Patented inventions are a large source of revenue in the pharmaceutical industry. Ireland’s tax exemption in respect of certain patent royalties, has been one of the driving factors behind investment by pharmaceutical multinationals, principally from the US, in the Irish economy.

Irish tax legislation provides an exemption from tax for income derived from "qualifying patents" when received by a person resident in Ireland and not resident in any other country. A "qualifying patent" is defined as a patent 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.

Taxation Implications

The taxation reliefs to be derived from patented inventions goes further than to exempt the income from patent royalties from tax. Certain distributions by companies made out of income from certain patents which has been disregarded for corporation tax purposes, are themselves disregarded for the purposes of income tax on the part of a shareholder. This has very wide implications for investors in pharmaceutical companies considering carrying out any of their research and development in Ireland.

The basic requirements for the patent exemption have always been that the work which went into developing and having a patent registered must have been carried out in Ireland, other than work which is ancillary to the main work carried out in Ireland. For a person or company to enjoy the exemption, that individual or company must be resident in Ireland for tax purposes. It is important to note that the patent itself does not need to an Irish registered patent. The determining factor for the grant of the relief is that the work in developing the patent is carried out in Ireland.

Restrictions on the patent exemption have been introduced over the last few years with a view to preventing the use of exempted patent income for the remuneration of employees and executives through special classes of company shares, and to prevent excessive tax exempt royalties being paid between connected parties. It should be noted, however, that no restriction exists where a patent royalty is paid by an unconnected person. The recipient of the royalty is entitled to the full exemption from Irish taxation.

Connected Persons

If the parties to a royalty payment are connected, then the exemption will only apply where the user of the patent is a manufacturing company, in Ireland or elsewhere. In addition, an arms length requirement is imported, meaning that any amount of royalty which exceeds an arms length royalty amount is not exempt from tax.


An individual will not be entitled to the exemption for royalties received in respect of a patent owned by him unless he himself carried out, either solely or jointly with any other person, the development and design work leading to the invention which is the subject of the patent. This means that an individual who owns a qualifying patent which he purchased or received by way of gift or inheritance, will not be entitled to exemption from income earned on it.

An individual shareholder will only enjoy exemption from income tax on dividends paid by a patent company either if he is the inventor, or co-inventor as above, or else if his shares are ordinary shares without any preferred rights.

Distribution out of Income from Patent Royalties - Connected Persons

Where the royalty income is received from a connected person, the arm’s length exempt amount of that of income in the company is referred to as "specified income". Distributions out of that specified income will only qualify for the distribution exemption subject to limitations as follows:

a) Research & Development Cap

The amount of a distribution made out of specified income by a company for an accounting period that does not exceed the amount of the aggregate expenditure incurred in research and development in the company and any company which is 75% associated with that company in that accounting period and the two previous accounting periods, will be treated as a distribution made out of disregarded income and such distribution will remain tax exempt. This is not usually problematic for pharmaceutical companies as a large portion of their budget is spent on research and development.

b) Radical innovation test

The second circumstance where distribution out of specified income can retain its exempt characteristic is where a company can show to the satisfaction of the Revenue Commissioners that the specified income is in respect of an invention which (i) involved radical innovation and (ii) was patented for bona fide commercial reasons and not primarily for the purpose of avoiding liability to tax. Where radical innovation is being claimed it is necessary to submit the patent certificate together with any trade or technical literature to prove that the produce or process is radically innovative.

Maximising Relief for Patent Income

Individuals or companies interested in knowing how to maximise benefits available under the patent royalty exemption should consider the following:

  • establishing a separate company to do research and development work for the qualifying patent which will apply for, and hold the relevant patents; and
  • this company should so far as is commercially viable, grant licences to unconnected third party users.

Patent royalties received by this company will be exempt from Irish corporation tax, and dividends paid on the ordinary shares of the patent holding company, or on other shares but only to the inventor or co-inventor, will be exempt from Irish income tax in the hands of the shareholders.


Patent income relief is a complicated area of tax law and there is considerable merit in obtaining detailed tax advice on how best to maximise the benefits, both for companies and individuals. Our Tax Department can provide such advice

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.