estate tax accountant

INTRODUCTION

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
2. Capital Allowances
3. Research & Development Relief
4. Withholding Tax
5. Stamp Duty

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:

1. The company must be a trading company.
2. The trade must be carried on in Ireland.
3. The trading activity must be controlled in Ireland.
4. The profit making apparatus must be located in Ireland.

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:

• Managing the intellectual property portfolio
• Developing and exploiting Intellectual property
• Promoting and licensing intellectual property rights for use by third parties

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:

• Strategic and operational exploitation and management of the Intellectual Property in Ireland.
• The Irish company should incur marketing, legal and Research & Development expenditure in relation to the IP.
•  The Irish company should be responsible for the development and protection of the IP.

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:

1. Copyrights
2. Patents and registered designs
3. Trademarks, brands, domain names and service marks
4. Computer software
5. Know How (related to commercial, industrial or scientific experience)
6. Goodwill to the extent that it is referable to the “specified intangible asset.”
7. Plant Breeder’s Rights
8. Secret Processes or Formulae
9. Applications or grant or registration of copyrights, patents, trademarks, etc.

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:

1. In line with the amount charged to the company’s profit & loss account  for the accounting period in respect of depreciation or amortisation or
2. Over a 15 year period.  A rate of 7% will apply for years 1 to 14 and a rate of 2% will apply for year 15.

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

 Background

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 1^st 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:

• offset the current year corporation tax liability of the company (the aggregate amount to be surrendered cannot exceed the corporation tax for the accounting period).
• to reward key employees who have been involved in the development of the R&D i.e. a “relevant employer” can surrender the benefits of the R&D credits to the employee who will then be entitled to have his/her income reduced by the amount of the tax credits surrendered in the tax year following the tax year in which the accounting period of the employer ends.
• Excess credits can be (a) carried forward indefinitely, (b) carried back to previous year, (c) surrendered within the group or (d) reclaimed from Revenue over a three year period, provided certain conditions are met.

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:

1. The full R&D credit can be claimed in the year in which the expenditure was incurred.
2. There is a ten year claw back in situations where the building is (a) sold, (b) ceases to be used for the purposes of R&D or (c) ceases to be used for the purposes of the same trade by the company.

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:

1. Where the recipient of a patent royalty payment is resident in an E.U. member state or a country in which Irish has a double taxation treaty in place.
2.  In situations where no tax treaty is in place, unilateral relief for foreign tax suffered on royalties received from abroad is available.

Extensive exemptions are available with regard to dividend payments to:

1. Irish resident companies
2. Pension Funds
3. Companies controlled by residents from an E.U. member state or tax treaty country and not under the control of Irish residents.
4. Companies that are not resident in an E.U. / treaty country but which are controlled by tax treaty residents
5. Individuals resident in an E.U. member state or tax treaty country

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.

SUMMARY

Ireland has one of the most competitive tax structures for trading and holding companies.  The main tax advantages are:

1. 12½% standard rate of Corporation Tax.
2. Significant Tax Credits for R&D Expenditure
3. No Capital Duty on incorporation.
4. Generally no Irish Stamp Duty on the transfer of Intellectual Property
5. Exemption for gains on the disposal of shares in a subsidiary company.
6. Tax Relief on the acquisition and development of Intellectual Property.
7. Exemption from withholding taxes to companies resident in E.U. member states and countries with which we have a double taxation treaty.
8. Availability of 25% Tax credit for capital expenditure incurred on buildings constructed or refurbished for the purposes of carrying on an R&D activity.