Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes

Income Taxes

14.         Income Taxes

As a company incorporated in Bermuda, the Company is principally subject to taxation in Bermuda. Under the current laws of Bermuda, tax on a company’s income is assessed at a zero percent tax rate. As a result, the Company has not recorded any income tax benefits from its losses incurred in Bermuda during each reporting period, and no net operating loss carryforwards will be available to the Company for those losses.

The Company and its wholly-owned subsidiaries have entered into agreements with Kiniksa US, under which Kiniksa US provides management, commercial, manufacturing and research and development services to those parties for which Kiniksa US receives costs plus a service fee.

In 2021, 2022 and 2023 the Company engaged in a series of intra-entity asset transfers and allocations to contribute assets to its wholly owned UK subsidiary and its UK Swiss branch office.

In January 2021, in connection with its launch readiness activities, Kiniksa Bermuda contributed all of its rights, title and interest in, among other things, certain contracts (including the Regeneron Agreement), intellectual property rights, product filings and approvals and other information, plans and materials owned or controlled by Kiniksa Bermuda insofar as they related exclusively or primarily to ARCALYST to Kiniksa UK.

In February 2022, Kiniksa Bermuda contributed its exclusive rights to develop and commercialize mavrilimumab in the Huadong Territory to Kiniksa UK.

In July 2022, Kiniksa Bermuda contributed all of its rights, title and interest in, among other things, certain contracts (including the Biogen Agreement), intellectual property rights, product filings and approvals and other information, plans and materials owned or controlled by Kiniksa Bermuda insofar as they related exclusively or primarily to vixarelimab to Kiniksa UK.

The consolidated Company did not incur tax liabilities on any of these intra-entity transfers since the transferor, Kiniksa Bermuda, is exempt from income tax in Bermuda, its jurisdiction of incorporation. Kiniksa UK accounted for the 2021 and 2022 intra-entity transfers as transfers of assets between related parties and received stepped up tax bases in the contributed intellectual property assets, equal to the fair value of the assets at the time of transfer. The Company recorded UK deferred tax assets as a result of these contributions, which represent the difference between the stepped-up tax bases and the book bases for financial statement purposes. At the time of the 2021 and 2022 transfers of the relevant assets, the Company recorded a valuation allowance on the full amount of the recognized deferred tax assets.

The fair value of the January 2021 transfer of ARCALYST intellectual property assets was determined utilizing forecasted cash flows attributable to commercial operations and estimated probabilities of success of such cash flows, discounted to present value utilizing the discounted cash flow method. The fair values of the transferred mavrilimumab and vixarelimab intellectual property assets were determined utilizing future cash flows related to agreements with third parties for the use of the applicable intellectual property and estimated probabilities of success of such cash flows, discounted to present value utilizing the discounted cash flow method.

In December 2023, Kiniksa UK allocated all of its rights, title and interest in, among other things, certain contracts (including the Regeneron Agreement), intellectual property rights, product filings and approvals and other information, plans and inventory owned or controlled by the Company insofar as they related exclusively or primarily to ARCALYST to Kiniksa UK’s Swiss branch office.

The December 2023 allocation of the assets to the Swiss branch did not result in a taxable disposal for Kiniksa UK as the allocation was to a branch within the entity. The future results of Kiniksa UK’s Swiss branch office are subject to income taxes in Switzerland and the Company expects it will not be subject to tax in the UK. Kiniksa UK’s Swiss branch office received a step up in basis resulting in a Swiss deferred tax asset. The fair value of the allocated ARCALYST intellectual property assets was determined utilizing forecasted cash flows attributable to commercial

operations and estimated probabilities of success of such cash flows, discounted to present value utilizing the discounted cash flow method. The fair value of the ARCALYST inventory was determined utilizing the average net selling price less estimated costs to sell.

Income (loss) before benefit (provision) for income taxes consisted of the following:

	Years Ended
	December 31,
	2023		2022		2021
Bermuda	$	(91,133)	$	(84,067)	$	(164,284)
Foreign (U.S., U.K., Germany, France, Switzerland)		74,481		95,093		7,745
Total	$	(16,652)	$	11,026	$	(156,539)

The components of the Company’s income tax benefit (provision) were as follows:

	Years Ended
	December 31,
	2023		2022		2021
Current income tax benefit (provision):
Bermuda	$	(122)	$	(1,318)	$	—
U.S. federal		(566)		(4,393)		(682)
U.S. state		(567)		(3,117)		(706)
Foreign (U.K., Germany, France, Switzerland)		(1,797)		(4,330)		14
Total current income tax benefit (provision)		(3,052)		(13,158)		(1,374)
Deferred income tax benefit (provision):
Bermuda		—		—		—
U.S. federal		12,958		—		—
U.S. state		5,122		—		—
Foreign (U.K., Germany, France, Switzerland)		15,708		185,495		(11)
Total deferred income tax benefit (provision)		33,788		185,495		(11)
Total benefit (provision) for income taxes	$	30,736	$	172,337	$	(1,385)

A reconciliation of the Bermuda statutory income tax rate of 0% to the Company’s effective income tax rate is as follows:

	Years Ended
	December 31,
	2023		2022		2021
Bermuda statutory income tax rate	—	%	—	%	—	%
U.S. and Europe tax rate differential	(103.1)		165.9		1.9
Research and development tax credits	13.7		(21.5)		2.4
Share-based compensation	(7.4)		13.2		(0.4)
U.S. state taxes, net of federal	(7.9)		10.4		(0.5)
FDII	13.8		(35.9)		1.4
Uncertain tax positions	—		14.3		0.2
IP transfers and allocation	258.6		(343.9)		71.0
Inventory allocation	181.4		—		—
Other	(4.7)		17.2		(0.8)
Change in valuation allowance	(159.8)		(1,382.8)		(76.1)
Effective income tax rate	184.6	%	(1,563.1)	%	(0.9)	%

