Knowledge Development Box Tax Relief
The Knowledge Development Box (“KDB”) is a corporation tax relief on income from qualifying assets. The KDB offers the opportunity for an effective tax rate of 6.25% on qualifying profits generated in periods commencing on or after 1 January 2016. The relief available is linked to the percentage of qualifying R&D expenditure incurred in Ireland.
There are links between the KDB and the R&D tax credit, and therefore companies already claiming the R&D tax credit should examine their eligibility and the potential benefits of also access the KDB regime.
What intellectual property ("IP") qualifies for the KDB?
A Qualifying Asset is IP, aside from marketing-related IP, which is the result of R&D activities. The definition of IP includes:
- Specifically defined computer programs
- Inventions, protected by qualifying patents
- Supplementary protection certificates for medicinal or plant protection products & plant breeders’ rights
- Inventions that are certified by the Controller or Patents, Designs and Trademarks as being novel, non-obvious, and useful**
**This criterion is specifically applicable to certain SME’s. Please contact us for more information.
In order to qualify for the regime the first thing that should be considered in whether or not the company has or is capable of creating qualifying assets, and in turn whether those qualifying assets are part of a profitable trade.
There is also scope to link assets and create a “family of assets” where it can be demonstrated that there is significant commonality of scientific, technological or engineering challenges underlying the associated R&D.
Where a company has qualifying assets for KDB purposes, the qualifying income from those assets will include royalties and licence fees. Also, where the price of a product or service includes an amount which is attributable to a qualifying asset, a portion of the income from those sales can qualify (i.e. embedded IP scenarios).
The assessment tool should provide you with a high level indication of:
- Whether your company might qualify for the KDB regime and
- How much benefit the company might get from availing of the KDB regime
This tool is a high level calculator and will not result in a figure that is sufficiently accurate to be relied upon or included in any tax return.
The qualifying profits are halved by way of a 50% tax deduction in order to give effect to the 6.25% rate on those profits.
The qualifying profits are determined by way of the following formula:
It is expenditure on a qualifying asset which has been wholly and exclusively incurred by the company in the carrying on by it of R&D activities in a Member State, where such activities lead to the development, creation or improvement of a qualifying asset.
Outsourcing to third parties is included in qualifying expenditure however spend on outsourcing to related parties is excluded.
Acquisition costs relating to qualifying assets are also excluded. A portion of these excluded costs may be brought back in under the calculation of uplift expenditure.
Qualifying expenditure also excludes interest expenses, expenditure to group companies in order to take on R&D activities under a cost sharing agreement or otherwise and any expenses which are relieved for tax purposes in a territory other than Ireland.
It is all of the qualifying expenditure on the asset as above together with the acquisition costs and related party outsourcing costs.
Given the nature of this aspect of the formula it is likely that the maximum benefit from the regime is to be derived where the company which is generating income from the qualifying IP is the same company that developed and incurred the cost of associated R&D activities which were carried on in Ireland.
Uplift expenditure is calculated as the lower of:
- 30% of the qualifying expenditure, or
- the aggregate of acquisition costs and group outsourcing costs.
This is the profit from the KDB trade (provided for as a “specified trade” under the legislation) which is related to the qualifying asset(s) before the 50% KDB tax deduction is taken into account.
Expenses incurred in generating income from the qualifying assets are to be attributed to the KDB trade on a just and reasonable basis. Companies which are within the remit of Irish transfer pricing legislation must apply those rules in determining the profit of the KDB trade.
A claim for the KDB regime must be made within 24 months of the period end to which the claim relates.
If you would like to request more information on Knowledge Development Box Support or information on how we can assist your company, please contact us via the button below.