A version of this article appeared in the July 2004 Irish Tax Review

The new stamp duty exemption on the transfer of intellectual property came into force on 1 April 2004. This recent substitution of Section 101 of the Stamp Duties Consolidation Act 1999 ("SDCA 99"), introduced through Finance Act 2004, now brings Ireland in line with the UK where a similar stamp duty exemption was introduced back in 2000.¹

However, differences do exist as to what is expressly incorporated into the statutory definition of "intellectual property" under both the Irish and UK stamp duty legislation. This is partly due to the fact that intellectual property as a concept is constantly evolving over time and therefore is difficult to statically define. This article explores what is meant by the term "intellectual property" for the purposes of the new stamp duty exemption, drawing comparisons with the UK position and highlighting a number of potential difficulties for practitioners.

What is intellectual property?

The dictionary definition of "intellectual property" states that intellectual property is intangible property that is the result of creativity.² This definition cannot be more precise because intellectual property is a basket of different rights protecting the product of human imagination, creativity and innovation, which is constantly evolving whether by way of statute or the common law i.e. judge made law. However, the subject matter of intellectual property rights, whether inventions or literary or artistic works, has a link with knowledge and ideas.³

Intellectual property is the generic term used to describe the creative output of the human intellect that has economic or commercial value. The economic or commercial value of intellectual property comes from the ability of its owner to control its use.⁴ This control is essentially negative in nature in that it stops others doing certain acts in relation to the subject matter of the intellectual property right and is given as an incentive to individuals or companies who create new and innovative products, services or literary or artistic works. Intellectual property rights are therefore seen as necessary devices for the creation and distribution of information within society,⁵ but at the same time they are assets of significant value and produce large revenues for their owners i.e. by selling, licensing or charging the intellectual property. This significant value is the reason why intellectual property has been described as the "currency of our time".⁶

What does the term intellectual property include?

Originally protection was given for what was termed "industrial property" and the 1883 Paris Convention for the Protection of Industrial Property (the "Paris Convention") stated that this term, although to be understood in its broadest sense, covered within its scope "patents, utility models, industrial designs, trademarks, service marks, trade names, indications of source or appellations of origin, and the repression of unfair competition".⁷

Industrial property is therefore restricted to those rights, which have a close connection with industry and are of practical application and importance, but it is also understood to include, by implication, the common law rights of passing off and breach of confidence, which at the time of the Paris Convention were only developing common law concepts.⁸

The modern day understanding of the term "intellectual property" arises when other rights such as copyright are added to what has been described above as industrial property. The copyright system was designed to provide protection of rights in literary, artistic, musical and dramatic works which would not neatly fall within the categories of industrial property developed since the Paris Convention. Therefore the term "intellectual property" is said to be traditionally divided into two branches; industrial property and copyright.

Since the Paris Convention, two more intellectual property related conventions, in particular, provide assistance in understanding what the term "intellectual property" is said to include. The first of these conventions is the Convention Establishing the World Intellectual Property Organization (1967) (the "WIPO Convention"). WIPO is an independent intergovernmental body headquartered in Geneva, Switzerland, comprising 179 Member States. WIPO's principal objective is to promote, through international cooperation, the creation, use, dissemination and protection of intellectual property worldwide. Ireland became a signatory to the WIPO Convention on 26 April 1970.

Article 2(viii) of the WIPO Convention states that "intellectual property" shall include the rights relating to:

The last line of the WIPO Convention definition of "intellectual property" could by implication provide a reference to the common law right to the protection of confidential information and know-how and this common law right is expressly included in the understanding of intellectual property in a subsequent convention, the Agreement on Trade-Related Aspects of Intellectual Property Rights, including Trade in Counterfeit Goods (1994) (the "TRIPS Agreement").

The TRIPS Agreement standardises substantive intellectual property law and procedures for the protection and enforcement of intellectual property, among members of the World Trade Organization, so as to reduce barriers to international trade amongst Member States. Ireland has been a member of the World Trade Organization in its own right, as well as through the European Union as a collective entity, since 1 January 1995.

Article 1(2) of the TRIPS Agreement states that for the purposes of that agreement, the term "intellectual property" refers to the following categories of intellectual property:

	Copyright and related rights;
	Trademarks;
	Geographical indications;
	Industrial designs;
	Patents;
	Layout - designs (topographies) of integrated circuits; and
	Protection of undisclosed information.

It can therefore be seen that the term "intellectual property" and what it is said to include is constantly changing and evolving with the passage of time and technological advances. Some of these changes can be seen from the development of intellectual property protection for semiconductor chips, which perform electronic or related functions and the recent database right, which protects the investment put into electronic databases.⁹ There has also been extensive development and harmonisation of performer's rights and moral rights across WIPO convention countries and the European Union.¹⁰ Therefore one would have difficulty in providing an exhaustive list of what the term "intellectual property" includes at any one time due to the dynamic nature of this area of the law.

