Irish royalty structures

[Patrick Moore]

Irish resident companies are very attractive at the moment because they can be used for the utilisation of intellectual property. Until recently, Irish companies have most commonly been used as intermediary licensing companies. Since May 2009, Ireland has also been an attractive jurisdiction for holding intellectual property beneficially.

Ireland: a top choice for royalties

The reason why Ireland is such an attractive option for the exploitation of royalties is that, generally speaking, no withholding tax is applicable to outgoing royalties (except on patent and mining royalties, but even these may be exempt under certain circumstances).

For many licensing structures, Ireland will be the best location for an intermediary licensing company for the exploitation of all types of intellectual property. With its new, convenient capital allowance regime, Ireland is now an ideal location for developing, holding and exploiting IP. It is important to remember that every case is different, and appropriate advice must always be sought.

About royalty payments

Royalty payments by Irish companies can be subject to a 20% withholding tax. However, there is an exemption where the recipient is a resident of an EU or a treaty state where royalty income is subject to tax. Even if these conditions are not met, with appropriate structuring and by ensuring that the payment is not treated as originating in Ireland (i.e. making sure that the patent is not registered or exploited in Ireland, that no Irish bank account is used and the relevant agreements are not governed by Irish law, etc.) it will still be possible in many cases for an Irish company to make patent royalty payments without any deductions for Irish withholding tax.

Structures where the Irish company is the IP owner

Alternatively, an Irish company may be used to hold the intellectual property beneficially, having either developed it in-house or purchased it (including from a connected party, in which case the purchase price will be capped for tax purposes at the arm’s length price). Generous tax allowances are available against income earned from the exploitation of intellectual property including patents, copyright, trade marks and brands and know-how (where the income is directly attributable to intangible assets). The allowances available are equal to the depreciation or amortisation charge shown in the accounts in accordance with generally accepted accounting principles.

The allowances can only be set against income or sales derived from the use or exploitation of the intellectual property, and are limited to 80% of the profits from such activities in any given year. With the right structuring, the average tax rate can be brought down to 2.5%. In order to claim Irish tax relief on the cost of intellectual property, the company must be actively exploiting it, or products deriving from it, in Ireland. This requires an office and employees located in Ireland. This requirement does not apply to those utilising an offshore structure.

Note that appropriate structures could be put in place to ensure that dividends paid by the Irish company out of its post-tax profits are not subject to withholding tax.

Structure using an Irish company as an intermediary

Here is an example of a royalty structure using an Irish licensing company, with calculations:

Assumed royalty income is €1,000,000.

Category	EUR	Percent
Income	1,000,000	100.00
Paid to offshore tax-free	(950,000)	(95.00)
Retained by Irish company	50,000	5.00
Irish CIT at 25%	(12,500)	(1.25)
Profit after tax	987,500	98.75

In certain situations, an additional 20% withholding tax may be levied on dividends paid to an offshore entity. This means that there could be a small additional tax expense associated with extracting funds held in Ireland. However, this can be avoided with careful structuring, if the ultimate owners of the offshore entity are individuals resident in a state that has a double tax agreement with Ireland.

As with any royalty structure, care should be taken regarding the timing of royalty receipts and payments to ensure that only the margin retained is subject to taxation. The licence agreements must be appropriately drafted to facilitate this.