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In January of this year the Department of Finance (the Department) launched a Public Consultation Process (the Consultation) on the proposed introduction of a corporation tax incentive for income generated from intellectual property (IP) known as the Knowledge Development Box (KDB)(see earlier blog Knowledge Development Box – Launch of Public Consultation Process – "Ireland will play fair, as it has always done, and play to win." – Minister Noonan)

The Consultation sought the views of interested parties on issues such as the scope of IP set to benefit under the regime, the calculation of qualifying income and the mechanism for applying relief. Nearly 40 written submissions were received and on 31 July the Department published a "Feedback Statement" (the Response) commenting on the views expressed as part of the Consultation and setting out possible approaches for the KDB regime.

Of particular interest is the approach taken in defining the types of assets that will be eligible for relief (the Qualifying Assets). Beginning from the premise that the type of assets eligible for relief would be limited to income derived from “patents and assets that are functionally equivalent to patents”, the Consultation had sought opinions on the specific question of what assets could be considered functionally equivalent to patents and the basis for that belief.

Within A&L Goodbody’s submission, we highlighted our concerns that limiting the definition of Qualifying Assets in this way would prevent a number of industry sectors from benefiting under the regime as it would exclude significant innovative activity which may not be patentable or for which patents are not typically obtained. By way of example, the indigenous technology sector, along with the domestic and international social medial and "born on the internet" sector which typically rely on copyright and other forms of IP protection as opposed to patents. Furthermore, we highlighted the potential for smaller companies and start-ups to be placed at a disadvantage as it is often not practical or affordable for such companies to seek patent protection meaning they would not stand to benefit under the KDB regime.

The Response referenced the fact that a number of submissions received by the Department had dealt with the potentially distortive effect of such a restrictive definition of Qualifying Assets and the potential exclusion of SMEs. The Response recognized these concerns as valid and noted that they have been reflected in Ireland’s discussions at the Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices which is to set down internationally agreed parameters for the design of KDB regimes.

The Response reiterates that there is no flexibility beyond the approach agreed by the OECD and the Department will need to consider how best to define Qualifying Assets within the confines of the OECD standards set down.  

However, the Response indicates that a possible approach would be to incorporate a definition of Qualifying Assets which would include not only patents but also any copyright or corresponding rights related to computer software.  While the Department is still actively considering the exact scope of patents and copyrighted software to be included in line with the OECD standards, the explicit inclusion of copyright and other rights pertaining to computer software within the regime is a development to be welcomed.

The Response repeats the government’s commitment to making the KDB the most competitive in its class within the agreed international parameters for fair taxation in this area.