Qualifying Intangible Assets
How the Relief Works
Restrictions

Interaction with Existing Relief
Stamp Duty
Comment



In a welcome move the Finance Act 2009 introduced wide-ranging tax relief on capital expenditure incurred by companies on the acquisition of intangible assets in order to enhance Ireland's appeal as a location for the development and exploitation of intellectual property. The act extended the definition of qualifying intangible assets, with the result that a wide range of intellectual property now falls within the scope of Ireland's tax incentive regime for the acquisition of intangible assets. These provisions will enable a host of companies previously not entitled to tax relief on intangible assets to avail of a tax write-off.

Qualifying Intangible Assets

The definition of an 'intangible asset' which qualifies for the relief has been extended and now includes:

  • patents and registered designs, design rights and inventions;
  • trademarks, trade names, trade dress, brands, brand names, domain names, service marks and published titles;
  • copyright or related rights within the meaning of the Copyright and Related Rights Act 2000;
  • certain plant breeders' rights;
  • know-how generally related to manufacturing or processing;
  • sale authorizations in relation to medicines or products of any design, formula, process or invention;
  • rights derived from research prior to authorization, on the effects of items covered directly above;
  • licences in respect of such intangible assets referred to above;
  • any 'non-Irish' right similar to those outlined above; and
  • goodwill to the extent that it is directly attributable to the items set out above.

How the Relief Works

Companies carrying on a trade are entitled to claim a tax write-off for the capital cost of acquiring or developing qualifying intangible assets. The tax write-off will be granted as a capital allowance and the write-off will be available in line with the depreciation or amortisation for accounting purposes.

Alternatively, a company can choose to take the tax write-off over a period of 15 years and in those circumstances a company is required to claim the allowance in its tax return.

Where a specified intangible asset is held for more than 15 years and then sold, clawback of capital allowances does not arise unless the asset is sold to a connected company which subsequently claims allowances in respect of the capital expenditure on the asset.

Restrictions

Certain restrictions and anti-avoidance measures have been introduced to prevent abuse of the relief. In particular, a limit has been placed on the aggregate amount of allowances granted in an accounting period.

Activities such as the exploitation of a specified intangible asset or the sale of goods and services that derive the greater part of their value from such assets are treated, for the purposes of the act, as a separate trading activity which is distinct from any other trading activity carried on by the company. The relief for capital allowances is restricted to 80% of the gross income from the deemed separate activity for the accounting period. Any unused allowances which are not permitted for a particular accounting period may be carried forward to the succeeding accounting period.

In addition, the provisions do not apply to capital expenditure incurred by a company where: (i) the expenditure incurred on the specified intangible asset exceeds the arm's-length amount and (ii) the expenditure was incurred not wholly and exclusively for genuine commercial reasons, but instead as an attempt to avoid or reduce a tax liability.

Where intangible assets are purchased from a third party or a foreign affiliate, they may qualify for relief. Relief is also available in respect of capital expenditure on intangible assets acquired from Irish related parties, although further conditions may apply in these cases. In particular, if the intangible assets are acquired from an Irish related company or in the course of a reconstruction or amalgamation, it may be necessary to elect out of certain Irish capital gains tax reliefs in order for the purchaser to be eligible to claim the relief.

Interaction with Existing Relief

Existing relief for expenditure on patents and know-how will be phased out for companies and the new provisions will apply instead to these assets. The scheme already in place for capital expenditure on computer software is unchanged and such expenditure continues to qualify for allowances over an eight-year period.

Stamp Duty

The act has also amended the definition of 'intellectual property' for the purposes of the existing stamp duty exemption to bring it into line with the new definition of 'specified intangible asset'.

Comment

The absence of a wide-ranging tax relief for the acquisition of intellectual property (except for certain cases such as patents and software) was considered to be a problem for some years. It is anticipated that the changes to the tax regime will encourage more companies to develop and exploit intangible assets from an Irish base and should help to increase Ireland's portfolio of overseas investors. The legislation applies to expenditure incurred after May 7 2009.

For further information on this topic please contact Aoife Murphy or Robin Hayes at WhitneyMoore by telephone (+353 1 611 0000), fax (+353 1 611 0090) or email ([email protected] or [email protected]).