John Menton A multinational approach to IP management and investment Structuring & Managing Global IP through Ireland

1 Summary – Why Ireland for IP? 1.Generous Government R & D Grants available. 2. Favourable IP Tax Regime: - (i) 12.5% corporation tax on trading profits (possible to reduce to effective tax rate of 2.5% or lower) (ii) New “Depreciation” Regime for “Intangible Assets” (iii) Generous R&D Tax Credits 3. Valuation of IP – maximising the “Depreciation” regime 4.Why Ireland? Irish IP Protections.

2 1.1R&D Grant Assistance to create/improve IP A variety of R&D Grant assistance is available from: (i) IDA Ireland (which is relevant agency for US Companies) (ii) Science Foundation Ireland. For example 25% Grant Assistance possible. Up to 50% for “Industrial Research”. In 2011 R&D Grants typically around % from IDA Ireland.

3 1.2Irish R&D Support Grants Maximum amount can be as high as 50% depending on type of research and collaboration with third parties and research institutes. In practice the typical grant assistance rates are 15% - 20%. Eligible costs include capital expenditure, personnel, travel, consultancy, materials, technology acquisition and overheads. No retrospective assistance can be given so application need to be submitted before work commences.

4 1.3Sample IDA backed R&D in Ireland Boston Scientific Citi Intel Pfizer - Analog Devices Wyeth Cisco -

5 2. Features of Ireland’s IP tax regime: The 12.5% corporation tax rate for trading income which depending on the relief available can be reduced to an effective rate of 2.5% or lower; Extensive tax relief for capital expenditure on the provision of certain “specified intangible assets”; An R&D tax credit for R&D expenditure of 3 times the standard tax deduction; A double deduction for capital expenditure on the construction or refurbishment of R&D facilities; Credit relief for foreign withholding taxes on royalty income; and An extensive double tax treaty network with reduced withholding tax rates on royalty income.

6 2.1 Introduction to Irish R&D Tax Credit R&D expenditure incurred by Irish companies is generally deductible for corporation tax purposes in Ireland regardless of whether the IP is held in Ireland. However, instead of the standard 12.5% deduction for R&D expenditure, Ireland offers an R&D tax credit (25%) against corporation tax which effectively amounts to 3 times the standard deduction (37.5% deduction). Thus, if a company’s R&D expenditure amounts to one-third or more of the company’s trading income, the effective corporation tax rate is reduced to zero and no corporation tax is payable as illustrated in the next slide.

7 2.2 R&D Tax Credit – key conditions The R&D tax credit applies to in-house R&D activities carried on in Ireland or the EEA (currently the 27 EU Member States and Iceland, Liechtenstein and Norway). R&D tax credit applies only in respect of incremental expenditure on R&D incurred over the expenditure in the base year (2003). For companies established in Ireland after 31 December 2003 the base year expenditure is zero (i.e. zero expenditure in 2003) and therefore all qualifying R&D expenditure should qualify. Assuming a Corporation did not incur R&D expenditure in Ireland (excluding Northern Ireland) in 2003, its base year threshold should be zero so that all qualifying R&D expenditure should qualify for relief.

8 2.3 R&D Tax Credit – potential uses Any unused credits can be carried forward indefinitely in future accounting periods for offset against corporation tax. Excess credits can also be carried back against corporation tax paid in the preceding accounting period and generate cash refunds of tax paid. Any remaining excess R&D Tax Credit can be claimed by way of repayment from the Irish Revenue over a three year period (subject to certain limits).

9 2.4 IDA IRELAND EXAMPLE OF BENEFITS

Tax Credit for Capital Expenditure on Construction of R&D Facility Relief is also available in respect of capital expenditure on buildings or structures used for the purposes of carrying on R&D activity. The relief is available again by way of credit against corporation tax and amounts to 25% of the cost of the construction or refurbishment and is available on a proportional basis if at least 35% of the building is used for R&D facilities. While capital expenditure would not typically generate a revenue deduction (excluding capital allowances), the tax credit effectively 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 or for the purposes of the same trade carried on by the company in connection with which the R&D activities were carried on.

Accessing the lower Irish tax rate The 12.5% corporation tax trading rate is available in respect of income from a trade that is actively carried on by a company in Ireland. The income from the royalty streams of a company that is actively carrying on the trade of acquiring, developing and exploiting IP in Ireland will qualify for the 12.5% tax rate. The company will require sufficient substance in Ireland and it is generally feasible for a company established in Ireland to exploit IP to avail of the 12.5% rate if the company has sufficient personnel located in Ireland with the appropriate expertise and skills required to manage the relevant IP portfolio.

Relief for foreign withholding taxes on Royalty Flows & Treaty Network (I) Relief for foreign withholding tax suffered on royalty income is available in respect of royalties received from both countries with which Ireland has signed a double taxation agreement and non- treaty countries. Withholding taxes in respect of royalty streams from double tax treaty countries are typically eliminated or significantly reduced under the applicable treaty provisions. Ireland’s extensive double tax treaty network (treaties signed with 61 countries) has steadily increased over recent years and is a key incentive to multi-nationals locating IP in Ireland.

Relief for foreign withholding taxes on Royalty Flows & Treaty Network (II) To the extent that significant withholding taxes arise, it is often possible to mitigate the potential exposure through the use of intermediate companies. Relief in respect of any remaining exposures to foreign withholding taxes on royalty income is available in Ireland through the use of credit relief. Credit relief is available to trading companies in respect of royalty income from both treaty and non-treaty countries. Credit is given in respect of foreign withholding tax and to the extent that the foreign tax exceeds the applicable Irish tax on the royalty income, no additional Irish tax will apply.

