Finance Act, 1996
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Treatment of patent royalties and related distributions. |
32.—(1) Section 34 of the Finance Act, 1973 , is hereby amended in subsection (1) in the definition of “income from a qualifying patent” by the insertion after paragraph (a) of the following proviso: | |
“Provided that where the royalty or other sum exceeds the royalty or other sum which would have been paid if the payer of the royalty or other sum and the beneficial recipient thereof were independent persons acting at arm's length, the excess shall not be income from a qualifying patent,”. | ||
(2) Section 170 of the Corporation Tax Act, 1976 , is hereby amended— | ||
(a) in subsection (1) by the substitution for the definition of “disregarded income” of the following definition: | ||
“‘disregarded income’ means— | ||
(a) income from a qualifying patent which by virtue of subsection (2) of section 34 of the Finance Act, 1973 (income from patent royalties) has been disregarded for the purposes of income tax, and | ||
(b) income from a qualifying patent which by virtue of subsection (2) of section 34 of the Finance Act, 1973, and subsection (6) of section 11 has been disregarded for the purposes of corporation tax, | ||
but does not include income from a qualifying patent (in this section referred to as ‘specified income’) which would not be income from a qualifying patent if paragraph (a) of the definition of ‘income from a qualifying patent’ in subsection (1) of the said section 34 had not been enacted;”, | ||
and | ||
(b) by the insertion after subsection (3A) of the following subsection: | ||
“(3B) (a) Where for an accounting period a company makes one or more distributions out of specified income, so much of the amount of that distribution, or the aggregate of such distributions, as does not exceed the amount of aggregate expenditure on research and development incurred by the company in relation to the accounting period shall be treated as a distribution made out of disregarded income: | ||
Provided that— | ||
(I) subject to paragraph (II), if in an accounting period the beneficial recipient (hereafter in this proviso referred to as ‘the recipient’) of the specified income shows in writing to the satisfaction of the Revenue Commissioners that the specified income is income from a qualifying patent in respect of an invention which— | ||
(A) involved radical innovation, and | ||
(B) was patented for bona fide commercial reasons and not primarily for the purpose of avoiding liability to taxation, | ||
the Revenue Commissioners shall, after consideration of any evidence in relation to the matter which the recipient submits to them and after such consultations (if any) as may seem to them to be necessary with such persons as in their opinion may be of assistance to them, determine whether all distributions made out of specified income accruing to the recipient for that accounting period and all subsequent accounting periods are to be treated as distributions made out of disregarded income and the recipient shall be notified in writing of the determination, | ||
(II) a recipient aggrieved by the determination of the Revenue Commissioners may, by notice in writing given to the Revenue Commissioners within thirty days of the date of notification advising of the determination, appeal to the Appeal Commissioners and the Appeal Commissioners shall hear and determine the appeal made to them as if it were an appeal against an assessment to income tax and all the provisions of the Income Tax Act, 1967 , relating to the rehearing of an appeal and the statement of a case for the opinion of the High Court on a point of law shall apply accordingly with any necessary modifications. | ||
(b) The Revenue Commissioners may nominate any of their officers to perform any acts and discharge any functions, authorised by this subsection to be performed or discharged by the Revenue Commissioners and references in this subsection to the Revenue Commissioners shall, with any necessary modifications, be construed as including references to an officer so nominated. | ||
(c) In this subsection— | ||
‘the amount of aggregate expenditure on research and development incurred by a company in relation to an accounting period’ means the amount of expenditure on research and development activities incurred in the State by the company in the accounting period and the previous two accounting periods: | ||
Provided that where in an accounting period a company incurs expenditure on research and development activities and not less than 75 per cent. of the expenditure was incurred in the State, all of the expenditure shall be deemed to have been incurred in the State; | ||
‘the amount of the expenditure on research and development activities’, in relation to expenditure incurred by a company in an accounting period, means non-capital expenditure incurred by the company being the aggregate of the amounts of— | ||
(i) such part of the emoluments paid by the company to employees of the company engaged in carrying out research and development activities related to the company's trade as is laid out for the purposes of the said activities, | ||
(ii) expenditure incurred by the company on materials or goods used solely by the company in the carrying out of research and development activities related to the company's trade, and | ||
(iii) a sum paid to another person, not being a person connected with the company, in order that such person may carry out research and development activities related to the company's trade: | ||
Provided that where the company (hereafter in this proviso referred to as the ‘first company’) is a member of a group then for the purposes of this section the amount of expenditure on research and development activities incurred in an accounting period by another company which in the accounting period is a member of the group shall, on a joint election in writing being made on that behalf by the first company and the other company, be treated as being expenditure incurred on research and development activities in the accounting period by the first company and not by the other company; | ||
‘research and development activities’ has the same meaning as in paragraph (a) of subsection (1) of section 59 of the Finance Act, 1995 . | ||
(d) In this subsection— | ||
(i) two companies shall be deemed to be members of a group if both are wholly or mainly under the control of the same individual or individuals or if one is a 75 per cent. subsidiary of another or both are 75 per cent. subsidiaries of a third company: | ||
Provided that in determining whether one company is a 75 per cent. subsidiary of another, the other company shall be treated as not being the owner— | ||
(I) of any share capital which it owns directly in a company if a profit on sale of the shares would be treated as a trading receipt of its trade, or | ||
(II) of any share capital which it owns indirectly, and which is owned directly by a company for which a profit on the sale of the shares would be a trading receipt, | ||
(ii) a company shall be wholly or mainly under the control of an individual or individuals if not less than 75 per cent. of the ordinary share capital of the company is owned directly or indirectly by the individual or, as the case may be, by individuals, each of whom own directly or indirectly part of that share capital, | ||
(iii) sections 108 to 114 of the Corporation Tax Act, 1976 , shall apply for the purposes of this paragraph as they apply for the purposes of Part XI of that Act and where two companies are deemed to be members of a group by reason that both are wholly or mainly under the control of the same individual or individuals those sections shall apply as they would apply for the purposes of the said Part if the references in those sections to a parent company included a reference to an individual or individuals who hold shares in a company.”. | ||
(3) This section shall apply— | ||
(a) as respects subsection (1), to a royalty or other sum paid on or after the 23rd day of April, 1996, and | ||
(b) as respects subsection (2), to a distribution made out of specified income accruing to a company on or after the 28th day of March, 1996. |