Revenue Note for Guidance
Prior to the Finance Act 2011, certain distributions made out of income from certain patents which income had been disregarded for income tax purposes under section 234, or for corporation tax purposes by that section as applied for corporation tax purposes, were themselves disregarded for the purposes of income tax and corporation tax under the provisions of this section. The exemption was, however, abolished in respect of distributions made out of disregarded income on or after 24 November 2010 under the provisions of section 26 of the Finance Act 2011.
(1) “disregarded income” is income derived from —
However, such income accruing to a company on or after 28 March, 1996, does not include income from a qualifying patent paid by a connected manufacturing or deemed manufacturing company (such income is referred to as “specified income”).
“eligible shares” are shares forming part of the ordinary share capital of the company which —
“other profits” includes dividends and distributions, but excludes a distribution made to a company out of disregarded income where that distribution is in respect of eligible shares.
(2) A distribution made partly out of disregarded income and partly out of other profits is treated as if it consisted of 2 distributions, one made out of disregarded income and the other made out of other profits.
(3)(a)(i) & (4) Distributions out of disregarded income made to a person are —
disregarded for income tax purposes. A distribution made partly out of disregarded income which is relevant income and partly out of other disregarded income is treated as if it were 2 separate distributions, one made out of relevant income and the other out of the other disregarded income.
(3)(a)(ii) Distributions out of disregarded income made to a company are, where the distributions are made in respect of eligible shares, treated as disregarded income of the recipient company for the purposes of this section.
(5)(a) & (b) “research and development activities” has the meaning set out in section 766 (deduction for certain expenditure on research and development).
“the amount of the expenditure on research and development” is expenditure on emoluments, materials, goods, and payments to third parties made in relation to research and development activities. Research and development expenditure incurred by companies which are members of a group may on a joint written election be treated as such expenditure by one member of the group. For this purpose, in addition to the usual requirement that one company is a 75 per cent subsidiary of another company or that the 2 companies are 75 per cent subsidiaries of a third company, 2 companies are in a group if both are owned to the extent of 75 per cent by the same individual or individuals.
“the amount of aggregate expenditure on research and development incurred by a company in relation to an accounting period” is the amount of expenditure on research and development activities incurred in the State by a company in an accounting period and each of the 2 preceding accounting periods. Where 75 per cent or more of all expenditure on research and development is incurred in the State then all such expenditure is to be taken into account in determining this aggregate.
(5)(c) Where a company makes a distribution out of specified income (see note on the definition of disregarded income) which accrued to the company on or after 28 March, 1996, and the specified income is income from a qualifying patent in respect of an invention which was patented for bona fide commercial reasons and not primarily for the purpose of avoiding liability to tax, the distribution is treated as a distribution out of disregarded income to the extent that the distribution does not exceed the aggregate expenditure on research and development incurred by the company for the accounting period in which the distribution is made.
(5)(d) Alternatively, where a person in receipt of specified income shows to Revenue’s satisfaction that the specified income derived from a qualifying patent for an invention involving radical innovation which was not patented primarily for tax avoidance purposes, Revenue may determine that all distributions made out of the specified income derived from the patent are to be treated as made out of disregarded income. In making this determination Revenue may consult appropriate experts. A person aggrieved by Revenue’s determination has a right to appeal the determination to the Appeal Commissioners and subsequently to the High Court.
(5)(e) The Revenue Commissioners are authorised to nominate any of their officers to perform the functions given to the Commissioners under this subsection.
(5A) A restriction applies in relation to an arrangement that dresses up what are, in reality, franchising, licensing or other similar fees between unconnected parties as exempt patent royalty payments. Exemption for distributions in the hands of shareholders out of such income are limited, as respects distributions made on or after 2 February 2006, by reference to the aggregate research and development expenditure incurred by the company, and its group companies, over a three-year period. This limited exemption will only apply if the patent was patented for bona-fide commercial reasons and not primarily for the purpose of avoiding liability to tax. Otherwise, no exemption applies.
(7) The statements required to accompany dividends and other distributions must show, where appropriate, that distributions are made out of disregarded income.
(9) A distribution for an accounting period is regarded as being made, as far as is possible, out of the distributable income of that period, any excess of the distribution over that income is treated as having been made out of the income of the most recent preceding accounting period in priority to earlier ones.
(10) Subsections (8) and (9) of section 140 apply to distributions out of disregarded income. These provisions provide, respectively, for the apportionment of distributions where the period for which a company makes up accounts is partly within and partly outside an accounting period for corporation tax purposes, and for regarding a distribution which is not for any specified period as having being made for the accounting period in which it is made.
(11) This section shall not apply to distributions made out of disregarded income on or after 24 November 2010.
Relevant Date: Finance Act 2018