Ireland offers a very favourable taxation regime for innovative and research orientated companies through the availability of the Research & Development (R&D) tax credit and the tax relief granted to companies for the capital cost of acquiring intellectual property.
R&D Tax Credit
The R&D tax credit scheme was introduced into Irish tax legislation with the objective of encouraging both foreign and indigenous companies to undertake new and / or additional R&D activity in Ireland.
The scheme allows Irish tax resident companies and branches engaged in in-house qualifying R&D undertaken within the European Economic Area (EEA), a tax credit of 25% against Irish corporation tax, provided that such expenditure is not otherwise eligible for tax benefit elsewhere within the EEA.
The R&D tax credit is also available on:
“Qualifying buildings”, which are defined as buildings with a minimum R&D usage of 35% over a defined 4 year period; and
R&D work sub-contracted to unconnected parties (subject to certain limits).
Tax Relief For Capital Expenditure Incurred On Intellectual Property
This favourable tax relief was introduced into Irish taxation legislation in 2009 and provides that capital expenditure incurred on or after 7 May 2009 on certain intangible assets used for the purposes of a trade will be available for offset against a company’s taxable income. The maximum deduction allowed on an annual basis is 80% of a company’s taxable income. In certain cases, the relief may reduce the company’s tax rate to 2.5% of its profits.
The type of expenditure that qualifies for the relief is quite broad and includes capital expenditure incurred on trademarks, licences, copyrights, patents, industrial know-how, brands and goodwill directly attributable to any of these intangible assets.
The tax relief operates by granting capital allowances (or tax depreciation) on the qualifying expenditure so as to reduce a company’s profits that are liable to corporation tax. The capital allowances granted will be the same as the amount of depreciation or amortisation on the intangible asset charged to the profit and loss account of the company. However, the tax relief also allows the company the option to claim the relief over a period 14 years at 7% per annum and 2% in year 15.
Where a company acquires intangible assets from group companies, the tax relief also applies. However, the amount of the relief is capped at an arm’s length price.
Also, for the tax relief to apply, the capital expenditure must be incurred wholly and exclusively for bona fide commercial reasons and not as part of any tax avoidance arrangement.
Through the introduction into the Irish taxation legislation of favourable taxation reliefs in relation to R&D and intellectual property, Ireland has become a very favourable location for innovative and research orientated companies to operate from.