major new feature to the Irish dividend credit system. Companies can now 'mix' credits for foreign tax on different dividend streams for the purpose of calculating the overall tax credit in Ireland (this is called 'onshore pooling'). Any excess credit unused can be carried forward indefinitely and offset in later years. Since Irish tax is only payable on dividends actually received in Ireland, this allows companies great flexibility in allocating dividends from different periods and different countries to avoid any additional tax in Ireland.

 This ability to onshore pool only requires a 5% shareholding (direct or indirect) in the dividend-paying company or that both companies are part of the same 5% group. The dividend-paying company can be tax-resident in any country.

In practice, many of Ireland's EU or treaty partners have tax rates higher than 25% and additional Irish tax on dividends is often not a real problem.



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