An individual or a company is entitled to have income from a patent arising from research and development work conducted in the state, disregarded for the purposes of the Income Tax Acts. This includes a royalty or other sum paid in respect of the use of the invention to which the qualifying patent relates.
The exemption, which must be justifiable on the basis of independent parties acting at arms length, will be available whether the activity is carried on in the State or elsewhere and applies to both "manufacturing" and "non-manufacturing" activities. Where the parties are connected the exemption relates only to "manufacturing" activities.
Where the individual is the inventor of the invention, the exemption applies both to direct payments received by the inventor and to dividend income from a company which holds the rights in the patent. Where the patent royalty payments are received from a connected company and the patent holding company has incurred R&D expenditure, the exemption will continue for dividends up to an amount equal to the aggregate of the current year and two previous years R&D spend. Any R&D carried out by a group of companies of which the patent holding company is a member can also be claimed.
The tax exemption on royalty income will not be limited to the aggregate R&D expenditure where it is shown, to the satisfaction of the Revenue Commissioners that the patent is in respect of a "radical innovation" and the invention "was patented for bona fide commercial reasons, and not primarily for the purpose of avoiding liability to taxation". While no clear guidelines as to the definition of radical innovation exist, it is felt that evidence would need to be produced clearly demonstrating both the technical and commercial novelty of the invention.
This should be read as general information purposes only. It does not purport to be comprehensive or to provide legal or tax advice. Persons wishing to avail of the above provisions should seek professional advice from an accountant or tax consultant.
© Maclachlan & Donaldson