Chapter 5

Taxation of companies engaged in knowledge development

769G Interpretation and general.

(1) In this Chapter—

“accounting period” in relation to a company, means an accounting period determined in accordance with section 27;

“acquisition costs”, in relation to expenditure incurred on a qualifying asset, means the expenditure incurred on the acquisition of intellectual property, or rights over intellectual property, where that intellectual property is reflected in the value of the qualifying asset, but where expenditure incurred on acquiring the intellectual property is incurred otherwise than by means of a bargain made at arm’s length, that acquisition shall, for the purposes of this Chapter, be deemed to be for a consideration equal to the open market value of the intellectual property;

“group” means a company and all of its 51 per cent subsidiaries;

“group outsourcing costs”, in relation to a qualifying asset, means any amount incurred in carrying on research and development activities which results in a qualifying asset, where that amount is not qualifying expenditure but would be qualifying expenditure on a qualifying asset—

(a)if the research and development activities were carried on in a Member State, or

(b)but for subsection (2)(b)(iii) or (vi),

and shall not include any amount of qualifying expenditure or acquisition costs;

“intellectual property”, other than for the purposes of the definition of ‘acquisition costs’ or ‘marketing-related intellectual property’ in this subsection and without prejudice to section 769R, means—

(a)a computer program, within the meaning of the Copyright and Related Rights Act 2000, but, where a computer program is a derivative work or adaptation, the portion of the computer program that represents the derivative work or the adaptation of the original work and the original work shall be treated as two separate computer programs, or

(b)an invention protected by—

(i)a qualifying patent,

(ii)any supplementary protection certificate issued under Council Regulation (EC) No. 469/2009 of 6 May 2009¹ concerning protection for medicinal products or any such certificate extended in accordance with Article 36 of Regulation (EC) 1901/2006,

(iii)any supplementary protection certificate issued under Regulation (EC) No. 1610/96 of the European Parliament and of the Council of 23 July 1996² concerning protection for plant protection products, or

(iv)any plant breeders’ rights within the meaning of section 4 of the Plant Varieties (Proprietary Rights) Act 1980;

“interest”, unless the context otherwise requires, includes any interest payable on a debt instrument, any discount on the issue of such an instrument, and any premiums paid or payable on redemption of such an instrument, or on the capital represented by such an instrument;

“marketing-related intellectual property” includes trademarks, brands, image rights and other intellectual property used to market goods or services;

“Member State” has the same meaning as ‘relevant Member State’ has in section 766;

“overall expenditure on the qualifying asset”, means—

(a)the qualifying expenditure incurred in relation to that qualifying asset, and

(b)the aggregate of the acquisition costs and the group outsourcing costs relating to that qualifying asset, incurred in any accounting period;

“overall income from the qualifying asset” means the following amounts arising in respect of an accounting period—

(a)any royalty or other sums in respect of the use of that qualifying asset,

(b)where the sales price of a product or service, excluding both duty due or payable and any amount of value-added tax charged in the sales price, includes an amount which is attributable to a qualifying asset, such portion of the income from those sales as, on a just and reasonable basis, is attributable to the value of the qualifying asset,

(c)any amount for the grant of a licence to exploit that qualifying asset, and

(d)any amount of insurance, damages or compensation in relation to the qualifying asset,

where that amount is taken into account in computing, for the purposes of assessment to corporation tax, the profits of a trade, and overall income from qualifying assets shall be construed accordingly;

“qualifying asset” means an asset which is intellectual property, other than marketing-related intellectual property, and which is the result of research and development activities;

“qualifying expenditure on the qualifying asset” has the meaning assigned to it in subsection (2) and qualifying expenditure in relation to all qualifying assets shall be construed accordingly;

“qualifying patent” means—

(a) a patent granted following substantive examination for novelty and inventive step, or

(b) a patent, other than a short term patent within the meaning of section 63 of the Patents Act 1992, or an equivalent provision in another jurisdiction, where—

(i)the Patents Office in the State, or equivalent Office elsewhere, has caused a search to be undertaken in relation to the invention and a search report (within the meaning of section 29 of the Patents Act 1992) prepared, and

