Revenue Note for Guidance

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Revenue Note for Guidance

234 Certain income derived from patent royalties

Summary

This section provided that prior to the Finance Act 2011 certain income derived from patent royalties was exempt from tax and was not, subject to an annual limit, to be taken into account for any purposes of the Tax Acts. The exemption was, however, abolished under the provisions of the Finance Act 2011 so that it will not apply to income from a qualifying patent which is paid to a person on or after 24 November 2010.

Details

Definitions

(1)a qualifying patent” is a patent where the work which gives rise to the invention which is patented is carried out in an EEA state. Prior to the Finance Act 2007, a “qualifying patent” was a patent in relation to which the research, planning, processing, experimenting, testing, devising, development or other similar activity leading to the invention which is the subject of the patent was carried out in the State. The extension to EEA states rather than just in the State, applies as respects income from a patent in relation to which the research, planning, processing, experimenting, testing, devising, development or other similar activity leading to the invention which is the subject of the patent is carried out on or after 1 January 2008.

EEA state” means a state which is a Contracting Party to the EEA Agreement.

EEA Agreement” means an agreement of the EEA signed at Oporto in 1992 as adjusted by the Protocol signed at Brussels in 1993.

income from a qualifying patent” is any royalty paid in respect of the user of the invention to which the qualifying patent relates and includes any sum paid for the grant of a licence to exercise rights under the patent. The royalty must be paid for the purposes of activities which —

  • are regarded as activities within the 10 per cent scheme of corporation tax provided for by Part 14, other than international financial services carried on from the International Financial Services Centre and Shannon Zone services activities (it is to be noted that the repair or maintenance of aircraft in the Shannon Zone is not excluded), or
  • would be eligible manufacturing activities for the purposes of Part 14 even though they are carried on by an unincorporated enterprise or are carried on outside the State.

However, as respects royalties paid after 23 April, 1996, only so much of a royalty paid to the holder of a patent by a connected manufacturing company as does not exceed an amount which would be paid between persons acting at arm’s length is treated as income from a qualifying royalty.

Also treated as income from a qualifying patent are royalties paid —

  • for the purpose of non-manufacturing activities where the payer is not connected (“connected” here means connected for the purposes of the Capital Gains Tax Acts – see section 10) with the beneficial recipient of the royalty, and
  • where no arrangements exist which have as a main purpose the satisfying of the condition that the royalty or other sum must be received from a unconnected person. In other words if third parties are brought into the payment stream in order to achieve exemption of royalties, the royalties are not exempt.

“resident of the State” is any person resident in the State for tax purposes and not resident elsewhere.

A company is resident in the State if it is controlled and managed in the State.

See also further definitions relevant to subsection (3A) below.

Exemption

(2) An Irish resident individual or company on making a claim on the appropriate form is entitled to have any income accruing from a qualifying patent disregarded for the purposes of the Income Tax Acts or Corporation Tax Acts, as appropriate. Applicants claiming exemption must, however, make the appropriate tax returns.

(3) An individual in receipt of income from a qualifying patent is not entitled to have that income treated as exempt income unless the individual carried out, either solely or jointly with another person, the research, planning, processing, experimenting, testing, devising, development or other similar activity leading to the invention which is the subject of the qualifying patent.

(3A), (a), (e) The aggregate amount of income from qualifying patents of a person (company or individual) to be disregarded for income tax or corporation tax cannot exceed €5m in the “relevant period” as defined in paragraph (e) below.

(b) Where a person or persons are connected (within the meaning of section 10) with a company which would otherwise have the income disregarded under subsection (2), the limit of €5m will apply to the aggregate of the amounts of income arising to such persons.

The €5m limit can be allocated between the above persons where the aggregate exceeds that amount.

(c) The persons can make a joint election as to the allocation of the €5m in writing to the appropriate inspector, by the return filing date, of the latest chargeable period (within the meaning of section 321(2)) of the company or any of the persons which falls wholly or partly into the 12 month relevant period. Where no election notice of allocation is given, the amount of the €5m allocated to the company or person is then determined by applying a formula to allow an amount in proportion to the aggregate of the amounts of income from qualifying patents to the company or person over the aggregate of amounts arising to all of the connected persons.

(d) Where the accounting period of a company does not coincide with the 12-month relevant period (as defined), the amount of income from qualifying patents arising to the company in the 12-month period is the aggregate of such amounts in the whole or part of an accounting period falling within the relevant period. There is a time apportionment of the income from qualifying patents in the accounting period according to their respective lengths. The amount of income to be disregarded is to be given in the earlier accounting period, or part of that accounting period.

(e) Two definitions are included within subsection (3A):

income from qualifying patents” means income from one or more than one qualifying patent.

relevant period” means the period of 12 months commencing on 1 January 2008 and each subsequent period of 12 months (i.e. a calendar 12 month period).

(4) Where under section 77 of the Patents Act, 1992 or any corresponding provision of any other country, an invention which is the subject of a qualifying patent is used for the service of the State or of the government of the country concerned, this section applies as if that use had taken place under a licence and any sums paid in respect of the licence were income from a qualifying patent.

Section 77 of the Patents Act, 1992, allows the State to make use of any patented invention for the service of the State on payment of compensation to the patentee. In such a case there may be no formal document corresponding to the licence referred to in the definition of “income from a qualifying patent”. This subsection brings any such compensation within this definition and, accordingly, extends the exemption to the compensation.

Miscellaneous

(5) Once a person establishes a Case III of Schedule D source of income, that source of income does not cease by virtue of the fact that that source represents income qualifying for relief under this section.

(6) The Revenue Commissioners may, in determining the amount of income to be disregarded under this section, make such apportionment of receipts and expenses as may be necessary.

(7) Relief under this section may be given by repayment or otherwise.

(8) Persons in receipt of disregarded income are obliged to show the amount of such income in their tax returns.

Abolition of exemption

(9) This section shall not apply to income from a qualifying patent which is paid to a person on or after 24 November 2010.

Relevant Date: Finance Act 2020