The Irish Government will launch the world’s first and only OECD-compliant tax regime for intellectual property (IP) from 01 January 2016; and the Finance Bill 2015 has given us first insight into how the so-called “Knowledge Development Box” (KDB) will be implemented.
The KDB is a preferential corporation tax regime that applies half the headline rate to IP-derived income; and which is intended to be impervious to challenge by other OECD member countries by basing the tax regime on income and expenditure relating to bona fide commercial purposes.
Under the KDB, an effective corporation tax rate of 6.25% is applicable to the portion of income derived from IP and which relates to the R&D expenditure directly incurred by a company (including outsourced R&D costs) as a proportion of the overall expenditure incurred (including global R&D expenditure, intra-group company R&D expenditure, and acquisition expenditure). In this way, companies directly expending more on R&D will benefit more than companies conducting R&D outside the EU or in related companies within a group, or those simply acquiring IP without R&D – The R&D expenditure directly incurred by the company is subject to a 30% uplift to compensate for such non-qualifying additional expenditure.
Simply put, the lower corporation tax rate is only applicable to income that is exclusively derivable from expenditure directly incurred by a company in carrying on R&D within the EU that leads to the creation of certain IP.
IP that qualifies for the KDB includes original computer programs (software); and inventions protected by a substantively examined, granted patent. Qualifying IP also includes patents granted by the Irish Patents Office prior to 01 January 2016 on the basis of a favourable search report. Unexamined patents granted on the basis of an opinion on patentability by an Irish Patent Agent can also qualify for the KDB up to 01 January 2017. However, trademarks, brands, image rights and other IP used to market goods or services does not qualify as IP for the purposes of the KDB.
R&D activities must be systematic, investigative or experimental activities in a field of science or technology, and which involve basic research, applied research, or experimental development. In addition, they must seek to achieve scientific or technological advancement; and involve the resolution of scientific or technological uncertainty. Undertaking routine analysis, copying, or conventional maintenance of an existing product, process, service or material would not be considered to be R&D activities.
Income that can qualify for the KDB includes any royalty, sales of a product or service, grant of a licence, insurance, damages or compensation relating to the qualifying IP.
In order to substantiate a claim, a company must maintain records that demonstrate that any income, outsourced R&D expenditure, EU & non-EU R&D expenditure, and intra-group R&D expenditure have been tracked – and it must be shown how such expenditures and income are linked to the qualifying IP. Detailed records of R&D activities must also be maintained – it is necessary for companies to document and be in a position to present evidence of qualifying activities, including dated documents of the original scientific or technological goals of the activity; the progress of the work, how it was carried out, and any conclusions arrived at.
To the benefit start-ups and SMEs, if a company (or group of companies) derives annual income of less than €7.5 million from IP and has an annual global turnover of less than €50 million; qualifying IP extends from software and substantively examined, granted patents; to include inventions certified by the Irish Patents Office as being novel, non-obvious and useful. However, this additional provision requires the introduction of separate legislation to amend the powers of the Irish Patents Office to allow it to issue certificates that can be presented as qualifying evidence to the Irish Revenue Commissioners; and so is not expected to enter into force at the same time as the KDB.
Given the imminent implementation of the KDB, any companies contemplating claiming the preferential corporation tax rate, should consider whether:
- your company carries on (or outsources) qualifying R&D activities within the EU;
- other companies in your group carry on qualifying R&D activities within or outside the EU;
- any of that R&D could be captured in a granted patent or copyrighted software;
- any external granted patent or copyrighted software has been acquired by your company;
- income is derivable from the granted patent or copyrighted software; and
- your company owns any patent applications not yet examined.
Immediate moves should also be made to ensure that documenting processes are established to ensure copyright duly subsists in any software; and that the grant of any unexamined patent applications is expedited before 01 January 2017 by procuring an opinion on patentability by an Irish Patent Agent.