1.

Tax treatment of royalties paid in respect of the user of a patent

1.1

Payments of patent royalties are subject to section 238(2) taxes consolidation

Act 1997 (“TCA 1997”). On making a payment of a royalty or other sum paid in respect of the user of a patent, the payer is obliged to deduct out of the payment a sum representing the amount of income tax on the payment at the standard rate. However,

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Chapter 6 of Part 8 of the TCA 1997¹ 4 provides that withholding taxes will not apply to royalty payments that meet the requirements of that Chapter. Essentially these are payments made to associated companies resident in another EU Member State.²

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Section 242A TCA 1997³ provides that with-holding tax will not apply to royalties paid by a company in the course of a trade or business to a company resident in a treaty country.⁴

1.2

Under section 238 TCA 1997 tax must be withheld on all patent royalty payments by a company with the exception of payments that are within in the scope of Chapter 6 of Part 8 or section 242A TCA 1997.

1.3

Under Chapter 6 of Part 8 and section 242A TCA 1997 the payee company will not be chargeable to tax in respect of patent royalty payments within the scope of that Chapter or section.

2.

Charge to tax in the case of Non-resident companies

2.1

A non-resident company is chargeable to income tax in respect of the profits arising or accruing from any property whatever in the State (section 18 TCA 1997). This is modified by Chapter 6 of Part 8 and section 242A TCA 1997, as mentioned above, and by the terms of double taxation agreements (“DTA's”). To maintain a charge to income tax in the case of a royalty, paid to a non-resident, from which tax is deductible on payment, the royalty must constitute profits accruing from property in the State.

2.2

The Revenue Commissioners accept that a patent royalty paid to a non-resident company does not give rise to a charge to income tax under section 18 TCA 1997 on the payee where the payment is made—

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in respect of a foreign patent, i.e. a patent originally registered outside the State in relation to an invention developed outside the State, and

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under a licence agreement

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executed in a foreign territory, and

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subject to the law and jurisdiction of a foreign territory.

3.

Administrative practice

3.1

The Revenue Commissioners are prepared to grant permission to a company paying a royalty, out of which it would otherwise be required to deduct tax, to make the payment without deducting that tax in the following circumstances:

3.1.1

The payee is—

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a company which is neither resident in the State nor carrying on a trade in the State through a branch or agency (notwithstanding that the payment may be unconnected with that branch or agency), and

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the beneficial owner of the royalty payment;

3.1.2

the royalty is payable—

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in respect of a foreign patent, i.e. a patent originally registered outside the State in relation to an invention developed outside the State, and

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under a licence agreement

–

executed in a foreign territory, and

–

subject to the law and jurisdiction of a foreign territory;

3.1.3

the payment is being made in the course of the paying company's trade; and

3.1.4

the payment is not part of a back-to-back or conduit arrangement whereby the payment represents all or substantially all of the income received or receivable by the paying company in connection with licensing of the same foreign patent.

3.2

Where such permission is granted by the Revenue Commissioners, the fact that tax was not deducted on payment will not preclude the paying company obtaining relief which would otherwise be due under section 238 TCA 1997 in respect of the payment.

4.

Making a claim

4.1

Application should be made by the payee for permission to receive the first payment due under a licence agreement without tax being deducted:

4.1.1

The application should identify the paying company and should be made to the Region or Division for that company.

4.1.2

The application should include the necessary information and documentation required to show that—

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the payee is not resident in the State and not trading in the State through a branch or agency;

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the payee is the beneficial owner of the royalty payment; and

•

the royalty is payable—

•

in respect of a foreign patent, i.e. a patent originally registered outside the State in relation to an invention developed outside the State, and

•

under a licence agreement

–

executed in a foreign territory, and

–

subject to the law and jurisdiction of a foreign territory.

4.1.3

The application should also contain sufficient information and documentation to show that the payment is made by the paying company in the course of its trade and that the payment is not part of a back-to-back or conduit arrangement whereby the payment represents all or substantially all of the income received or receivable by the paying company in connection with licensing of the same foreign patent.

4.2

On being satisfied that the application is in order, Revenue will write to the paying company (copying to the payee) granting permission to make the first payment, and subsequent payments under the licence agreement, without deduction of tax.

5.

Commencement

5.1

This Statement of Practice will come into effect from 26 July 2010.

5.2

The practice set out in this Statement should be relied upon only to the extent that the royalty payments concerned are made in good faith and for purposes that do not include tax avoidance. The Revenue Commissioners reserve the right to amend or withdraw this Statement of Practice as respects royalty payments made from a date not earlier than the date of notice of any amendment or withdrawal.