Knowledge Development Box (KDB) and SMEs

What is the KDB?

As of 1st January 2016, the KDB offers reduced taxation of income (an effective corporate tax rate of  6.25%) arising from qualifying intellectual property (IP), i.e. patents, copyrighted software and, in  relation to smaller companies, other IP that is similar to an invention which could be patented.

Who is entitled to this tax relief?

Eligible companies are those that carried out research and development (R&D), within the meaning of  section 766 Taxes Consolidation Act 1997 (TCA 1997), which led to the creation of the qualifying IP.

With respect to other IP that is similar to an invention which could be patented, certification by the Controller of Patents, Designs and Trademarks that this IP is novel, non-obvious and useful is required. However, primary legislation is required to permit the Controller to provide such certification and only SMEs with an income from IP of less than €7.5m in a 12-month period will be entitled to KDB relief in relation to such assets.

Qualifying income from your IP

 Rather than requiring smaller companies to establish how much of the sales price is attributable to a qualifying patent royalty, Revenue is prepared to accept a notional royalty rate of 10%.  This provision only applies to small and micro companies (with fewer than 50 employees and turnover or balance sheet of less than €10m) but does not extend to medium-sized companies.

This notional royalty rate will avoid the need for small and micro companies to enlist an expert to carry out an economic analysis and a transfer pricing study.

Action to take

SMEs should ensure an IP review is carried out as soon as possible and that any documentation requirements are addressed in a timely manner.

Denis McCarthy and Isabel Meenan of MacLachlan & Donaldson would be happy to assist in this regard.