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EU Asks Ireland To Change Patent Research Tax Exemption

by Ulrika Lomas, for, Brussels

06 April 2007

The European Commission has formally requested Ireland to change its tax law provision by which patent royalties are tax exempt only if research leading to the patent was carried out in Ireland.

According to a 'reasoned opinion' issued under Article 226 of the EC Treaty (the first stage in legal proceedings against a Member State) issued recently, the provision is incompatible with freedom of establishment and the free movement of services. If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the European Court of Justice.

Section 243 of the Taxes Consolidation Act 1997 provides an exemption from tax for income derived from patents in relation to which the research, planning, processing, experimenting, testing, devising, designing, developing or similar activity leading to the invention, the subject of the patent, was carried out in Ireland. The exemption is available to persons resident in Ireland and not resident in any other country, and it extends in many cases to distributions made out of qualifying income, something which is extremely beneficial for Irish-resident investors, particularly in the pharmaceutical sector.

The Commission considers this provision contrary to Articles 43, 48 and 49 of the EC Treaty (freedom of establishment and free movement of services) and the corresponding articles of the EEA Agreement. The provision, says the Commission, dissuades Irish companies and individuals from contracting out research to institutions established outside Ireland, or from setting up their research centres in other Member States, thus infringing freedom of establishment rules.

The Commission states that its opinion is based on the EC Treaty as interpreted by the European Court of Justice in judgments of 10 March 2005 and 8 July 1999 in Cases C-39/04 (Laboratoires Fournier SA) and C-254/97 (Baxter and Others).

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