234 Certain income derived from patent royalties.

[FA73 s34; CTA76 s140(1) and Sch2 PtI par35; FA81 s19; FA92 s19(1); FA94 s28; FA96 s32(1) and (3)(a) and s132(1) and Sch5 PtI par7; FA97 s146(1) and Sch9 PtI par6(2)]

(1) In this section—

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“EEA Agreement” means the Agreement on the European Economic Area signed at Oporto on 2 May 1992, as adjusted by the Protocol signed at Brussels on 17 March 1993;

“EEA state” means a state which is a Contracting Party to the EEA Agreement;

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“income from a qualifying patent” means any royalty or other sum paid in respect of the user of the invention to which the qualifying patent relates, including any sum paid for the grant of a licence to exercise rights under such patent, where that royalty or other sum is paid—

(a) for the purposes of activities which—

(i) would be regarded, otherwise than by virtue of paragraph (b) or (c) of section 445(7) or section 446, as the manufacture of goods for the purpose of relief under Part 14, or

(ii) would be so regarded if they were carried on in the State by a company,

but, as respects a royalty or other sum paid on or after the 23rd day of April, 1996, where the royalty or other sum exceeds the royalty or other sum which would have been paid if the payer of the royalty or other sum and the beneficial recipient of the royalty or other sum were independent persons acting at arm’s length, the excess shall not be income from a qualifying patent,

or

(b) by a person who—

(i) is not connected (within the meaning of section 10 as it applies for the purposes of capital gains tax) with the person who is the beneficial recipient of the royalty or other sum, and

(ii) has not entered into any arrangement in connection with the royalty or other sum the main purpose or one of the main purposes of which was to satisfy subparagraph (i);

“qualifying patent” means a patent in relation to which the research, planning, processing, experimenting, testing, devising, designing, developing or similar activity leading to the invention which is the subject of the patent was carried out ^[2]>in the State;^<[2][2]>in an EEA state;^<[2]

“resident of the State” means any person resident in the State for the purposes of income tax and not resident elsewhere;

a company shall be regarded as a resident of the State if it is managed and controlled in the State.

(2) (a) A resident of the State who makes a claim in that behalf and makes a return in the prescribed form of his or her total income from all sources, as estimated in accordance with the Income Tax Acts, shall be entitled to have any income from a qualifying patent arising to him or her disregarded for the purposes of the Income Tax Acts.

(b) In paragraph (a), the reference to a return of total income from all sources as estimated in accordance with the Income Tax Acts shall apply for corporation tax as if it were or included a reference to a return under section 884.

(3) Notwithstanding subsection (2), an individual shall not be entitled to have any amount of income from a qualifying patent arising to him or her disregarded for any purpose of the Income Tax Acts unless the individual carried out, either solely or jointly with another person, the research, planning, processing, experimenting, testing, devising, designing, developing or other similar activity leading to the invention which is the subject of the qualifying patent.

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(3A) (a) Notwithstanding subsection (2) but subject to paragraphs (b) to (d), so much of the aggregate of the amounts of any income from qualifying patents arising to a person in a relevant period which would, apart from this subsection, be disregarded under subsection (2) for the purposes of income tax or corporation tax as exceeds €5,000,000 shall not be so disregarded.

(b) Where—

(i) in relation to a company, income from qualifying patents arising in a relevant period would, apart from this paragraph, be disregarded under subsection (2), and

(ii) in relation to one or more persons who are connected (within the meaning of section 10) with the company referred to in subparagraph (i), income from qualifying patents arising in that relevant period would, apart from this paragraph, be disregarded under subsection (2),

then the aggregate of the amounts of income from qualifying patents, which is to be disregarded under subsection (2), arising to the company and all of those persons in the relevant period shall not be greater than €5,000,000.

(c) Where the aggregate of the amounts of income from qualifying patents in a relevant period arising to a company and all of the persons referred to in paragraph (b) which would, apart from paragraph (b), be disregarded under subsection (2) exceeds €5,000,000, the amount of any income from qualifying patents which is to be so disregarded for the relevant period in relation to the company or any person referred to in paragraph (b) shall be—

(i) so much of €5,000,000 as is allocated to the company or that person in the manner specified in a notice made jointly in writing to the appropriate inspector by the company and the connected persons on or before the time by which a return under section 951 is to be made for the latest chargeable period (within the meaning of section 321(2)) of—

(I) the company, or

(II) any of those persons,

which falls wholly or partly into the relevant period: but the aggregate of the amounts allocated to the company and all of the persons referred to in paragraph (b) in relation to the relevant period shall not exceed €5,000,000, and

(ii) where no such notice is given, an amount determined by the formula—

€5,000,000	×	P
		T

where—

P is the aggregate of the amounts of income from qualifying patents arising to the company, or as the case may be the person, in the relevant period, and

T is the aggregate of the amounts of income from qualifying patents arising to the company and all of the persons referred to in paragraph (b) in the relevant period.

(d) For the purposes of this subsection, where a relevant period does not coincide with an accounting period of a company—

(i) the amount of income from qualifying patents arising to the company in the relevant period shall be the aggregate of the amounts of income from qualifying patents arising to the company in any accounting period or part of an accounting period falling within the relevant period,

(ii) income from qualifying patents arising to a company in an accounting period shall be treated as arising in part of that accounting period on a time basis according to the respective lengths of the part and the whole of the accounting period, and

(iii) subject to the preceding provisions of this paragraph, income arising in a relevant period that is to be disregarded under subsection (2) shall be treated as representing income of an accounting period only to the extent that it cannot be treated as representing income of an earlier period, or part of such period.

(e) In this subsection—

“income from qualifying patents” means income from a qualifying patent or from more than one such patent;

“relevant period” means the period of 12 months commencing on 1 January 2008 and each subsequent period of 12 months.

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(4) Where, under section 77 of the Patents Act, 1992, or any corresponding provision of the law of any other country, an invention which is the subject of a qualifying patent is made, used, exercised or vended by or for the service of the State or the government of the country concerned, this section shall apply as if the making, user, exercise or vending of the invention had taken place in pursuance of a licence and any sums paid in respect of the licence were income from a qualifying patent.

(5) Where any income arising to a person is by virtue of this section to be disregarded, the person shall not be treated, by reason of such disregarding, as having ceased to possess the whole of a single source within the meaning of section 70(1).

(6) For the purpose of determining the amount of income to be disregarded under this section for the purposes of the Income Tax Acts, the Revenue Commissioners may make such apportionments of receipts and expenses as may be necessary.

(7) The relief provided by this section may be given by repayment or otherwise.

(8) Subsections (3) and (4) of section 459 and paragraph 8 of Schedule 28 shall, with any necessary modifications, apply in relation to exemptions from tax under this section.

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(9) This section shall not apply to income from a qualifying patent which is paid to a person on or after 24 November 2010.

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