Ireland has always been a key location to own and exploit intellectual property, the government’s commitment to Irelands “smart economy” continues to provide incentives to locate and develop IP in Ireland.
Ireland is host to many indigenous businesses and foreign national businesses which started with a creative idea or invention. Governmental policy promotes the development of local businesses in Ireland and also foreign inward investment from foreign companies wishing to set up in Ireland.
Individual business owners and companies often become inextricably linked to their product or service. Overtime that name, brand or reputation is developing into an asset of that company, but failure to recognise and protect these assets risks your product or service being easily copied and sold by others. development you protect your ideas and trade names from being freely copied.
WHAT IS INTELLECTUAL PROPERTY
Intellectual property starts out as an innovative invention, know how, a piece of unique technology or software, a secret process , a design or a name. These items can be developed internally by the business but they can also be purchased or licenced from a third party.
Once a business realises it has something that is different and valuable, it can decide to officially register its ownership of this intellectual property. There are numerous advantages of doing this, and these are described below but first we should examine how intellectual property is registered.
REGISTERING INTELLECTUAL PROPERTY IN IRELAND
The Office of Trademarks and Patents are the body that register trademarks, patents and copyright in Ireland. They appoint independent approved agents to assist with the application process, and it is recommended that an agent is engaged to obtain independent advice so that your application is successful. Hamble is closely affiliated with some of these agents and can offer this service.
ADVANTAGES OF OWNING INTELLECTUAL PROPERTY
Owning and recognising IP in a business can provide significant financial benefits. Registering IP shows long term commitment to the brand and can enhance the credibility of the business model. This special IP regime recognises the benefits of have registered IP in Ireland by reducing entry and exit costs, having tax efficient structuring and tax management of the asset and therefore maximising the cashflow benefits to the owner of the IP.
There are numerous advantages, such as the following examples:
IP can be recognised as a Capital asset on the balance sheet, with capital allowances offset against income
Upfront tax deduction on cost of registering a trademark
Tax credits for Research and Development to reduce overall tax
Double Tax Treaty network available for tax efficient structuring of group companies and cross border payments
Royalty payments can be treated as a tax deductible charge against income in certain cases
Receipt of Royalty income can be taxed at lower tax rate of 12.50% in certain circumstances
Capital gains tax arises as opposed to income tax on gains
Capital gains tax exemption on disposal of the shares in the IP holding company through participation relief or the migration of tax residence of the company
Stamp Duty Relief on acquisition of IP
No capital duty on acquisition of IP
No thin Capitalisation or CFC rules
Maximisation of cashflow due to minimised entry and exit costs.
CAPITALISATION OF IP
It is important that the correct accounting treatment is followed to ensure that the company is extracting the maximum benefit. An Irish company must prepare its accounts under IFRS or Irish GAAP and an understanding of how IP affects corporation tax and deferred tax is necessary. Where IP is internally generated, the revenue cost of developing the IP can be taken as a deduction where allowable, with the capital costs receiving tax relief under the special IP regime. The capital cost of IP will still be recognised as an intangible asset on the balance sheet and any goodwill can also be separately recognised.
Where the IP is purchased from a third party or there is an intra-group purchase, the recognition of this asset in the balance sheet of the Irish company will have an effect on deferred tax. Under Irish GAAP, the intention to dispose of the asset within 10 years creates an obligation to recognise a deferred tax liability, however as most businesses will retain their IP, this option may obtain better results than under IFRS. Under IFRS, a deferred tax charge will arise and must be recognised in the company accounts.
Infinite life assets such as goodwill or know how, can be written off in the accounts over 15 years by election, with all other assets written of in line with the standard accounting treatment. There is no clawback once the 15 year life has been exceeded.
STRUCTURE OF IP COMPANY
Ireland is an ideal place for companies to centralise their activities from both a commercial and tax perspective. Companies based in Ireland can own and exploit intangible assets out of Ireland in a tax efficient manner.
Many US multinationals establish an Irish subsidiary company is Ireland to acquire intra-group intangible assets, so that the cashflow benefits of the tax relief can be obtained by the Irish company in the form of IP allowances. The US Parent can consequently receive an accounting benefit upon consolidation of the Irish company results into the US accounts.
Ideally a business would be carried on in a single company, however there are many reasons why it is necessary to establish multiple companies for the same business:
A separately incorporated company can protect a trade name. In Ireland, once a company is incorporated with a particular name, the name is protected as nobody else can set up a company with that same name, however this does not protect against a competitor providing the same service as you under a similar name. Although notably that does not prevent a foreign company from using that company name in a foreign jurisdiction if it does not already exist there. For this reason a company name can be registered as a trademark or brand for use in many different jurisdictions by the original founder to protect it.
A separate company may also be required to do business in another country under the local laws of that other country.
For the purposes of IP relief, a separate trade is deemed to arise from managing, developing or exploiting the intangible assets and any relief is ring fenced to that trade. Therefore a separate company may be usefully set up to manage this business separately.
A separate company can facilitate the disposal of the shares in that company separately in the future
A project that requires financing from a bank or investor is often separately incorporated so that the interest is tax deductible against the profits of that company. It should be noted that the interest on borrowings used to acquire IP or intangible assets, and interest on funds used to invest in a company which acquires intangible assets can only be relieved against the income of that separate trade. Therefore a separate company is recommended when financing either the development or acquisition of IP.
Some of the most common structures for developing IP are: