In developing IP there are a number of general issues that should be considered such as whether the IP should be held and developed within a separate legal entity, whether  the IP is patentable and the mechanism to capture/track the Research & Development (R&D) spend. 

In this phase of the IP lifecycle the most important tax issue is gaining the maximum tax relief for the expenditure incurred.

Tax deduction for expenditure on developing/acquiring IP rights

In general, for an expense to be deductible as a business expense under Irish tax legislation, there are a number of conditions that must be met. The expense must be incurred wholly and exclusively for the purposes of the trade and must be revenue, and not capital, in nature.
Where it is not possible to claim a deduction under the wholly and exclusively/revenue in nature test it may be possible to claim a deduction as follows:

• scientific research:  revenue and capital expenditure on "activities in the fields of natural or applied science for the extension of knowledge" is allowable as a trading expense in the year in which the expenditure is incurred. The write-off is not available for mining and petroleum related research.
• patents:  costs can be written-off and a tax deduction generally claimed over 17 years on a straight line basis (less than 17 years where the life of the patent is less)
• know how (industrial):  revenue and capital expenditure can be written-off fully as a trading expense in the year in which it is incurred. The write off is not available where the know how was part of an acquired business or purchased from a related party.
• software:  is written-off over eight years at 12.5% on a straight line basis where the software is used for business purposes.
• trademarks:  no tax depreciation is available for the cost of developing or acquiring trademarks although a deduction is available for the costs of obtaining the registration of a trademark.
• other (including brands and copyright):  no tax depreciation is available for the purchase of other IP assets (although it may be possible to obtain a revenue deduction for costs incurred to "build" a brand, e.g. advertising).

Licence/royalty payments

It is common for companies to license in IP for use in the development of their own IP and or products/services. Check out the Heatsolve Case Study on our website here
The level of royalties/licence fees depends on the nature of the IP and may vary from industry to industry.  Charges in connection with licence fees and royalties should be tax deductible as they are accrued to the accounts, so long as they are revenue in nature and trade related.
Payments in respect of patent royalties are tax deductible on a paid basis only.
There are also withholding tax implications which are addressed later in this guide.  Click here to go to the withholding tax section.

Cost share payments

Again it is common for companies to undertake joint R&D to co-develop IP, sharing the associated costs.  It certain circumstances one or both parties may have already developed/partially developed IP which the other party needs to make an upfront payment to ‘buy-in’ to.

Ongoing cost share payments

In respect of the ongoing cost share payments, so long as they are revenue in nature and trade related a tax deduction should be available.

“Buy in” payment

An upfront buy-in payment is more likely to be regarded as capital in nature and potentially non-deductible. Accordingly care should be taken in structuring such payments.  As each situation is different advice should be sought before entering into an agreement where such a payment is required.

R&D tax credit

Ireland operates an R&D credit system for in-house R&D activities.

A 20% tax credit applies only to incremental expenditure on certain R&D incurred by companies that are themselves trading or are members (more than 50% owned) of a trading group. This tax credit is in addition to the corporate tax deduction available.  The tax credit is available for offset against current year corporation tax liability and any unused credit can be carried forward indefinitely to future periods.

For further details on this credit see appendix I or click here.

Financial Support

There are a number of financial supports available to assist with R&D expenditure. Click here for more information.

Tax Guide Index | Phase 2 - Exploiting IP rights