At present under Irish law at least, intellectual property rights can be divided into seven main statutory categories and two common law categories. These categories of intellectual property rights are as follows:

	Copyright and Related Rights (i.e. performer and moral rights), which protect the expressed form of literary, dramatic, musical and artistic works;
	Industrial Designs, which protect the ornamental or decorative features of a product;
	Semiconductor chip protection, which protects the rights of the creator of a topography of a semiconductor product;
	A Database Right, which protects the substantial investment, both in terms of time and money, of the maker of an electronic database in obtaining, verifying or presenting the contents of the electronic database;
	Trade Marks, which protect distinguishing signs used in the course of a trade for the sale of goods or the provision of services;
	Patents, which protect novel inventions of industrial application;
	Plant Breeder's Rights, which provide statutory protection for the producers of "new" varieties of plants, which have been independently bred or discovered and developed;
	Confidential Information under which a common law obligation of confidentiality exists in relation to information imparted from one party to another in confidential circumstances; and
	Passing off, which protects the goodwill and reputation of a business from misrepresentations made by other traders.

The new stamp exemption on intellectual property transfers

Very little was said in the Minister for Finance's budget speech by way of what was to be included within the term "intellectual property" for the purposes of the then proposed stamp duty exemption. However, the Minister for Finance did state that he was to consult with the various bodies with an interest in the area of intellectual property before introducing the new exemption.

The new stamp duty exemption on the sale or transfer of intellectual property was ultimately enacted through Section 74 of the Finance Act 2004, which substituted a new Section 101 SDCA 99. This new Section 101 SDCA 99 defines "intellectual property" for the purposes of the new stamp duty exemption as follows:

One area included in the Section 101 SDCA 99 definition of "intellectual property" worth mentioning, and that has not been dealt with above, is the supplementary protection certificate. These certificates grant patent like protection in the areas of medicinal products for human or animal use (Regulation No. 1768/92) and plant protection products such as insecticides, herbicides etc. (Regulation No. 1610/96) where considerable time that would normally be covered by patent protection is spent testing a product in order to obtain authorisation from the relevant regulatory authority so that the product can be sold to the public. Therefore, in order to compensate for the time lost in exploiting a patent while such testing/authorisation is taking place, the above-mentioned Council Regulations allow for the patent protection period to be extended beyond the normal 20-year period up to a maximum of 25 years in total.

Another area of interest is the inclusion of the term "invention" in the Section 101 SDCA 99 definition of "intellectual property". This may give rise to some uncertainty in the future due to the fact that the scope of what is to be covered under the term "invention" is not entirely clear. Normally inventions would qualify for patent protection if they met the statutory criteria set out in the Patents Act 1992 i.e. novel, inventive step and of industrial application. Uncertainty now exists as to whether the term "invention" covers not only inventions that would be patentable, but the inventor has not lodged an application in the Irish Patents Office i.e. pre-patented inventions, but also inventions that are expressly excluded under statute from being the subject matter of a patent, such as a scientific theory, mathematical method or a method of surgical treatment practised on humans or animals.¹¹

So how does the new stamp duty exemption work?

Section 101(2) SDCA 99 provides that stamp duty shall not be chargeable under any heading in Schedule 1 SDCA 99 on an instrument for the sale, transfer or other disposition of "intellectual property" as defined. Therefore, transfers of intellectual property rights, applications and licences will no longer attract stamp duty rates of up to 9% for values in excess of €150,000.

Section 101(3) SDCA 99 then provides for an apportionment on a "just and reasonable basis" where there is an instrument transferring both intellectual property and other property. Only the proportion of consideration relating to intellectual property would be exempt from stamp duty under Section 101 SDCA 99.

In addition, Section 101(4) SDCA 99 provides that any value attributable to intellectual property is disregarded for the purposes of the statement regarding conveyances being part of a larger transaction or a series of transactions. The rest of the provisions of Section 101 SDCA 99 deal with how the presence of exempt intellectual property interacts with Section 45 SDCA 99 (i.e. directions as to apportionment of consideration where separate instruments are concerned) and the commencement of the exemption.

