Ireland is a leading jurisdiction of choice for Life Sciences and Technology companies looking to establish a European base for their digital health products and services and for developing, managing and exploiting intellectual property rights globally. Businesses with the relevant substance and activities can benefit from:
- Reduced knowledge development box (KDB) tax rate on profits from IP developed in Ireland and the EU/EEA
- A 12.5% corporation tax rate on other trading income
- Tax depreciation for intangible assets
- Research and development credit
- Relief for withholding taxes and credit for foreign taxes
- Special tax relief for executives
Knowledge Development Box
Ireland has an OECD-approved KDB regime, which applies to research and development (R&D) operations carried on in Ireland and the EU. Income derived from R&D work leading to the development of IP assets including patented inventions, copyrighted software, and other rights related to medicinal products, and for certain small companies unregistered certified patent rights, is currently taxed a reduced rate of 6.25%.
This important relief was due to expire on 31 December 2022. However, Finance Act 2022, which was signed into law on 15 December 2022, extends the relief for a further four years, up to and including, accounting periods commencing before 1 January 2027.
Under the Finance Act 2022, provision is made for the effective rate of tax for this regime to increase to 10%, in line with the implementation of the OECD Pillar Two agreement. This rate increase will come into effect by ministerial commencement order, once agreement is reached by the OECD/G20. Ireland’s KDB regime is more favourable than other countries, some of which are limited to patented inventions. The inclusion of copyrighted software in Ireland’s regime is particularly interesting for companies engaged in developing and using digital health technologies.
12.5% trading rate
Trading companies in Ireland are subject to corporation tax at 12.5%. This rate will remain unchanged for the vast majority of companies. However, it is expected to increase to 15% for companies with a global turnover more than €750m once agreement has been reached on the implementation of the OECD Pillar Two agreement, which has the aim of introducing a global minimum 15% effective tax rate.
Research and development credit
Ireland offers a generous 25% tax credit for R&D expenditure carried on within Ireland and/or the EU/EEA. Expenditure for these purposes includes expenditure on plant, equipment, and buildings where R&D activities are carried on by the company in that building. Currently, the 25% tax credit can be utilised to reduce tax payable at the corporate level or to incentivise employees in a tax efficient manner. Finance Act 2022 implements changes relating to the payment of the R&D credit to align with requirements under the OECD Pillar Two rules.
As a result, a company will be able to claim the R&D tax credit in three fixed instalments or offset the credit against other tax liabilities. Certain changes are designed to provide cashflow benefits for small R&D claims, including that the first €25,000 of any R&D credit can be claimed as a payable in the first year. Companies will also have the ability to claim pre-trading expenditure as a payable credit over a three-year period from when the company commences to trade. It is important to note that no changes are being made to the quantum of credit that a company may earn.
Tax depreciation for intangible assets
Tax depreciation is available for capital expenditure incurred on acquiring IP. This relief allows companies to invest in new technologies and/or migrate existing IP to Ireland tax efficiently. It may be claimed on a broad range of qualifying intangibles, including:
- Trade secrets, and
- Secret processes
Write-offs may be claimed at a rate in line with the accounting treatment or at a rate of 7% for years 1 to 14 and 2% in year 15. The relief for any one year, in aggregate with any interest expense, is capped at 80% of the trading related income and the balance is carried forward against future profits.
Special tax relief for employees
Ireland offers special tax relief known as ‘Special Assignee Relief Program’ (SARP), for employees seconded to work in Ireland for a minimum period of 12 consecutive months. SARP is available for up to 5 years. The relief reduces the amount of income tax payable by qualifying employees by 30% above a set income level. Finance Act 2022 extends this relief until the end of 2025, which is welcome. However, the set income level at which the relief will be available is being increased from €75,000 to €100,000.
Ireland has a very favourable tax regime for companies engaged in managing, developing and exploiting IP and advanced technologies in the digital health sector. It also offers an excellent regime and supports for carrying out R&D activities and an attractive system for rewarding key employees engaged in those developments and seconded to work here. The extension of these important reliefs in Finance Act 2022 are positive for the digital health sector. These measures should facilitate the expansion and establishment of digital health companies in Ireland in the coming years.
For more information on these proposals and how they may impact your organisation, contact a member of our Tax team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.