Revenue Note for Guidance
A charge to tax under Case IV of Schedule D arises on a resident person who sells a patent right for a capital sum. (By virtue of section 754(2), the term “sale” includes the grant of a licence). The taxable amount is, in general, spread over a 6 year period commencing in the year the capital sum is received. Where the recipient is a nonresident person, the whole sum is chargeable under Case IV of Schedule D and is treated as if it were an annual payment, tax being deducted at source. A non-resident person may elect to have the charge to tax spread over a 6 year period. However, the sum is still subject to full tax at source in year one, with the necessary adjustments being made year by year by means of repayment.
(1)(a) Where a person resident in the State sells patent rights for a capital sum, that person is liable to tax under Case IV of Schedule D on one-sixth of the sum received for each of the 6 chargeable periods beginning with the chargeable period in which the sum is received.
(1)(b) However, the recipient of the capital lump sum may, by a written request to the inspector, opt to be charged on the whole sum in the chargeable period in which the sum is received. This option is useful where that person is a trader and it may be of advantage, if the trade has incurred a loss, to treat the whole of the capital sum as income of the chargeable period in which the sum is received so as to set the loss against that income. Any such request must be made within 12 months of the end of the chargeable period in which the sum is received.
(1)(c) In addition, the recipient of the capital sum may, by notice in writing to the inspector within 12 months of the end of the chargeable period in which the sum is received, request that the tax charge be spread over a period other than 6 years. In such circumstances, the Revenue Commissioners are empowered to direct that the charge be spread over a number of chargeable periods greater or less than 6, where it appears to them that the normal treatment would give rise to hardship.
(2) & (3) There is special provision to meet the case where a person resident outside the State sells Irish patent rights. Since the seller is non-resident, proceedings for recovery of tax might be ineffective. It is provided, therefore, that tax on the whole sum is to be charged under Case IV of Schedule D and that the purchaser must deduct income tax at the standard rate from the payment as if it were an annual payment under section 238.
The seller may, by notice in writing to the inspector within 12 months of the end of the chargeable period in which the capital sum is paid, elect to be charged on one-sixth of that sum for that period and for each of the 5 succeeding chargeable periods. This option for a 6-year spread of the charge does not, however, affect the obligation of the purchaser to deduct income tax at source under section 238 but the seller may claim repayment subsequently year by year, as and when his/her revised liability can be worked out on the basis of the charge being spread over 6 years.
(4) Due account can be taken of the fact that the seller of patent rights may have incurred capital expenditure on their acquisition at an earlier date. The capital gain which the seller makes and for which the seller is to be charged with tax under the section is the difference between what was paid and what is received. Where part of the patent rights have already been sold, the amount received from that sale must be reflected in an equivalent lowering of the acquisition costs to be deducted from the final sale proceeds. These adjustments cannot, however, influence the amount of tax to be deducted at source under section 238. Thus, where a non-resident seller of Irish patent rights acquired those rights by purchase, the person to whom the rights are being sold may have no knowledge of the original cost of acquisition to the seller. It is provided, therefore, that the purchaser (who is to account for tax to the Revenue) is to treat the whole sum which he/she pays as liable to deduction of tax, without any enquiry into the possible reduction in the seller’s liability which might otherwise apply by the application of this provision. Any relief due to the seller is to be given by way of repayment of tax.
(5) These rules apply to the sale of part of any patent rights as they apply to the sale of patent rights.
Relevant Date: Finance Act 2020