(ii)either—

(I)the patent was granted prior to 1 January 2016, or

(II)the patent was granted on or after 1 January 2016 and before 1 January 2017 and a patent agent, within the meaning of section 106 of the Patents Act 1992, certifies that in his or her opinion such a patent meets the patentability criteria, in that the invention is susceptible of industrial application, new and involves an inventive step,

but this paragraph is subject to section 769I(6)(a)(i)(VII);

“relevant company” means a company which carries on a specified trade and is within the charge to tax in the State, and where two or more companies carry on that specified trade in partnership then each company that is within the charge to tax in the State shall be a relevant company;

“research and development activities” has the meaning assigned to it in section 766;

“specified trade” has the meaning assigned to it in subsection (3);

“up-lift expenditure”, in relation to a qualifying asset, is the lower of—

(a)30 per cent of the amount of the qualifying expenditure on the qualifying asset, or

(b)the aggregate of acquisition costs and group outsourcing costs.

(2) (a) Subject to paragraph (b), for the purposes of this Chapter, qualifying expenditure in relation to the qualifying asset, in respect of a company, means expenditure incurred by a relevant company, in any accounting period, wholly and exclusively in the carrying on by it of research and development activities in a Member State where such activities lead to the development, improvement or creation of the qualifying asset, being an amount—

(i)which is allowable as a deduction in computing the profits or gains from a trade (otherwise than by virtue of section 307), or would be so allowable but for the fact that for accounting purposes it is brought into account in determining the value of an asset,

(ii)expended on machinery or plant (other than specified intangible assets within the meaning of section 291A treated as machinery or plant by virtue of subsection (2) of that section where the specified intangible asset was acquired directly or indirectly from a member of the group) which qualifies for any allowance under Part 9,

and for the purposes of this section, where a company engages a person who is not a member of the group, to carry on research and development activities on behalf of that company, then any sum payable to that person in respect of those activities shall be treated as if it were expenditure incurred by the company in the carrying on by it of research and development activities in a Member State.

(b) Qualifying expenditure on the qualifying asset shall not include—

(i)any amount of acquisition costs in relation to the qualifying asset,

(ii)any amount of interest paid or payable,

(iii)an amount paid or payable directly or indirectly to a member of the group to carry on research and development activities, whether under a cost sharing arrangement or otherwise,

(iv)expenditure incurred under a cost sharing arrangement with another company to the extent that such expenditure exceeds an amount that would be determined by means of a bargain made at arm’s length,

(v)any additional amount, agreed between members of the group, on an expense paid or payable indirectly through a group member to a person who is not a member of the group to carry on research and development activities, where that additional amount is to be retained by the group member, or

(vi)any amount incurred if that amount—

(I)may be taken into account as an expense in computing income of the company,

(II)is expenditure in respect of which an allowance for capital expenditure may be made to the company, or

(III) may otherwise be allowed or relieved in relation to the company,

for the purposes of tax in a territory other than the State.

(3) (a) Subject to paragraph (b), for the purposes of this Chapter, specified trade means a trade or part of a trade, other than an excepted trade within the meaning of section 21A, consisting of or including one or more of the following categories of activities—

(i)the managing, developing, maintaining, protecting, enhancing or exploiting of intellectual property,

(ii)the researching, planning, processing, experimenting, testing, devising, developing or other similar activity leading to an invention or creation of intellectual property, or

(iii) the sale of goods or the supply of services that derive part of their value from activities described in subparagraphs (i) and (ii), where those activities were carried on by the relevant company.

(b) In the case of a trade consisting partly of the carrying on of such activities, as described in paragraph (a), and partly of the carrying on of other activities, that part of the trade consisting solely of the carrying on of activities described in paragraph (a) shall be a specified trade.

(4) Where a relevant company incurs expenditure for the purposes of a specified trade before the time that trade has been set up and commenced, then for the purposes of this Chapter other than section 769O, that expenditure shall be deemed to have been incurred in the first accounting period of that company.