The Finance Bill 2015 provided for the introduction of the Knowledge Development Box (KDB). The broad objective of the KDB is to promote innovation and provide an incentive whereby profits arising from patented inventions, copyrighted software and certain other specific asset classes can effectively be taxed at a reduced rate of 6.25%.
Any royalty or other sum in respect of the use of a qualifying asset, or income reasonably attributable to a qualifying asset, can benefit from the reduced rate. Broadly, the relief is linked to the qualifying Research and Development (R&D) expenditure incurred by the Irish company as a proportion of its overall global R&D expenditure, thereby making the KDB very attractive to companies that carry on a significant element of their R&D activities in Ireland.
The KDB will also be attractive to large groups that are capable of isolating individual qualifying assets, the R&D for which is carried on in Ireland.
For the purposes of the KDB, a qualifying asset is copyrighted software, certain patented inventions, plant breeders’ rights, protection certificates for medicinal products and plant protection certificates.
Small and Medium Enterprises (SMEs) benefit from an expansion of the definition of Intellectual Property (IP) to include inventions that are certified by the Controller of Patents, Designs and Trademarks as being novel, non-obvious and useful.
For the purposes of the KDB relief, SMEs are companies with annual income from IP not exceeding €7.5 million and group turnover not exceeding €50 million.
The mechanics of the KDB relief are to allow a tax deduction of 50% of the qualifying profits from the R&D activities, thereby resulting in an effective tax rate of 6.25%.
