Insight

Outbound patent royalties: payable gross

(27 July 2010)

Under a statement of practice issued yesterday, the Irish Revenue Commissioners have extended the already broad legislative exemptions from Irish withholding tax in respect of cross-border payments of royalties. Historically, all royalty payments other than payments of patent royalties to foreign entities located outside the EU and in non-treaty partner jurisdictions could be made free of Irish withholding tax. Under the statement of practice, the payment of royalties by an Irish company in respect of a “foreign patent” to any non-resident company (irrespective of its location) can now be made free of withholding tax, subject to prior approval of the Irish Revenue Commissioners. The statement of practice is to take effect from 26 July 2010.

What are the conditions?

The statement of practice provides that a patent royalty can be paid free of withholding tax where:

1. the royalty is paid in respect of a foreign patent (i.e. in respect of a patent originally registered outside Ireland in relation to an invention developed outside Ireland);

2. the relevant licence agreement is executed outside Ireland and governed by foreign law;

3. the paying company pays the royalty in the course of its trade;

4. the royalty is not paid in the course of a “back to back or conduit arrangement” which involves the Irish payer acting as a flow-through entity;

5. the payee company is not resident in Ireland and does not carry on a trade in Ireland through a branch or agency; and

6. the payee company is the beneficial owner of the royalty payment.

The statement of practice further provides that it can only be relied upon to the extent the royalties are paid “in good faith and for purposes that do not include tax avoidance”.

What does the payee company have to do?

The statement of practice specifies that an application to the Irish Revenue Commissioners must be made by the payee company for gross receipt of patent royalties. The application must identify the paying and payee company, and provide sufficient information to demonstrate compliance with the points at 1 to 6 above.

Conclusion

This statement of practice further enhances Ireland as a location of choice for exploiting intellectual property and, as such, is to be welcomed.

For further information, please contact any partner in our tax group or speak to your usual contact at Matheson Ormsby Prentice.