Ireland has implemented a rather different Intellectual Property (IP) scheme to the ones currently adopted by other European countries like Luxembourg and Cyprus. Whereas Luxembourg IP regime and Cyprus IP regime provide for an 80% exemption of IP profits, Ireland provides a deduction of interest and tax depreciation equal up to 80% of the IP profits.
Ireland's IP scheme is a scheme of deduction of interest suffered to acquire the IP and capital allowances (tax depreciation) on capital expenditure incurred by companies on acquiring the IP. The deduction is available for offset against income generated from exploiting IP assets or from the sale of goods and services that derived the greater part of their value from the IP. The deduction is capped at 80% of this income. Excess deductions can be carried forward indefinitely and utilised against IP profits in future years.
The above deductions together with Ireland's 12.5% corporation tax rate lead to an effective tax rate of 2.5% (assuming maximum deduction for allowances and funding costs).
Ireland's IP regime is further complimented by a Research & Development (R&D) regime.
Under the R&D regime, companies are entitled to a tax credit of 25% on the first €100,000 of R&D expenditure incurred on or after 1 January 2012 and on any incremental R&D expenditure incurred in excess of the base year of 2003. The base year means that if a company spends more on R&D in the current year than it did in 2003 a tax credit is available.
Therefore for a company establishing in Ireland after 2003, the base year expenditure would be zero and all qualifying R&D expenditure incurred should qualify for the R&D credit.
The credit is deductible in full in the year the expenditure is incurred and is in addition to the normal trading deduction (12.5%) for such costs. Therefore, the effective value of the tax relief available is 37.5% on income taxable at 12.5%.
The R&D regime is flexible so that the IP resulting from the R&D does not need to be owned by the Irish company.
In the event that a company does not have sufficient corporation tax to absorb the credits then it can result to a tax refund over a period of 3 years subject to certain limits. In addition, provided certain conditions are satisfied, a company can use the credit to reward 'key employees' involved in R&D (i.e. employees can use the credit to reduce their income tax liability).
For the purposes of the regime, R&D means basic research, applied research or experimental development that seeks to achieve scientific or technological advancements and the resolution of scientific or technological uncertainty. The definition is so broad that covers a wide range of activities carried out in almost any industry.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
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