Patent/ licence

Galdonagh

I was just wondering if anyone had any info for me. This is the story. A girl bought a patent/ Licence from her sister last year and has been a sole trader since. Things have gone well, better than anyone expected, and she is now thinking of going company. One of the issues with a company is of course getting money out of the company. I am suggesting selling the patent/licence to the company at a increased value but realistic value and paying the CGT on the gain and this is one way of getting money from the company. However this girl has been told that she cannot sell the patent/licence to the company. I cannot understand why but my knowledge of the topic is very limited. Can anyone throw some light on the issue for me. Also, how would you work out a fair price for a patent/licence?

Newaglish

Income from a qualifying patent, in short, is exempt from income tax. In more detail:

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 (prior to 1 January 2008) or in the European Economic Area (“EEA”) (after 1 January 2008). It is not the case that the patent itself must be registered in Ireland, or indeed in the EEA. The relief merely specifies that the work must be carried on in Ireland or, after 1 January 2008, in the EEA.

“Income from a qualifying patent” is any royalty or other sum paid in respect of the use of the invention to which the qualifying patent relates. It thus includes any capital sum paid for the grant of a licence to exercise rights under the patent (but would not include any capital sum received on disposal of the patent).

An individual in receipt of income from a qualifying patent is not entitled to have that income treated as exempt income unless the individual carried out, either solely or jointly with another person, the research, planning, processing, experimenting, testing, devising, development or other similar activity leading to the invention which is the subject of the qualifying patent. Consequently, an individual who owns a qualifying patent which was purchased or received by way of gift or inheritance, will not be entitled to exemption from income earned on it.

The main stumbling block here I imagine is the fact that the girl bought the patent from her sister. As per the last paragraph above, unless she was substantially involved in the development of the patented asset, she will not qualify for the relief.

If she were to qualify, she could hold the patent, grant the company a license to use the patent and receive that income tax-free.

If the patent is sold to the company and the income is earned by said company and a salary is paid to the girl, the company will pay 12.5% on all its profits and will receive a tax deduction for the salary paid to the girl. The girl however, will be taxed at her marginal rate (20%/41% + PRSI).

Selling the patent as a whole would indeed result in a 20% capital gain - however I'm not sure what you mean by "an increased but realistic" value?

Galdonagh

What I mean by an increased but realistic value is, more than what the girl paid her sister for it in the first place, say she paid 100K but she now sells it to company for 120K, but as I say how do you value the patent? Is there any reason why the patent cannot be sold to the company as this person has been advised? I cannot think of any but as I say I am not well up in this field.
Thanks

Galdonagh

Hi this was a question i posted yesterday that seems to have been removed because I put my name at the end. I apologise for that, didn't realise it was wrong.
If a person buys a licence for a product from the patent holder say last year and has been trading as a sole trader the past year, now the business has done very well and the person wishes to form a company. The problem with companies is of course taking money out of the company. I was suggesting that the individual sell the licence to the company but this person tells me that they have been told that they cannot sell the licence to the company. Is there an issue with selling a licence for a patented product to a company from an individual? Secondly how do you value a licence?

Mr. Incognito

Firstly paragrahs and punctuation.

That's very difficult to read. Try and make it clearer.

If a person buys a licence for a product from the patent holder

What type of licence? Distribution licence, user licence, software relating to land. etc.

has been trading as a sole trader the past year

Right.

the person wishes to form a company

This is a whole seperate issue and depends on the nature of the trade.

I was suggesting that the individual sell the licence to the company but this person tells me that they have been told that they cannot sell the licence to the company

So let me get this straight, Person A buys a licence from the patent holder, incorporates a company and then sells the licence to their own incorporated company?

The patent holder probably has a clause on re-selling of licences. (this is why they cannot sell it on)

Why bother. Can you not just have the patent holder pass the licence on to the newly incomrporated company?

Otherwise you'll be taxed on the licence income as an individual and the company will be taxed again.

Depending on the licence you may also suffer stamp duty on the sale.

Is there an issue with selling a licence for a patented product to a company from an individual

No, two seperate legal identities regardless of the ownership.

Secondly how do you value a licence?

Depends on the licence but an arms length transaction would be applied by Revenue on the sale of the licence to the company. (i.e market value)

Galdonagh

OK I will try and do better.

The Licence is for memorial products, ie Crosses etc

The individual has allready paid the patent holder for the licence a year ago.

Setting up a company is not the issue, the issue is wether or not the licence can be sold again.

When the licence was bought by the individual there was 17 years left on the licence.

Can sole trader sell the licence to there own company, same as machinery etc taken from sole trade to company on formation.

How do you put a value on such a licence.

From what I can gather there has been no restriction placed on the licence.

Mr. Incognito

well there's a very simple answer.

Look at the licence agreement. That is the contract that will enable the licence to be passed on or not.

If there is a barring clause- you may have to re-negotiate the licence agreement with the patent holder.

If there is not, then you can look at mechanisms for bringing it into the company.

Galdonagh

Thank you most kindly.
I think it was the typical story of the bar stool accountant saying that Oh no you cant do that.

May I ask what are the ways of bringing the licence into the company.?

Is it a matter of the director selling the licence at market value to the company?

Mr. Incognito

Well comapany law has a bit of red tape on assets brought in from directors, I'd cross that bridge when it comes.

Firstly you'll have to establish whether entitled to do that under the licence agreement.

Secondly you'd be better off passing the licence agreement between the patent holder and the newly incorporated comapany rather than selling it on.

All you have to do is revoke the old licence agreement and draw up a new one with new parties on the same terms. Don't overcomplicate things.

Galdonagh

Ok I see.

But forgive the silly question.

What happens to the money that the sole trader paid for the licence say 18 months before the company was incorporated?

Sorry for all the questions but not my area of expertise, just trying to help a mate.

Mr. Incognito

lol, it's the same consideration. You just approach the patent holder and say-

"Here mate, I've incorporated a company to deal with this, do you mind if we re-sign the licence agreement. They say, sure, whip out the pen and sign the exact same contract with the parties names changed"
The patent holder already has his cash for the sale- he doesn't care.

From an income perspective on paper the company will assume the debt of the licence agreement from the sole trader. the company will in theory pay the sole trader for the taking over of the contract and the sole trader is re-ivesting the payment as capital invested into the incoporated company. In reality these all net off and no actually cash has to change hands.

The sole trader now becomes the shareholder of the company recieves his income in the form of dividends annually.

You'll need a professional to structure this to make sure it's airtight but that's my initial thoughts.

Mr. Incognito

This has been answered in a different thread the OP started. Can a mod remove this.

Galdonagh- asking the same question twice won't help. Tack it on to your other thread if you want.

information

SetantaL wrote: »

This has been answered above. Can a mod remove this.

Galdonagh- asking the same question twice won't help. Tack it on to your other thread if you want.

No it hasn't, the question is

Is there any reason why the patent cannot be sold to the company as this person has been advised?

Mr. Incognito

Look you've started two threads on the same topic wild mild variations on a theme.

Plug this question at then end of the last one.

You are also looking for very specific advice. This forum is not capable of providing this service and boards could be seen to be liable if anyone gives such - seek professional help. I answered your last question when it was posted and now you're back again

Is there any reason why the patent cannot be sold to the company

This was answered.

In addition your sister has a licence, not a patent or patent income so the above advice is not applicable.

I'm reporting this post to a mod and they can make a call on it.