The Knowledge Development Box (KDB) became effective in Ireland from 19 May 2017. The KDB is a preferential corporation tax regime that applies a lower rate of corporation tax (6.25%) on profits on intellectual property assets resulting from qualifying research and development activities carried out in the European Economic Area (EEA). The normal rate of corporation tax in Ireland is 12.5%.
The KDB provisions define qualifying intellectual property assets as:
• an invention protected by a qualifying patent;
• a computer program /copyrighted software, and
• inventions of small companies which are patentable but have not been patented and have been kept secret;
Qualifying patents include Irish long-term patents and equivalent patents in other jurisdictions provided the patents have been substantially examined for novelty and inventive step. That rules out Irish short-term patents. Up to now, the Irish Patents Act did not provide for substantial examination, but in order for Irish long-term patents to qualify for the KDB, the Irish Patents Act has been amended to provide for examination of long-term patent applications. It is expected that most KDB claims will be for income derived from inventions protected by granted patents.
Interestingly the KDB includes as a qualifying IP asset inventions of small companies which are patentable but have not been patented and have been kept secret. A KDB Certificate is required for this IP asset in order to benefit. A recent European Union Intellectual Property Office (EUIPO) study entitled “Protecting innovation through Trade secrets and Patents – Determinants for European Union firms” found that trade secrets are used widely by most types of companies (especially SMEs), in most economic sectors and in all EU member states. The study also found that processes and service innovations are more often protected through trade secrets, and many companies use both patents and trade secrets to protect their innovations.
A small company is defined for KDB purposes as one which has income arising from intellectual property of less than €7.5 million in a 12 month accounting period, is a member of a group with group turnover of less than €50 million, and is a micro, small or medium-sized company as defined by EU rules. Small companies falling within the above definition may have certain inventions, for example manufacturing processes, which they do not wish to make public, as they would under the patent system if a patent application for the invention were filed. The KDB allows for such assets to be eligible for KDB tax relief provided they are shown to be inventions that have patentable features, i.e., they are novel, inventive, and useful.
The KDB guidelines indicate that the application for KDB certification under this provision includes a document which is very similar to that of a patent specification. In this regard, the application must include a clear and accurate description of the invention, specify the date the invention began to be used, produced or marketed, and be accompanied by an opinion from a patent agent attesting that the invention is novel, inventive and useful up to and on the date it began to be used, produced or marketed.
The opinion from the patent agent has to include evidence attesting to the novelty, inventive step and usefulness of the invention. Such evidence could include a search conducted by an independent patent searching agency or even a patent office itself in the form of a patent application which could be withdrawn later to avoid publication. For such a search to be undertaken, the invention may have to be defined as it would in a patent specification, i.e., in one or more claims.
In order to obtain KDB certification, the company must have qualifying expenditure and qualifying profits arising from the invention. It is recommended that any taxation advice in this regard should be procured from a qualified tax consultant.
For any specific advice on the application process for the KDB from an IP perspective, please contact Alan Casey.
Irish Patent Agent and European Patent Attorney