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Irish Royalty Company

Since 1973, Irish tax legislation has provided for an exemption from tax for income derived from ‘qualifying patents’. A qualifying patent is defined as a patent in relation to which the research, planning, processing, experimenting, testing, devising, designing, developing or similar activity leading to the invention, the subject of the patent, was substantially carried out in Ireland. It is not necessary for the patent itself to be an Irish patent. However, the company or individual claiming the relief must be resident in Ireland for tax purposes.

Royalties received by companies from a qualifying patent are exempt from corporation tax. In addition, full relief is also available, in certain circumstances, to shareholders on dividends which are made by companies out of income from patents which have been disregarded for corporation tax purposes. Restrictions on the patent exemption have been introduced over the last few years with a view to preventing the use of exempted patent income for the remuneration of employees and executives through special classes of company shares, and to prevent excessive tax exempt royalties being paid between connected parties. It should be noted, however, that no restriction exists where a patent royalty is paid by an unconnected person. The recipient of the royalty is entitled to the full exemption from Irish taxation. Where research and development work in relation to patented intellectual property has been carried out in Ireland, the tax rate applicable to the resulting patent income will be reduced from the 12.5% rate to 0%. While no limitation has previously been placed on the patent income exemption, as and from 1 January 2008, a cap of €5 million for each 12-month period is being introduced in respect of this exemption. Where a number of connected individuals or companies qualify for this relief on patent income, the cap of €5 million for each 12-month period is applied between them. Any income above this threshold will be subject to either income tax or corporation tax.

The Irish Government remains committed to maintaining this valuable tax exemption and with careful tax planning, the patent royalty exemption can be of great benefit to companies and individuals in the licensing of IP from Ireland.