Pearse Trust is receiving increasing numbers of enquiries in relation to the onshoring of I.P. currently held in traditional ‘offshore’ financial centres.
This article briefly summarises the key features and numerous planning opportunities available in Ireland in this important area.
Ireland Economic and Politically
Ireland is regarded as a stable, competitive, secure, transparent and pro-business country and is a committed member of the European Union, the EU Single Market and the Eurozone. The country boasts one of the most educated workforces in the world, with over 50% of the key 25-34 age group having a university or other third level qualification.
Ireland is already home to most of the top companies across several business sectors including I.T., Pharma, Industrial Automation, Aircraft Leasing and Financial Services.
Ireland Corporate Taxation
Ireland has a very transparent and attractive tax regime which is available to all companies large or small and irrespective whether it is Irish or foreign owned.
Ireland has a standard rate of corporation tax of 12.5% for all trading income, the lowest rate in Western Europe. Trading has a very broad definition and covers just about every type of business (e.g. manufacturing, aviation, treasury function). It should however be noted at the time of writing that discussions are ongoing regarding Ireland’s commitment or otherwise to the OECD’s proposed ‘global tax rate’ of at least 15%. Non-trading or passive income is taxed at 25%.
Currently, Ireland has entered into Tax Treaties with over 74 jurisdictions which eliminate double taxation.
Research and Development
Where an Irish tax resident company engages in R and D anywhere within the European Economic Area, a tax credit of 25% against Irish corporation tax is available.
If the company does not have the profitability to utilise the tax credit, the Tax Authorities will refund it over 3 accounting periods.
It is also important to note that an Irish company can outsource the R and D work and still avail of the Tax Credit. Qualifying expenditure for the purposes of the claim can include the salary costs of those engaged in the R&D process.
Intellectual Property & Ireland – Key Attractions
I.P. has a very broad scope. Apart from the obvious examples of patents, trademarks and copyrights, it also includes such things as customer lists and business ‘know how’.
Tax relief is granted where an Irish company buys intellectual property from a related company or a third party, at a fair market valuation. This relief is granted on the royalty income it receives, until the full purchase cost is recovered by the reduction in tax.
The only restriction is that the maximum amount that can be sheltered in any year is 80% of the income received. Ultimately, 100% of the purchase cost is recovered.
By way of example, most IR Global members will advise the owners of existing businesses. A number of these businesses may potentially create a royalty stream from itself, other associated companies or, better still, 3rd parties.
In the event this royalty income is capable of reaching €1 million each year, the capital value of such a sum would be €10 million or more.
From an onshoring perspective, an Irish company may be established to either purchase this I.P. or alternatively purchase a licence to use and develop the I.P. for €10 million.
Where (for the purposes of illustration) in year 1 and subsequent years, the Irish company receives royalty income of €1 million. 80% or €800,000 can be written off for tax purposes against the purchase cost and is, therefore, tax free. The remaining €200,000 is subject to taxation at the 12.5% tax rate which means a tax bill of €25,000.
In other words, the Irish company may receive an income of €1 million on which it is subject to tax of approximately €25,000. This is the equivalent of a 2.5% tax on the €1 million.
This relief continues year after year until the €10 million purchase cost is fully recovered.
As mentioned at the outset, with the changing attitudes generally to pure offshore companies where previously a great deal of I.P. was housed, this relief is proving very attractive to companies seeking an alternative I.P. holding location.
Further benefits include the R and D tax credit of 25% referred to earlier which means that if an Irish company also carries on Research and Development anywhere in the European Economic Area and, for example, spends €500,000 in an accounting year, it will be able to reduce its tax liability by €125,000.
Where this credit eliminates current and previous year’s tax liabilities, the company may apply to the Irish Tax Authorities for a refund payable in instalments.
Additionally, if this R and D subsequently create an income stream, the tax rate on this income may be taxable at a rate of 6.25% under the country’s Knowledge Development Box (see below) regime.
Other Tax Treatments
Withholding tax
Withholding taxes are not imposed on Irish companies on dividend payments to EU or Tax Treaty countries or indeed to any company in any country where the ultimate owner of that entity is an EU resident. For this treatment to apply, there are certain administrative procedures which need to be adhered to.
Capital gains
With regard to Capital Gains Tax, where an Irish company disposes of 5% or more of the shares in an underlying trading company, which is resident in the EU or a Tax Treaty country, Ireland will exempt such gains from Capital taxation. The qualifying shares disposed of by the Irish company, must have been owed by the Irish company for a continuous period of at least 12 months at any time within the two years prior to the disposal.
Knowledge Development Box
The Knowledge Development Box mentioned above relates to income that arises from patents, software and other intellectual property developed in Ireland.
This relief provides for an effective tax rate of 6.25% on all income generated from such I.P.
Smaller companies are not required to incur the expense of registering a patent and will still get the relief once the Controller of Patents certifies that the I.P. is capable of receiving a patent.
Conclusion
Pearse Trust have over 35 years experience in the provision of Irish corporate services and are on hand to assist in all aspects of your I.P. planning and exploitation requirements, providing a full ‘turn-key’ solution in Ireland to meet your structuring and planning objectives in this area.
For more information, please contact Pearse Trust here
