The Knowledge Development Box (KDB) as it currently applies, is a regime for the taxation of income which arises from patents and copyrighted software and applies to accounting periods commencing on or after 1 January 2016. Where relief under the KDB applies, the company in question will be entitled to a deduction equal to 50% of its qualifying profits in computing the profits of its specified trade. As such, profits arising from patents and copyrighted software may be taxed at 6.25%. In order to qualify for the KDB, the company in question must have carried out the research and development (R&D), within the meaning of section 766 Taxes Consolidation Act 1997 (TCA 1997), which led to the creation of the patent or copyrighted software but the company need not have actually claimed R&D tax credits.
In October 2016 an update was released by the Department of Finance concerning "Ireland's International Tax Strategy". This release coincided with Budget 2017 and confirmed that legislation will shortly be brought forward by the Minister for Jobs, Enterprise and Innovation to provide an additional benefit, within the parameters of the OECD "modified nexus" approach, for small companies who wish to avail of the KDB. For the purposes of the KDB, small companies are those with income arising from IP of less than €7.5m and with a global turnover of less than €50m where the profits result from R&D.
As identified by Revenue's Guidance Notes on the KDB (updated in August 2016), the "modified nexus" approach creates a link between the R&D expenditure incurred by a company and the income arising to that company as a result of that R&D expenditure. However, the approach also recognises that the acquisition of intellectual property (IP) and the outsourcing of certain activities to related parties is part of international business and thus allows for an amount of "uplift expenditure" for each qualifying asset equal to the lower of:
(a) 30% of the amount of the qualifying expenditure on the qualifying asset; or (b) the aggregate of acquisition costs and group outsourcing costs.
Section 769R TCA 1997 currently identifies "intellectual property for small companies" as a qualifying asset under the KDB where it is the result of R&D and defines this asset as:
"…inventions that are certified by the Controller of Patents, Designs and Trade Marks as being novel, non-obvious and useful."
However, the legislation to empower the Controller of Patents, Designs and Trade Marks to provide this certification is not yet in place, meaning that IP for small companies cannot at present qualify as an asset under the KDB.
The Knowledge Development Box (Certification of Inventions) Bill 2016 will, once enacted, establish the required certification scheme. The Bill was presented to the Seanad on 2 November 2016 and is expected to be enacted in early 2017. Revenue has confirmed that updated Guidance Notes will issue concerning IP for small companies when the certification scheme has been established in Irish law.
In practice, one of the reasons why many SMEs do not claim R&D tax credits is because there is a limit on the amount of R&D which a company can outsource to a university or third level institution and on which R&D tax credits can be claimed. It is worth noting that for the purposes of the KDB, a company can outsource R&D to a university or institution located anywhere in the world and there is no limit on the amount of that expenditure which can be treated as qualifying expenditure on a qualifying asset.
As identified in the Regulatory Impact Analysis published by the Department of Jobs, Enterprise and Innovation on 21 November 2016, the availability of the KDB for small companies is expected to encourage and stimulate innovation, research and development in SMEs The new certification process is also expected to facilitate the generation of profits from IP assets that are not being patented thus allowing small companies to use IP assets without necessarily incurring the costs associated with patenting.
This article was originally published in the December edition of Finance Dublin.