Moving IP Rights to Ireland New IP Depreciation Regime Introduced in 2009, improved in 2010 Ability of a trader to write down capital expenditure over: Period written down in accounts (IFRS/Irish GAAP) 15 years (if elect, e.g. brands under IFRS) Profit taxed at 12.5% - trading rate “relevant activities”: restriction of allowances and interest Effective 2.5% minimum tax rate possible Capital Gains Tax on sale: 25% 10 year clawback (15 years under FA 09)

Specified intangible assets that qualify for Depreciation regime(1) Must be an “intangible asset” for accounting purposes; and Can be; (a) any patent, registered design, design right or invention, (b) any trade mark, trade name, trade dress, brand, brand name, domain name, service mark or publishing title, (c) any copyright or related right within the meaning of the Copyright and Related Rights Act 2000, (c) computer software or a right to use or otherwise deal with computer software other than such software or such right construed in accordance with section 291(3), (d) any plant breeders’ rights within the meaning of section 4 of the Plant Varieties (Proprietary Rights) Act 1980, as amended by the Plant Varieties (Proprietary Rights) (Amendment) Act 1998, (e) any application for the grant or registration of anything within the paragraphs (a) to (e) above,

16 3.3Specified intangible assets (2) (g) secret processes or formulae or other secret information concerning industrial, commercial, or scientific experience, whether protected or not by patent, copyright or a related right, including know-how within the meaning of Section 768 of the Taxes Consolidation Act 1997, (h) any authorisation without which it would not be permissible for— (i) a medicine, or (ii) a product of any design, formula, process or invention, to be sold for any purpose for which it was intended, but this paragraph does not relate to a licence within the meaning of Section 2 of the Intoxicating Liquor Act 2008, (i) any rights derived from research, undertaken prior to any authorisation referred to above, into the effects of— (i) a medicine, or (ii) a product of any design, formula, process or invention, (j) any licence in respect of an intangible asset referred to in any of the paragraphs above (k) any rights granted under the law of any country, territory, state or area, other than the State, or under any international treaty, convention or agreement to which the State is a party, that correspond to or are similar to those within any of the paragraphs above, or (l) goodwill to the extent that it is directly attributable to anything within any of the paragraphs above Key provision from IP management perspective

17 3.4Worked Example IP Depreciation regime €€ IP Trading income % = €12.5) Capex on acquisition of IP (capped at 80% of income)(80) Taxable income %2.5 Effective CT rate (2.5/100) x (100/1)2.5%

18 4. Valuation of “intangibles” Tax Valuation and Open Market Value Fair Value Fair Market Value Commercial Value Investment Value Profession of IP Valuers exist to navigate the valuation of inbound IP.

Potential Opportunities for Multinationals If you incur capital expenditure on the construction of R&D facilities in Ireland then there is an opportunity to avail of R&D grant aid assistance as well as utilising the 25% tax credit for capital expenditure on R&D facilities and the 25% R&D Tax Credit for R&D carried out at the facility. Establishing a new IP trading company in Ireland would also enable US Corporations to benefit from the extensive tax incentives available for R&D expenditure and for the acquisition or transfer of existing and future IP (which can include the transfer of “licences” to IP in addition to outright assignments/transfers of IP).

Potential Opportunities for Multinationals As outlined above, moving or locating your IP in Ireland can give rise to an effective tax rate in Ireland on the resultant trading income of as low as 2.5%. It may also reduce withholding tax costs on your current royalty streams and present opportunities for licensing arrangements in a broader range of jurisdictions than may currently be available to the group. The transfer of IP is specifically exempted from stamp duty in Ireland and any Irish VAT on the transfer should be deductible with no tax or cashflow costs once the Irish company is using the IP for the purposes of its taxable supplies, e.g. licensing IP. The transfer of IP to Ireland would be deemed to take place at market value for Irish tax purposes. This could result in a high base cost and provide the potential for a significant tax write-off in line with your amortization and may also have favourable accounting implications.

21 6. Why Ireland ? IP Protection Trade Marks Act, 1996 Patents Act, 1992 Copyright and Related Rights Act 2000 Strong IP legislation Berne Convention implemented TRIPS Agreement implemented Geneva Copyright Treaties EU IP Directives implemented Significant number of US companies with IP assets in Ireland

22 John Menton, Partner Education and Qualifications  BCL, 1991, University College, Dublin  Admitted as a solicitor (Ireland), 1995, (Northern Ireland), 1996  Licensed as a foreign legal consultant in New York, 1999  Qualified as an Irish and European Trade Mark Agent Memberships  Law Society of Ireland  Irish Software Association  Tech Law Group TECHNOLOGY & LIFE SCIENCES 'John Menton heads the (IP) group and focuses on non- contentious IP. Sources appreciate his straightforward demeanor, stating: “He isn’t reticent about putting forward an opinion and that’s vital when you are advising major corporate players”.' CHAMBERS EUROPE: EUROPE'S LEADING LAWYERS FOR BUSINESS, 2009 'John Menton heads the firm’s technology and intellectual property practice and represents a wide range of technology companies. Between 1996 and 1999 he ran Arthur Cox’s New York office, which has given him a keen understanding of the US technology market.' CHAMBERS EUROPE: EUROPE'S LEADING LAWYERS FOR BUSINESS, 2009 Practice areas John is head of the Technology and Life Sciences practice group and specialises in representing a broad range of technology companies from domestic start ups through to multinational household names. He gained his primary experience dealing with technology companies from North America establishing in Ireland when he was head of the Arthur Cox New York Office for over three years from 1996 to 1999 and continues to advise North American technology companies, domestic software and life sciences companies as well as Universities on matters relating to Intellectual Property, establishing corporate presence and commercialisation of technology. t: +353 (0) e:

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