Apart from a highly skilled, English speaking workforce; membership of the E.U.; an excellent standard of living for employees seconded to Ireland; a large network of international routes and a successful track record of investment, research and development from U.S. corporations there are many advantages to setting up Intellectual Property Trading companies in Ireland.
The main focus of this article is the tax advantages which can be summarised under the following headings:
1. CORPORATION TAX
Ireland has one of the lowest corporation tax rates on trading income in the world. The standard rate is 12½% on trading profits.
A 25% rate is charged on non-trading and foreign source income. It is the rate applied to “passive income.”
To be eligible for the 12½% Corporation Tax rate the following criteria must apply:
Does your company qualify for the 12½% rate?
If your company is an Intellectual Property Trading Company established in Ireland with a workforce of individuals specialised in:
your company should be eligible for the 12½% rate of Corporation Tax. If, however, there is any doubt, it is possible to obtain an advanced decision from the Irish Revenue Commissioners. If the company does not qualify as a trading company, the 25% corporation tax rate will apply.
Other factors to be considered in the context of eligibility for the 12½% tax rate for IP companies include:
A point to keep in mind:
An Irish resident investment company which is in receipt of certain trading dividends can make an election for those dividends to be taxable at the 12½% rate.
2. CAPITAL ALLOWANCES
Capital Allowances are available for capital expenditure on the creation, acquisition and/or licence to use certain “specified intangible assets” which includes:
Qualifying capital expenditure can be written off against 80% of the income generated from the “relevant trade” (income from developing, exploiting or managing the Intellectual Property) in either of two ways:
A point to keep in mind:
A clawback of capital allowances claimed will arise if the IP is sold within ten years of its acquisition. In other words no balancing allowance or charge event will arise if the intangible asset is sold ten years after the date of acquisition provided the intangible asset is not acquired by a connected company which is entitled to a tax deduction under this section.
3. RESEARCH & DEVELOPMENT RELIEF
The 2012 Finance Act introduced a new tax relief which allowed a company to surrender a portion of its R&D tax credit to key employees engaged in research and development activities.
This relief reduced the employee’s Income Tax (but not Universal Social Charge) on relevant emoluments providing the employee’s effective income tax rate didn’t fall below 23% in any tax year.
To be eligible for this relief:
a) The key employee must have performed 75% or more of the duties of his/her employment in “the conception or creation of new knowledge, products, processes, methods and systems.”
b) In addition 75% of the employee’s emoluments with the employer in question must qualify as expenditure on R&D within the provisions of Section 766 TCA 1997.
2013 Finance Act
The 75% thresholds were reduced to 50%.
This applies to accounting periods commencing on or after 1st January 2013.
The Finance Act 2013 increased the amount of qualifying R&D expenditure that can be ignored when referencing current year expenditure to base year expenditure from €100,000 to €200,000.
This means that the first €200,000 of qualifying expenditure is effectively on a volume base. Any qualifying amount in excess of this €200,000 is compared to the 2003 threshold amount and the R&D credit will be calculated on this portion of qualifying expenditure in the normal manner.
How does this relief work?
The R&D Tax Credit is available to:
In addition to the above relief, there is also a tax credit for capital expenditure on buildings or structures used for the purposes of R&D activities.
The tax credit is 25% of the cost of construction or refurbishment of a building or structure used to facilitate the R&D activity. This is available on a proportional basis if at least 35% of the building is being used for the purposes of R&D.
Two points to remember:
4. WITHHOLDING TAX
In general, Irish resident companies must deduct 20% withholding tax on dividends and other profit distributions.
There are, however, a number of situations where shareholders can receive dividends free from withholding tax from an Irish resident company providing certain documentation is filed. For example:
Extensive exemptions are available with regard to dividend payments to:
As a result of these exemptions it is generally possible to extract profits from an Irish resident company by way of dividends free from Irish tax.
A point to remember:
Withholding tax of 20% may apply to interest payments on loans/advances paid in the course of a trade or business to an E.U./Treaty country resident company. Providing the loan is capable of lasting in excess of twelve months no withholding tax should apply.
5. STAMP DUTY
Intellectual Property can be transferred to an Irish resident company without incurring Stamp Duty in Ireland.
Goodwill that is directly attributable to such IP is also covered by this stamp duty exemption.
Ireland has one of the most competitive tax structures for trading and holding companies. The main tax advantages are:
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