Tax incentives for the healthcare and life sciences sector

Ireland is an attractive location for the healthcare and life sciences sector from a tax perspective. Our 12.5% corporation tax rate for trading profits is very competitive and certain corporation tax incentives could apply to provide further tax benefits. One such incentive is the Knowledge Development Box (the KDB) which could apply to reduce the 12.5% corporation tax rate by half, down to 6.25%, for income generated from commercialising R&D and intellectual property.

The KDB compliments other innovation tax incentives in Ireland, targeting different stages of a company’s intellectual property development. Such tax incentives include the R&D tax credit regime which supports companies at the time they are undertaking research and development (R&D), by reducing the net costs of doing so. Also included is Intangible Assets relief which reduces the after tax costs to companies who are investing in and exploiting certain intangible assets (eg patents, copyright, trademarks, know-how) and using them in respect of their Irish trade.

R&D tax credits

A credit of 25% of a company’s spend on R&D activities may be set against its corporation tax bill for the year in which it spends that money. Often this credit eliminates the company’s tax bill for that year. If the company doesn’t need the full amount of the credit to eliminate that year’s tax bill, the balance of the credit remaining can be set against the company’s tax bill for the previous year. If the full credit has still not been exhausted, the company can claim a cash refund of the excess.

Companies claiming the R&D tax credit are not required to hold the intellectual property rights resulting from the R&D work. Also, there is no requirement for the R&D work to be successful. The definition of qualifying R&D activity simply requires that the claimant company engages in a systematic activity which seeks to achieve a scientific or technological advancement, and which involves the resolution of scientific or technological uncertainty.

Tax credits are also available in respect of capital expenditure on buildings or structures used for the purposes of carrying on R&D activity. These credits amount to 25% of the cost of the construction or refurbishment and are available on a proportional basis if at least 35% of the building is used for R&D over a period of four years. Typically, companies cannot take revenue deductions for capital expenditure (aside from capital allowances). This tax credit permits a double deduction from trading income and may be claimed in full in the year in which the expenditure is incurred. A 10 year claw back applies if the building or structure is sold or ceases to be used by the company for the purposes of R&D.

Intangible assets

If a company spends money on “specified intangible assets” (a widely defined term) for the purposes of its IP trade, it can claim back the cost of that spend through tax deductions against the profits of its IP trade. The relief is available as a write-off in the form of capital allowances and can be claimed in one of two ways. The company may opt to:
(a) match the tax deduction with its amortisation or impairment charge (included in its accounts), or
(b) claim the allowances over a fixed write-down period of 15 years at the rate of 7% per annum for the first 14 years and 2% in year 15.

The maximum deduction, (which helpfully includes any funding costs associated with the acquisition of the intangible assets eg interest charges), available in a given year is capped at 80% of the relevant IP trading profits of the company. Any excess deductions and funding costs can be carried forward and offset against IP trading profits in the following years, again subject to the 80% restriction.

The KDB

The KDB is aimed at future income earned as a result of R&D activity ie the income arising from the IP that is developed. The company’s tax bill on trading profits arising in relation to that IP is halved – the effective tax rate reducing from 12.5% to 6.25%.

The profits qualifying for the KDB are calculated by reference to the proportion that a company’s qualifying R&D expenditure bears to the overall expenditure on qualifying assets. In effect, the higher the proportion of R&D undertaken by a company, the greater the proportion of income that may qualify for the KDB rate.

Profits derived directly from a “qualifying asset” will qualify for the reduced tax rate. Qualifying assets include patented inventions, copyrighted software and, for smaller companies, inventions which may be patentable but are not yet patented and are classified as “novel, non-obvious and useful”. This makes the KDB more accessible for certain SMEs (companies with global turnover of less than EUR 50 million and which derive annual income of less than EUR 7.5 million from IP assets).

Conclusion

The tax incentives in Ireland for healthcare and life sciences companies are well established and very beneficial. This is most likely a large part of the reason why 18 of the world’s top 20 pharmaceutical companies and 15 of the world’s top 25 MedTech companies are located in Ireland. Tax is not the only attraction to Ireland - we have a fantastic workforce and, as a member of the European Union, we can easily and efficiently distribute pharmaceutical products to a ready European market. Accordingly to Enterprise Ireland, the total life science sector, across medical devices, pharma and bio in Ireland, export more than EUR 45 billion annually and employ over 50,000 people directly. Ireland is very supportive of the healthcare and life sciences sector and we hope to see further growth in this sector in the future.

For further information, contact Martin Phelan, Head of Tax, Simmons & Simmons Dublin or Patricia McCarvill, Managing Associate, Simmons & Simmons Dublin.