Ireland: ‘Knowledge box’ patent tax rate expected to be 5%

Ireland: The Department of Finance will publish a consultation document Wednesday on the proposed ‘knowledge box’ patent tax regime that will be enacted in replacement of the Double Dutch tax avoidance scheme. Late last year Department officials hinted that a 5% rate was under discussion to match the Dutch rate.

The Irish headline corporation tax rate is 12.5%.

Special rates and tax conditions applying to intellectual property (IP) have become popular in recent years and all countries actively seeking FDI (foreign direct investment) will have a regime in coming years but for European Union countries, both the European Commission and the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) are due to propose common rules to avoid another battleground for corporate tax avoidance.

Italy introduced IP tax incentives last month.

The evolving regime is one where it will no longer be as simple as using digital accounting transactions to shift IP ownership to low tax or no tax jurisdictions and relevant profits will have to derive from actual research and development (R&D) within a country. The value of trade marks and brands will be excluded.

This is a challenge for Ireland as business R&D is not generally at a level that merits a patent while less than one-third of IDA Ireland’s foreign client companies spend any money on research. Israel is the preferred overseas location for American R&D centres.

Last November the UK, which has a preferential rate of 10% compared with the headline rate of 21%, announced an agreement with Germany on  the link between profit and actual research done in a country while rules regarding collaboration between teams in two or more countries have to be agreed.

At the monthly ECOFIN council meeting of EU finance ministers  concerning an amendment of the Parent Subsidiary Directive and the Directive covering the automatic exchange of information, the Netherlands expressed concerns about the definition of intellectual assets and a requirement for patenting.

However, it’s unlikely that there would be trust in a certification by an accountancy firm for example as it’s already easy to abuse what’s classified as R&D and an Irish IP consultant has suggested that the Irish self-assessed 25% R&D tax credit is used more to cut tax bills than promote innovation.

KPMG Netherlands said in a comment following the ECOFIN meeting: “In the report, the Deputy Minister states that for the competitiveness of small and medium-sized enterprises in particular it is important that innovation boxes are not confined to patents, but also that profits arising from activities for which an R&D certificate has been issued (R&D innovations) remain within the innovation box. After all, the process of applying for a patent is often too expensive for SMEs, while they do have more than sufficient ties with the Member State of residence. In this regard, the Netherlands has added a written statement to the minutes of the ECOFIN meeting. In his letter to the Lower House of December 4, 2014, the Deputy Minister had already stated that the Netherlands would also continue to argue strongly within the EU and OECD for the inclusion of R&D innovations in the future innovation box. At the moment, however, it is still uncertain whether it will succeed in this.”

Michael Noonan, Irish finance minister, last month said on the Anglo-German agreement on patent boxes that it appeared qualifying for the tax break would be determined by whether a certain percentage of a company’s research and development staff worked locally.

“This approach on the one hand fits into Ireland’s core value of attracting substance,” he said.

“However, on the other hand, I do have concerns that such an approach, if designed too tightly, would have the potential to limit the scope for use by smaller countries.

“Would this represent a fair reform? I don’t think so. Further discussion is both planned and necessary.”