Net deferred tax assets consisted of the following:

	December 31,
	2023		2022
Deferred tax assets:
Research and development tax credit carryforwards	$	265	$	231
Share-based compensation		15,642		11,789
Operating lease liability		3,317		1,543
Accrued expenses and other liabilities		2,914		2,134
Intangible assets		215,396		181,458
Inventory		30,338		—
Capitalized research and development		—		5,586
Net operating losses		1,128		4,054
Total deferred tax assets		269,000		206,795
Valuation allowance		(46,260)		(19,584)
Deferred tax liabilities:
Depreciation and amortization		(237)		(312)
Right of use asset		(3,220)		(1,404)
Net deferred tax assets	$	219,283	$	185,495

As of December 31, 2023 and 2022, the Company had no federal research and development tax credit carryforwards available to reduce future tax liabilities. As of December 31, 2023 and 2022, the Company had state research and development tax credit carryforwards of approximately $337 and $297 respectively, available to reduce future tax liabilities, which can be carried forward indefinitely. As of December 31, 2023 and 2022 the Company had foreign net operating loss (NOLs) carryforwards of $1,128 and $3,902 respectively, available to reduce future tax liabilities. The NOLs maybe carried forward and utilized, subject to local limitations.

As required by ASC 740 management regularly reassesses the valuation allowance on the Company’s deferred income tax assets. Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that the Company will be able to recover its deferred tax assets. Such assessment is

required on a jurisdiction-by-jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

In the third quarter of 2022, the Company assessed the valuation allowance on its UK deferred tax assets and considered positive evidence, including, among other things, cumulative UK income in recent years, estimates of sales related to the Company’s commercial product ARCALYST, and future profitability by jurisdiction. After assessing both the positive evidence and negative evidence, the Company determined it was more likely than not that its UK deferred tax assets would be realized in the future and released the associated valuation allowance during the year ended December 31, 2022. This resulted in a non-cash deferred tax benefit of $185,495. As of December 31, 2022, the Company maintained a full valuation allowance against its U.S. deferred tax assets.

In the second quarter of 2023, the Company assessed the valuation allowance on its U.S. deferred tax assets and considered positive evidence, including cumulative U.S. income in recent years, primarily related to cost plus arrangements and expectations regarding future profitability. The Company determined it was more likely than not that its U.S. deferred tax assets are realizable in the future and released the associated valuation allowance as of June 30, 2023.

In the fourth quarter of 2023, the Company assessed the valuation allowance on its Kiniksa UK deferred tax assets and considered positive and negative evidence, including among other things, the impact of future profitability decreasing in the UK as a result of the allocation of ARCALYST to the Swiss branch office. After assessing both the positive and negative evidence, the Company determined it was more likely than not that a portion of the UK deferred tax assets would not be realized in the future and established a partial valuation allowance on those assets during the year ended December 31, 2023.

The Company recognized a non-cash deferred tax benefit of $33,788 during the year ended December 31, 2023. This benefit primarily resulted from the step up in basis of intangible assets and inventory received in Switzerland associated with the allocation of ARCALYST to the Swiss branch office and the release of the U.S. valuation allowance. This was partially offset by the establishment of a partial UK valuation allowance. There are no material deferred tax assets in the jurisdictions outside the United States, UK and Switzerland.

Utilization of the state research and development tax credits may be subject to substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the shares of a corporation by more than 50% over a three-year period.

Changes in the valuation allowance for deferred taxes were as follows:

	Years Ended
	December 31,
	2023		2022
Valuation allowance at beginning of year	$	(19,584)	$	(127,944)
Increases recorded through the balance sheet		—		—
Decreases (increases) recorded to income tax provision		(26,676)		108,360
Valuation allowance at end of year	$	(46,260)	$	(19,584)

The valuation allowance increased by $26,676 in 2023 primarily as a result of the establishment of the valuation allowance for the UK deferred tax assets which primarily consisted of the tax basis in intellectual property transferred from Bermuda and net operating losses.

The Company recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The amount of unrecognized tax benefits is $1,794, $1,794 and $545 as of December 31, 2023, 2022 and 2021, respectively. The net change in 2023, 2022 and 2021 relate to tax positions on our intellectual property transfers and positions on research and development credits.

A roll forward of the Company’s uncertainties in its income tax provision liability is presented below:

	Years Ended
	December 31,
	2023		2022		2021
Gross balance at the beginning of year	$	1,794	$	545	$	837
Gross increases based on current period tax positions		—		1,386		50
Gross increases based on tax positions of the prior periods		122		—		—
Gross decreases based on tax positions of the prior periods		(122)		(137)		(342)
Unrecognized tax benefits at the end of the year	$	1,794	$	1,794	$	545

The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. The Company had recorded immaterial interest on the tax positions during the year ended December 31, 2023, 2022 and 2021.

The Company files U.S. federal income tax returns and income tax returns in various state, local and foreign jurisdictions. The Company’s income tax returns are subject to tax examinations for the tax years ended December 31, 2020 and subsequent years. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by tax authorities to the extent utilized in a future period.

No additional provision has been made for withholding taxes related to undistributed foreign earnings of the Company’s wholly owned foreign subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries. As such, earnings are expected to be permanently reinvested, the investments are permanent in duration, or the Company has estimated that no additional tax liability will arise as a result of the distribution of such earnings. Unremitted earnings are $50,466 as of December 31, 2023 and a liability could arise if amounts are distributed by the subsidiaries or if subsidiaries are ultimately disposed, which could result in up to $15,140 withholding taxes related to permanently reinvested earnings.