Ireland's appeal as a domicile for the holding and development of intellectual property will be boosted by the introduction across EU states of exit taxes from the beginning of next year.
Ireland – a leading hub for IP
Ireland is an already attractive location for IP-rich companies. In 2016, Ireland added to its appeal in launching a new preferential tax regime for companies undertaking research and development activities with its new patent box regime, the Knowledge Development Box.
Under the KDB, an eligible company can claim a deduction equal to 50% of its qualifying income that arises from patents, copyrighted software, and, in the case of smaller companies, other intellectual property that is similar to an invention that could be patented.
This means that, in effect, these profits are taxed at 6.25% – half Ireland's headline corporate tax rate of 12.5%.
Further, under the capital allowances for intangible assets (CAIA) regime, companies can claim capital allowances for the cost of acquiring intellectual property rights, which can markedly reduce their effective corporate tax rate in Ireland.
EU exit taxes
The EU's exit tax policy is part of the EU's response to tax base erosion and profit shifting, announced as part of the first EU Anti Tax Avoidance Directive.
Member states are being required to introduce these exit taxes to prevent domestic companies from avoiding tax by shifting intangible assets situated in an EU member state out of that state, and into low-tax non-EU states before these assets generate taxable income.
These new exit taxes enable member states, such as Ireland, to tax the value of the product before the intellectual property is shifted overseas.
The exit tax's design is simple. A taxpayer will be subject to the exit tax at an amount equal to the market value of the transferred assets, at the time of the exit of those assets, less their value for tax purposes. This will ensure that states will receive an amount of tax equal to what would be expected to be returned from the exploitation of that IP in that state were it not for the transfer.
Opportunities in Ireland
The tax world has evolved rapidly since 2015, when the OECD set out to change the international tax landscape for multinationals. Responding to a mandate from the G20 countries, it has proposed solutions to enhance the amount of tax paid by multinationals and to close some avenues for aggressive tax avoidance.
A key recommendation from this work was that the location in which income should be taxed should be where economic activities with substance take place.
Ireland has responded quickly to this new environment by introducing the exit tax rules ahead of the rest of the EU, and by enhancing its appeal for companies with IP that set up physical operations in Ireland.
In particular, Ireland offers generous tax breaks for companies that move their IP to the country. Under the CAIA regime, companies can acquire intangible assets and offset the cost of the acquisition against future taxable profits, for a period of up to 15 years.
As a result of the KDB and CAIA regimes, relocating intangible assets to Ireland can result in substantial tax savings.
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