Ireland's Research and Development Regime

Ireland's Commitment to International Tax Reform

Over the past number of years Ireland has been committed to international tax reform being introduced at both EU and OECD level. This has led to the introduction of changes to Ireland’s corporation tax policy including the introduction of a 15% minimum corporation tax rate for large corporates, interest limitation rules for highly leveraged companies and more stringent transfer pricing requirements for intergroup transactions. Such changes can lead to fear about Ireland internationals competitiveness but the Government’s continued commitment to defending the prevailing 12.5% corporation tax rate along with the ease of doing business in Ireland has maintained Ireland as a leading destination for foreign direct investment.

Enhancements to Ireland's Research and Development (R&D) Tax Regime

Another key area of attractiveness for business establishing in Ireland is the Research and Development tax regime and the improvements made to this regime over the last two years.  Prior to recent changes the R&D tax credit allowed a tax credit of 25% of the qualifying R&D spend which could be offset against the corporation tax charge. This was in addition to the general corporation tax deduction for such spend which effectively gave a €37.50 corporation tax deduction for every €100 of R&D spend. Where there was no corporation tax payable the tax credit could be claimed as a cash refund over three years leading to positive cash flow impact for new or smaller businesses in Ireland.

Changes Introduced by the Finance Act 2022

The Finance Act which was signed into law in December 2022 made some significant changes to the manner in which a qualifying R&D tax credit was refunded where it was not available to use against a corporation tax charge. It changes the refund bring split equally over three years to being repaid in year one at the greater of 50% of the claim or €25,000 with the remainder being 60% in year two and 40% in year three. This had a significant positive cash flow impact for SME’s with relatively small R&D claims. Further enhancements to this had been introduced from the beginning of 2024 to increase this first year refund to the greater of 50% of the claim €50,000.

Recent Significant Changes to the R&D Regime

The most significant change in the R&D regime was introduced in the recent Finance Act which has increased the tax credit from 25% to 30%. This has led to companies being able to obtain corporation tax relief for effectively €42.50 of every €100 R&D spend. Taking this positive improvement together with the increased year one refund could see companies incurring €166,667 of qualifying R&D spend claiming a cash refund of €50,000 from Revenue post year end. This increase in rate will apply for periods beginning on or after 1 January 2024.

Importance of R&D Tax Credits in Attracting Foreign Direct Investment

As is clear from the improvements noted, Ireland’s R&D tax credit regime is a key source of attractiveness for foreign direct investment and companies establishing in Ireland. It is also important to note that although it is more commonly claimed in the technology and pharmaceutical industries, the credit is not just limited to such companies and many companies in other industries can find themselves carrying out research and development work. 

Conclusion

At Baker Tilly we work closely with companies considering an R&D claim to advise on the qualifications of the claim and the appropriate documentation.

If you think you may be entitled to make an R&D claim we would be pleased to discuss.