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Change to patent tax law urged in light of EU demand
26.03.2007
A patent expert has warned that if the Irish Government removes the proviso in its patent tax law whereby patents registered in Ireland are free of income tax if the research and development (R&D) was carried out in Ireland, as the EU has asked it to do, the floodgates would open and the country would be “in desperate trouble”.
Last week the European Commission formally asked Ireland to amend legislation where tax exemption of received patent royalties is granted only if the research leading to the patent was carried out in Ireland. The commission said the provision is incompatible with the freedom of establishment and the free movement of services guaranteed under European law.
It claims the law dissuades Irish companies and individuals from contracting out research to institutions established elsewhere in the EU or in the EEA (European Economic Area) and dissuades Irish undertakings and individuals from setting up research centres in other member states, thus infringing their freedom of establishment.
But Donal O'Connor, senior partner, Cruickshank Intellectual Property Attorneys, has warned that if the provision is simply removed it will open up Ireland to become a tax haven for multinationals.
"Where the commission is coming after us is on the basis of the R&D taking place in Ireland. It is saying that this is discriminatory against R&D carried out in other countries. On the face of it I have no problem with that, but if the Irish government was to remove that proviso the floodgates would open."
O'Connor said that large corporations could simply put all their patents into Ireland and then license out the patents to subsidiaries in other European countries. Even though the R&D took place elsewhere they would get the patent royalties free of income tax.
"To do that would be an appalling vista," O'Connor told siliconrepublic.com. "Essentially that would become a vehicle to allow companies to repatriate funds to lower-corporate tax environments."
O'Connor believes this problem can be gotten around if the Government limits the tax exemption to individuals and shareholders of patent-holding companies in this country.
"A proposal to overcome the problems is to take the operation of the incentive out of the corporate tax system and to direct it solely to inventors and individual patentees and ideally to shareholders of R&D or patent-holding companies, all of whom as individuals are resident in Ireland for tax purposes."
"That way there is no advantage for a large company if there is no tax advantage [for them]," he said. "They will simply deduct the tax from the dividends paid to the resident Irish shareholder and he or she will be able to reclaim it. It would be the same as a credit against tax in any other way."
This, O'Connor said, is the best way to ensure the original purpose of the legislation – to encourage R&D activity in Ireland – is maintained.
"The European Commission knows it can't attack the legislation on the tax-free status; they're attacking it on the very, very narrow ground that the R&D is only in Ireland," he said.
He added: "It does seem possible with a little modification, largely cosmetic, to obtain all the benefits for Ireland of the legislation without causing our European partners concern."
He said that personalising the tax exemption would benefit the following people:
·Inventors and other individuals who obtain patents and license the invention to unconnected or connected third parties.
·Inventors who are named as inventors on patents filed by third-level and other State employees who are afforded a share of the net benefits of inventions licensed by the applicant body, whether the inventor is a joint applicant or not.
·Inventors who are named as such by a patent-holding company which would be afforded the same tax treatment as the company being licensed or at the same rate as a company treated as a manufacturing company. However, the share of the royalty or other sums earned by the patent holding company when paid out to an inventor would be treated as a charge against profits and not taxable in the company's hands and would be tax free in the inventor's hands.
·Other individuals who are shareholders of the patent-holding company and are resident for tax purposes in Ireland.
O'Connor remarked that many of the latter are the individuals who put their own money into R&D projects or at the least are very valuable employees whom a company needs to attract to work in Ireland.
The Irish Government has two months to respond to the European Commission's request, at which stage the commission may refer the matter to the European Court of Justice.
By Niall Byrne
It claims the law dissuades Irish companies and individuals from contracting out research to institutions established elsewhere in the EU or in the EEA (European Economic Area) and dissuades Irish undertakings and individuals from setting up research centres in other member states, thus infringing their freedom of establishment.
But Donal O'Connor, senior partner, Cruickshank Intellectual Property Attorneys, has warned that if the provision is simply removed it will open up Ireland to become a tax haven for multinationals.
"Where the commission is coming after us is on the basis of the R&D taking place in Ireland. It is saying that this is discriminatory against R&D carried out in other countries. On the face of it I have no problem with that, but if the Irish government was to remove that proviso the floodgates would open."
O'Connor said that large corporations could simply put all their patents into Ireland and then license out the patents to subsidiaries in other European countries. Even though the R&D took place elsewhere they would get the patent royalties free of income tax.
"To do that would be an appalling vista," O'Connor told siliconrepublic.com. "Essentially that would become a vehicle to allow companies to repatriate funds to lower-corporate tax environments."
O'Connor believes this problem can be gotten around if the Government limits the tax exemption to individuals and shareholders of patent-holding companies in this country.
"A proposal to overcome the problems is to take the operation of the incentive out of the corporate tax system and to direct it solely to inventors and individual patentees and ideally to shareholders of R&D or patent-holding companies, all of whom as individuals are resident in Ireland for tax purposes."
"That way there is no advantage for a large company if there is no tax advantage [for them]," he said. "They will simply deduct the tax from the dividends paid to the resident Irish shareholder and he or she will be able to reclaim it. It would be the same as a credit against tax in any other way."
This, O'Connor said, is the best way to ensure the original purpose of the legislation – to encourage R&D activity in Ireland – is maintained.
"The European Commission knows it can't attack the legislation on the tax-free status; they're attacking it on the very, very narrow ground that the R&D is only in Ireland," he said.
He added: "It does seem possible with a little modification, largely cosmetic, to obtain all the benefits for Ireland of the legislation without causing our European partners concern."
He said that personalising the tax exemption would benefit the following people:
·Inventors and other individuals who obtain patents and license the invention to unconnected or connected third parties.
·Inventors who are named as inventors on patents filed by third-level and other State employees who are afforded a share of the net benefits of inventions licensed by the applicant body, whether the inventor is a joint applicant or not.
·Inventors who are named as such by a patent-holding company which would be afforded the same tax treatment as the company being licensed or at the same rate as a company treated as a manufacturing company. However, the share of the royalty or other sums earned by the patent holding company when paid out to an inventor would be treated as a charge against profits and not taxable in the company's hands and would be tax free in the inventor's hands.
·Other individuals who are shareholders of the patent-holding company and are resident for tax purposes in Ireland.
O'Connor remarked that many of the latter are the individuals who put their own money into R&D projects or at the least are very valuable employees whom a company needs to attract to work in Ireland.
The Irish Government has two months to respond to the European Commission's request, at which stage the commission may refer the matter to the European Court of Justice.
By Niall Byrne
Tags:
EU,
E-government