A UK comparison

The Section 101 SDCA 99 definition of "intellectual property" is to be compared with Section 129 of the UK Finance Act 2000, which provides that for the purposes of the UK's intellectual property stamp duty exemption, the term "intellectual property" means:

Unlike the Irish stamp duty definition of "intellectual property", the UK provision does not expressly contain an exemption for pending intellectual property applications, supplementary protection certificates or domain names. However, Paragraph 4.341 of the Inland Revenue's Stamp Taxes Manual (March 2002) states that the UK stamp duty exemption does apply to these types of intellectual property.¹² Furthermore, the Inland Revenue's Stamp Taxes Bulletin - Issue 1 also confirms that the UK stamp duty exemption applies to domain names, databases and software applications even though they are not specifically referred to in Section 129 of the UK Finance Act 2000.¹³ It should also be noted that Section 116 of the UK Finance Act 2002 subsequently made the transfer of goodwill exempt from stamp duty in the UK.

Therefore, both the Irish and UK stamp duty exemptions cover the same types of subject matter, with the Irish stamp duty definition of "intellectual property" expressly including some of the less well known and emerging areas of intellectual property, perhaps with the benefit of hindsight of the UK clarifications mentioned above. However, there are perhaps two areas, which the Irish definition of "intellectual property" should have included in order to improve the operation of the exemption.

(i) Where is the know-how?

It is apparent that both the Irish and UK stamp duty definitions of "intellectual property" contained in the respective exemptions are limited to some of the more common statutory forms of intellectual property protection outlined above and therefore do not appear to include the intellectual property protection granted under the common law for confidential information or know-how. One would have liked to have seen the common law protection of confidential information and know-how included in the stamp duty exemption given its importance in the area of protecting disclosures of pre-patented inventions made with a view to obtaining funding for the development of such ideas and concepts into inventions.

Perhaps this is the reason why the term "invention" is included under the definition of "intellectual property" in the new Section 101 SDCA 99, so that pre-patented inventions would fall within the scope of the exemption. However, know-how can extend beyond inventions and include items ranging from secret formulae and processes to customer lists and sales information. Such information would equally be valuable to companies and individuals that have an interest in various intellectual property rights.

Whilst it is generally accepted that stamp duty is not payable on the transfer of know-how,¹⁴ the case law used as authority for this legal position is not entirely on point.¹⁵ Therefore at present, the legal position on whether stamp duty is payable on the transfer of know-how is unfortunately not free from doubt, although it is commonly accepted by practitioners that there is no stamp duty payable on such transfers.¹⁶

Even if no stamp duty is payable on the transfer of know-how, the inclusion of know-how under the definition of "intellectual property" for the purposes of the new stamp duty exemption would have provided more certainty in the area by making the stamp duty treatment of know-how transfers statute based rather than practitioners relying on an uncertain common law basis.

(ii) What about the shares?

One practical area which might also provide some difficulty in the future for practitioners is whether the stamp duty exemption should have applied not only where an intellectual property right per se is acquired but also where a company is purchased whose only valuable asset so to speak is some form of intellectual property, for example a patent royalty company or a company that maintains the licensing and protection of a set of intellectual property rights such as the company involved in the Noddy case.¹⁷

Notwithstanding a stamp duty rate of 1% for the transfer of shares, any prospective purchaser may want to purchase the assets of the company including the intellectual property itself, instead of the shares in the company, if the stamp duty exemption would provide a stamp duty saving overall for the purchaser. This would provide some further hurdles than just a straightforward share purchase, for instance a double CGT charge for the owners of the company when realising the fruits of their creative endeavours (the raison d'être of intellectual property rights), something that the purchaser as the party responsible for paying the stamp duty may not necessarily sympathise with.

One would have hoped that a provision similar to that contained in Section 648 of the Taxes Consolidation Act 1997 and its definition of "development land" would have been included in the new stamp duty exemption, i.e. where the term "intellectual property" would include shares deriving their value or the greater part of their value from the types of intellectual property already listed in Section 101 SDCA 99. The proviso in Section 648 of the Taxes Consolidation Act 1997 that excludes shares on a recognised stock exchange would also ensure that stamp duty would be payable on the transfer of shares by members of the public in plcs and large multinationals such as Coca Cola whose most valuable asset would be the brand itself.

Conclusion

Given the motives of the Minister for Finance in providing this exemption, i.e. targeting reliefs that can produce economic benefits for Ireland, overall the stamp duty exemption is to be considered a welcome development. The stamp duty exemption on the sale or transfer of intellectual property should go some way towards achieving those objectives, as Ireland moves towards a more knowledge based workforce and economy, by significantly reducing the costs involved in high value intellectual property transactions.

The stamp duty exemption should also enhance the R&D tax credit system for in-house R&D activities, also implemented in Finance Act 2004, and is certainly justifiable on the grounds of economic benefits for Ireland. However, in order to ensure that the recent stamp duty exemption continues to achieve its policy objectives, it must be capable of adapting to new types of intellectual property as and when they gain recognition so as to assist Irish companies in establishing and developing their businesses in Ireland's new found knowledge based economy.

Back