Under a recently issued statement of practice, the Irish Revenue Commissioners have extended the exemption from Irish withholding tax for cross-border patent royalty payments. This development is a welcome step in enhancing Ireland’s status as a location in which to develop, exploit and manage intellectual property.
General Exemption Available
Patent royalties are the only form of royalty payment potentially subject to Irish withholding tax. A general exemption from this withholding tax is available where the recipient company is tax resident in an EU or tax treaty country (and a number of supplementary conditions are satisfied). In a positive development, the Revenue Commissioners have now confirmed that ‘foreign patent’ royalties may now be paid to recipients resident outside of the EU or a tax treaty countries once a number of conditions are satisfied.
Six conditions must be satisfied to claim this exemption:
- The royalty must be paid in respect of a ‘foreign’ patent (ie, a patent originally registered outside Ireland in relation to an invention developed outside Ireland).
- The licence agreement must be executed outside Ireland and must be subject to the law and jurisdiction of a country other than Ireland.
- The Irish company making the payment must pay the royalty in the course of its trade.
- The royalty must not paid in the course of a ‘back to back or conduit arrangement’ which involves the Irish company acting as a flow-through entity.
- The recipient company must not be resident in Ireland and must not carry on a trade in Ireland through a branch or agency (even if that branch or agency is unconnected with the royalty payment).
- The recipient company must be the beneficial owner of the royalty payment.
The exemption can only be relied upon to the extent the royalties are paid “in good faith and for purposes that do not include tax avoidance”. To claim the exemption, an application must be made by the recipient company to the Irish Revenue Commissioners.
Expansion of Relief
Ireland has recently taken significant and focused steps to further enhance Ireland’s position as a leading jurisdiction for the development and holding of intellectual property. The scope of Ireland’s exemptions from withholding tax for patent royalties have been expanded. The categories of intellectual property for which tax depreciation can be claimed has been extended. The R&D tax credit has been broadened. Taken together (and in the context of Ireland’s low 12.5% rate of corporation tax), these steps provide further tangible benefits to businesses seeking to develop, exploit or manage intellectual property in Ireland.