Building upon Ireland’s recent re-affirmation of its commitment to maintaining the 12.5 percent corporate tax rate, today’s Finance Bill 2009 provides for a new regime of tax relief in respect of intangible assets.

Capital expenditure incurred on “intangible assets” (as defined) will now be available for offset against taxable income for corporate tax purposes. How does it work?

Tax relief will reflect the standard accounting treatment of intangible assets and will be based on the amount charged to the profit and loss account in respect of the amortisation or depreciation of the relevant intangible asset. Alternatively, the tax payer can opt to claim relief over 15 years at a rate of seven percent for the first 14 years with the remaining two percent in the final year.

Activities relating to the management, development or exploitation of relevant intangible assets including the sale of goods or services which derive the greater part of their value from such intangible assets are deemed by the new regime to be carried on as a separate trade and any income from such activity is to be assessed separately. This is a complicated element of the relief, not least because it will require an analysis of whether the sales of goods and services derive the greater part of their value from the underlying intellectual property.

The aggregate amount of relief together with related interest expense will be limited in any one year to 80 percent of the trading income derived from the relevant intangible assets. Any unutilised relief may be carried forward indefinitely for offset against future trading income from the separate trade.

The existing reliefs available for acquisitions of certain patent rights and know-how are, effectively, being absorbed in to the new relief. However, the tax payer may elect to apply these existing reliefs for a further two years.

What expenditure qualifies?  

The regime applies to capital expenditure incurred after 7 May 2009 on the provision of intangible assets for the purposes of a trade. Importantly, the regime will not apply to capital expenditure in respect of which tax relief is otherwise available or where the expenditure incurred exceeds the amount that would be payable between independent parties. Relief is also not available in respect of any expenditure incurred as part of a tax avoidance arrangement.

What intangibles qualify?  

The definition of intangibles for the purposes of the new relief has been very widely drafted to include, amongst others, patents, inventions, industrial know how, design rights in general, trademarks, copyright, licences or authorisations of any of these rights and, importantly, any goodwill directly attributable to any of these intangibles.

Can relief be claimed in respect of intra-group acquisitions?  

The regime specifically provides that where intangible assets are acquired from a group company in circumstances where such transferor would be entitled to Irish capital gains tax group relief, the acquiring company will be able to claim the new relief on the assets acquired only if both it and the transferring company elect to opt out of the group relief provisions.

Can the relief be clawed back?  

There is no clawback of relief granted where the intangible asset is held for a 15 year period (other than where the sale is to a connected company which could itself claim the relief).

Entry into force  

The legislation is expected to be enacted by the end of May 2009 and, once enacted, will take effect in respect of expenditure incurred after 7 May 2009.