Revenue Note for Guidance

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Revenue Note for Guidance

242A Tax treatment of certain royalties

Summary

Section 238 provides for a deduction of tax at source from certain annual payments, and patent royalty payments. Section 242A allows royalty payments to be paid free of withholding tax in certain circumstances.

The section provides that, subject to certain conditions:

1. royalty payments can be paid free of withholding tax where they are made to companies that are tax resident in relevant territories. A relevant territory is a EU Member State other than Ireland or a country with which Ireland has a tax treaty, and

2. the general charge to income tax or corporation tax is removed for companies that are tax resident in relevant territories and in receipt of a royalty payment to which the section applies.

The conditions that apply in each case are:

  • the royalty payment must be made by a company in the course of a trade or business carried on by the company,
  • the receiving company must be resident in a relevant territory, and the payment must be made for bona fide reasons and not as part of any tax avoidance arrangement, and
  • the country of the recipient must have a tax that generally applies to royalty income receivable in that country from sources outside that territory.

Details

Definition

(1) “relevant territory” is given the same meaning that it has in section 172A. A relevant territory is an EU Member State other than the State or a territory with which Ireland has a tax treaty.

(2) The royalty payments to which the section applies are royalty payments that meet the following conditions:

  1. the royalties are paid by a company in the course of a trade or business carried on by it.
  2. the royalties are paid to a company:
    • that is not resident in the State,
    • that is resident in a relevant territory that imposes a tax that generally applies to royalties receivable there by companies from sources outside that territory, and
  3. the royalty payment is paid for bona fide commercial reasons and do not form part of a tax avoidance scheme.

The section does not apply to royalties paid to a company in connection with a trade or business carried on by it in the State through a branch or agency. Such royalties remain within the charge to Irish tax.

Non-application of section 238

(3) The requirement to apply withholding tax under section 238 does not apply to any payment to which this section applies.

Non-resident companies

(4) This subsection removes the royalty payments to which this section applies from the substantive charge to Irish tax that would otherwise apply.

Commencement

The section applies to a payment made on or after 4 February 2010.

Relevant Date: Finance Act 2021