Summary of the regime
- The relief under the KDB will be provided by a reduction by 50% of qualifying profits from a separate trade for qualifying KDB activities. The profits in question may include royalty income, a portion of a product/service sales price, other sums from the use of the asset etc but not gains from the disposal of the asset. This reduction will serve to lower the applicable tax rate to an effective rate of 6.25%.
- The profits qualifying for the KDB follows the OECD endorsed ‘modified nexus approach’ and will be calculated by reference to the proportion of a company’s qualifying R&D expenditure carried on in Ireland (or in certain limited circumstances in the EU) as a percentage of overall group expenditure on the qualifying asset. Therefore the higher the proportion of overall group R&D carried on in Ireland the higher the level of relief available. This Ireland v group expenditure calculation will generally be carried out on an intellectual property (“IP”) assets by asset basis. However, in certain circumstances where it is almost impossible to separately identify the expenditure on a number of IP assets, the regime may be applied on a ‘family of asset’ basis.
- Assets qualifying for the KDB are IP derived from R&D activities including; patents (including supplementary protection for plant protection products and medicinal products, and plant breeders rights), and copyrighted software. A broader definition of qualifying IP assets is provided for certain smaller companies with income from IP assets not exceeding €7.5m.
- Expenditure incurred on outsourced R&D activities to unconnected parties (located anywhere) will be regarded as qualifying expenditure for the purposes of the KDB regime. However, expenditure incurred on the acquisition of IP and on outsourcing to connected parties is specifically excluded from the definition of qualifying expenditure. Where such costs have been incurred, companies will be entitled to an uplift, but only up to a maximum of 30% of the total amount of qualifying expenditure.
- The KDB will apply to any income earned from accounting periods commencing on or after 1 January 2016 and before 1 January 2021. Many previous and existing Irish tax regimes were introduced with a limited lifespan only to be extended on a regular basis. We anticipate that this may be the case with the KDB depending on its impact and level of uptake. All claims must be made within 12 months from the end of the accounting period to which the claim relates.
Nexus Taxation comment
In practice, the KDB regime will likely be most beneficial for indigenous Irish groups rather than large multinationals with Irish operations. This is on the basis that a significant portion of the R&D activities of the group as a whole on a particular IP asset must be carried out in Ireland in order to obtain most benefit from the relief. This will be easier for an indigenous Irish group to achieve rather than a large multinational with R&D activities spread across a number of sites. In addition, restrictions on the relief in circumstances where the IP assets are acquired (internally or externally) and where expenditure is incurred on R&D activities outsourced to group companies will likely have a greater impact on the availability of the KDB for larger groups.
To learn more about Ireland’s new Knowledge Development Box, the underpinning legislation and its practical implementation please contact Patrick McClafferty, Partner at Nexus Taxation – firstname.lastname@example.org