A plan to scrap a tax break on patent royalties could have a serious impact on innovation and investment in hi-tech companies, according to The Irish Software Association (ISA) and others in the sector.

Talking to The Sunday Business Post, ISA director Paul Sweetman criticised the government decision announced last week to end with immediate effect the patent royalty scheme, which allowed companies to earn up to €5m tax-free and to pay tax-free dividends to shareholders.

Sweetman described the scheme as a “very real driver of innovation”. His view was echoed by others in the sector.

Meanwhile, elsewhere in the same newspaper, human capital manager at Ernst & Young, Jim Ryan, says Revenue approved share option schemes which allow employees to acquire shares in the company without being liable to pay income tax, PRSI, health levy or income levy charges will disappear if the proposals in the national plan are adopted.

Many small start-ups – particularly technology companies – use share options to entice and incentivise key employees.

“The income tax exemption on approved options has been withdrawn with effect from last Thursday, PRSI and the health levy will apply to all share income gains crystallising on or after January 1, 2011,” Ryan notes. “The income levy introduction in 2009 will be charged on all shares awarded which crystallise on or after January 1, 2010.”

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