Bringing IP to Ireland
5 November 2007
Ireland is becoming an attractive location for IP, with foreign companies moving their brands/licensing IP to those located in Ireland. To sustain this position, substantial efforts have been made to introduce measures to ensure that Ireland has the necessary legislative and administrative framework in place to offer sufficient legal protection for IP rights, as well as tax incentives to encourage and foster growth of IP rights in Ireland.
The Irish court system
Due to the dramatic changes and enormous efficiencies introduced by the Commercial Court in 2004, Ireland is now in a position to offer a court system in which litigation can be resolved with minimum expenditure of time and resources and a guarantee of a trial in early course.
For a case to qualify for the Commercial Court List, the claim must be for at least Euro1m (£695,000) in value. The Commercial Court deals with all IP proceedings, regardless of their financial value.
The current average waiting time from the date of issue of the proceedings to the allocation of a trial date is approximately eight to 11 weeks from entry to the commercial list. Previously, a case could have taken years before it came to trial. In more complicated patent cases, this process may take a little longer as the issues are invariably more complicated and may take longer to resolve.
Notwithstanding the speed of which the Commercial Court deals with the dispute, the quality of justice dispensed is not adversely affected; rather the new rules mean that case preparation is more concentrated.
Substantial efforts have been made at a government level to introduce measures to ensure that Ireland has the necessary legislative framework in place to offer sufficient legal protection for IP rights. Ireland’s IP law can be split into four principal categories: trademarks, patents, copyright and designs. Except for copyright (rights automatically), all IP rights can be registered in Ireland and abroad.
Registered Irish trade marks are governed by the Trade Marks Act 1996. A registration lasts for a period of 10 years and can be renewed for a further 10 years. Unregistered trademarks may be protected under the common law tort of passing off; however, this can be uncertain and consequently difficult and expensive to enforce. Ireland also ratified the Madrid Protocol in 2001, which allows the applicant to apply to protect his/ her mark in several countries (which are also party to the Protocol) by filing one application in the Irish Patents Office.
The Patents Act 1992 governs the law relating to patents. The life of a patent is 20 years, or in the case of a short-term patent 10 years. Ireland is also a signatory to the Paris Convention pursuant to which each convention country must grant, as regards IP rights, the same protection to nationals of all other convention countries as it grants to its own nationals.
Ireland introduced the Copyright and Related Rights Act 2000 to govern and modernise the law relating to copyright and address the enormous technological changes that have taken place in recent years.
In addition, Ireland’s new Industrial Designs Act 2001 substantially updates Irish law with respect to the protection and registration of industrial designs. Registered designs are protected for up to 25 years, renewable at five-year periods. Ireland also benefits from the introduction of the Community Design Right (community-wide legal protection for designs) and Unregistered Community Design Right.
Patent Income exemption
An exemption from Irish tax will apply in respect of patent royalties or other income received where R&D work in relation to patented IP has been carried out in Ireland. After 1 January 2008, income from qualifying patents above Euro5m (£3.48m) will be subject to Irish tax. After that date, the tax exemption will also extend to patent royalty income derived from patented inventions in any European Economic Area State (ie EU, Iceland, Norway and Liechtenstein).
This patent income can, in turn, be paid by a company to its shareholders in the form of dividends and such patent dividends will be exempt from Irish income tax in the hands of the Irish resident recipient.
Tax credit for R&D
A 20 per cent R&D tax credit applies to qualifying expenditure on R&D incurred by companies subject to Irish tax. The tax credit will apply to incremental expenditure incurred on R&D. Where a company cannot utilise all of its R&D tax credit in a given year to reduce corporation tax otherwise owing, it is permitted to carry forward any unused credit indefinitely and to apply that unused balance to reduce further taxes payable.
Stamp duty exemption
Irish tax law provides an exemption from stamp duty on the sale, transfer or other disposition of IP such as any patent, trademark, copyright, registered design, design right, invention, domain name, supplementary protection certificate or plant breeder’s rights. Also included in the exemption is goodwill to the extent that it is directly attributable to such IP.
This is an important exemption as prior to its introduction any transfer of IP rights attracted stamp duty up to a rate of 9 per cent, depending on the value of the assets transferred. This represents a huge tax saving for companies engaged in the licensing of IP or other hi-tech business and therefore acts as an incentive to these types of companies to locate their IP rights in Ireland.
Low corporate tax
A general corporate tax rate of 12.5 per cent applies to all companies operating in Ireland regardless of whether they are Irish companies or not. To qualify for the 12.5 per cent rate, the income earned must be active ‘trading income’ and not passive investment income (such as interest, dividends or ‘passive royalties’). The trade must also not be carried out “wholly outside of Ireland”. Practically speaking, this means that some essential part of the trading function, such as a sales function, must be carried out from Ireland.
A higher corporate tax rate of 25 per cent will generally apply to passive non-trading income or where the trade is carried on wholly outside of Ireland.
An issue can arise as to whether royalty income from the licensing of IP is eligible for the 12.5 per cent rate. Provided that sufficient management, sales and/or enforcement activities are carried out in Ireland, an IP holding company can technically qualify for the 12.5 per cent rate. Where the holding of IP can be combined with research and development work carried on in Ireland, the licensing of the IP will generally be viewed as a trading activity that qualifies for the 12.5 per cent tax rate. In such circumstances, Ireland becomes a very tax efficient IP licensing jurisdiction.
Ireland does not, as a general rule, impose withholding taxes on either interest or dividend payments made by an Irish subsidiary to a foreign parent company that is located in either an EU Member State or a Tax Treaty jurisdiction (ie a jurisdiction with which Ireland has entered into a double taxation agreement).
In the case of dividends, this exemption is extended to also apply to recipient companies that are not resident in EU or Treaty jurisdictions, but which are ultimately controlled by persons who are so resident. Interest and dividend payments made to non-qualifying foreign persons will generally attract 20 per cent withholding tax in Ireland. Most of Ireland’s Tax Treaties reduce any withholding tax on royalties to zero.
Thin capitalisation rules
Most countries have thin capitalisation rules aimed at limiting interest deductions where a company is controlled by a non-resident person. Ireland has limited thin capitalisation rules, which limit the tax deductibility of interest payments made from an Irish subsidiary to a parent company in an EU Member State or a Tax Treaty country.
Transfer pricing rules/CFC rules
Ireland does not impose either controlled foreign company rules (CFC rules) or transfer pricing rules on companies operating in Ireland. The intent of transfer pricing rules is to prevent income from artificially being shifted from a country with high corporation tax rates to lower tax jurisdictions by having a related company in a low-tax jurisdiction supply goods or services to a related company in the high-tax jurisdiction at artificially inflated prices.
Extensive tax treaty network
Ireland has entered into a double taxation treaty with 44 countries at present. This extensive double tax treaty network is one element that differentiates Ireland from most other low-tax jurisdictions.
Irish holding company regime
Ireland has introduced new tax measures designed to increase the attractiveness of Ireland as a holding company jurisdiction. It is hoped that these measures will incentivise multinational corporations to locate not only manufacturing activities in Ireland, but also their European headquarters.
The general rule is that capital gains realised on the sale of shares attracted corporation tax at an effective rate of 20 per cent.
However, capital gains realised on the disposal by an Irish company of a 5 per cent plus shareholding in a company located in either an EU Member State or a country with which Ireland has entered into a double taxation treaty will, provided certain conditions are met, be exempted from Irish tax.
Martin Phelan and Deirdre Finn at William Fry Tax Advisers