Budget 2016 saw the Irish Government announce that it would be implementing the world's first OECD compliant income-based tax regime for intellectual property - the "Knowledge Development Box" (the KDB). This was then subsequently affirmed in the Finance Bill published on 22 October 2015.
The announcement came roughly one year after the Irish Government announced that it would be closing off the Double Irish Tax arrangement from 2020 onwards.
The KDB provides that for accounting periods commencing after 1 January 2016 a corporate tax rate of 6.25% can be availed of by Irish companies for income derived from IP. This relief under the KDB is connected directly to the proportion of R&D expenditure incurred by an Irish company as a proportion of its global R&D spend. Therefore, in theory the KDB should make Ireland an attractive location for companies to conduct the majority of their Intellectual Property R&D activities.
The IP that qualifies for relief under the KDB includes software and patented inventions. Smaller companies which have not patented their IP can also avail of the relief under the KDB where their IP is "patentable" even though it has not been granted a patent.
As this is the first OECD compliant KDB or patent box in the world, Ireland will be under the watchful eye of governments internationally, curious to see how effective the KDB will be in reality and whether it is something that should be replicated in other jurisdictions.
The initial 12 months of the KDB's existence will be interesting to keep an eye on.
Ireland is not the first nation to institute an IP-based tax break designed to attract and retain R&D in sectors such as technology, pharmaceuticals and life sciences. However, it will be the very first compliant with the OECD’s Base Erosion and Profit Shifting, or BEPS, guidelines. This means that Ireland’s KDB and applicable tax rate is future proofed while others such as the United Kingdom’s “Patent Box” with its 10 percent rate and the Netherlands’ “Innovation Box” (currently 5 percent) will have to be overhauled to fit BEPS parameters.