As part of the 2016 Budget Statement, the Irish Government proposes to launch the world’s first OECD-compliant income-based tax regime for intellectual property (IP). The so-called “Knowledge Development Box” (KDB) will apply a corporation tax rate of 6.25% to profits arising from the commercialisation of certain IP assets. The scheme is estimated to deprive the Exchequer of €50m in annual corporate tax returns, with the advantage being that the shortfall will remain with qualifying businesses engaging in substantive research and development (R&D) and innovation in Ireland.
The KDB scheme is intended to allow businesses to avail of beneficial tax treatment of income arising out of IP, so long as there is a direct nexus between that income and the expenditures contributing to the income. The income subject to the reduced tax rate can include royalties, capital gains, other income from the sale of an IP asset, and income from the sale of products directly related to the IP asset.
The scheme is to be made available to domestic and foreign resident companies, as well as foreign permanent establishments of resident companies subject to Irish tax.
The only IP assets intended to qualify for tax benefits under the scheme are certain patents and copyrighted software that are the result of qualifying R&D carried out in Ireland. “Marketing-related” IP assets, such as trademarks, are not intended to qualify for tax benefits under the proposed regime.
The KDB is to be a cornerstone of Ireland’s competitive corporation tax offering, which includes a 12.5% headline rate; R&D tax credits; and an intangible asset regime. With the imminent introduction of the scheme, now is the time to assess your intellectual property standing, to determine whether you might qualify for the proposed tax relief, including the preferential corporation tax rate of 6.25%.