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Withhold No More - Outbound Patent Royalties Can Be Paid Gross
Under a statement of practice issued earlier this year, the Irish Revenue Commissioners have introduced a new administrative practice which allows royalty payments in respect of non-Irish patents to be paid gross. This development is a welcome step in enhancing Ireland’s status as a location in which to develop, exploit and manage intellectual property.
Patent royalties are the only form of royalty payment potentially subject to Irish withholding tax. A general exemption from this withholding tax is available where the recipient company is tax resident in an EU (excluding Ireland) or a tax treaty country and a number of supplementary conditions are satisfied. In a positive development, Irish Revenue have now confirmed that ‘foreign patent’ royalties may now be paid to recipients not resident in the EU or tax treaty countries once a number of conditions are satisfied.
What are the conditions?
The statement of practice is effective since 26 July 2010. It provides that a patent royalty can be paid free of withholding tax where:
- the royalty is paid in respect of a foreign patent (that is, in respect of a patent originally registered outside Ireland in relation to an invention developed outside Ireland);
- the relevant licence agreement is executed outside Ireland and is governed by foreign law;
- the paying company pays the royalty in the course of its trade;
- the royalty is not paid in the course of a “back to back or conduit arrangement” which involves the Irish payer acting as a flow-through entity;
- the payee company is not resident in Ireland and does not carry on a trade in Ireland through a branch or agency; and
- the payee company is the beneficial owner of the royalty payment
The exemption can only be relied upon to the extent the royalties are paid “in good faith and for purposes that do not include tax avoidance”.
What does the payee company have to do?
The statement of practice specifies that an application to the Irish Revenue Commissioners must be made by the payee company for permission to receive patent royalties without tax being deducted. The application must identify the paying and payee company, and provide sufficient information to demonstrate compliance with the requirements set out above.
Ireland has recently taken significant and focused steps to further enhance Ireland’s position as a leading jurisdiction for the development and holding of intellectual property. The scope of Ireland’s exemptions from withholding tax for patent royalties have been expanded. The categories of intellectual property for which tax depreciation can be claimed has been extended. The R&D tax credit has been broadened to a refundable credit. Taken together with Ireland’s low 12.5% rate of corporation tax, these measures provide further tangible benefits to businesses seeking to develop, exploit or manage intellectual property in and from Ireland.