EU demands change to Irish patent tax law

23 Mar 2007

The European Commission has formally requested Ireland to change its tax law provision by which patent royalties are exempt from tax only if research leading to the patent was carried out in Ireland. The provision is incompatible with the freedom of establishment and the free movement of services, the commission said.

Under Irish legislation (Section 243 of the Taxes Consolidation Act 1997) tax exemption of received patent royalties is granted only if the research leading to the patent was carried out in Ireland.

The current tax law provision dissuades Irish companies and individuals from contracting out research to institutions established elsewhere in the EU or in the EEA (European Economic Area) since the income from any resulting patents would not be tax exempt, unlike income from domestic patents.

Such legislation also dissuades Irish undertakings and individuals from setting up their research centres in other member states, thus infringing their freedom of establishment.

The European Commission considers this provision contrary to Articles 43, 48 and 49 of the EC Treaty (freedom of establishment and free movement of services) and the corresponding articles of the EEA Agreement.

The commission’s request has come in the form of a ‘Reasoned Opinion’ under Article 226 of the EC Treaty. If there is no satisfactory reaction to the reasoned opinion within two months, the commission may decide to refer the matter to the European Court of Justice.

The commission’s opinion is based on the EC Treaty as interpreted by the European Court of Justice in judgements of 10 March 2005 and 8 July 1999 in Cases C-39/04 (‘Laboratoires Fournier SA’) and C-254/97 (‘Baxter and Others’).

By Niall Byrne