Finance (No. 2) Bill 2026: R&D and innovation

Research and Development (R&D) Tax Credit

The Research and Development (R&D) Tax Credit provides a 35% tax credit for qualifying expenditure incurred on R&D activities undertaken to resolve scientific or technological uncertainty.

Following a review of the regime and the ongoing work under the Research & Development Tax Credit and Innovation Compass, Budget 2027 announced a number of enhancements to the R&D Tax Credit, which are now included in Finance (No. 2) Bill 2026:

• Enhanced deduction for R&D payroll costs: Companies may claim an amount equal to 105% of qualifying R&D emoluments as R&D expenditure, subject to certain conditions. To avail of the enhancement, the company must also incur non-qualifying expenditure of at least 5% of the qualifying R&D emoluments.
• Greater flexibility for preliminary tax payments: Companies may elect to treat second or third instalments of a prior R&D tax credit claim as an overpayment of tax and use those amounts in calculating preliminary tax liabilities for the current or subsequent accounting period.
• Increased subcontracting limits: The limits for qualifying expenditure on R&D subcontracted to third-level institutions and unconnected parties will increase to the greater of 20% of in-house R&D expenditure or €200,000 in each category, provided the company incurs at least an equivalent level of qualifying in-house R&D expenditure.
   

In addition, technical work is ongoing to introduce measures whereby regulated clinical trials may satisfy the scientific test for the credit, to better recognise Irish participation in global trials, and to reduce administrative burdens. The relevant amendment is expected to be introduced at Committee Stage.

These changes will apply for accounting periods where the specified return date falls on or after 23 September 2028. In practice, this means they should apply to 12-month accounting periods commencing on or after 1 January 2027.

Knowledge Development Box (KDB)

The Bill also extends the Knowledge Development Box (KDB) regime to accounting periods commencing before 1 January 2032. The KDB provides an effective 10% corporation tax rate on certain qualifying intellectual property income developed from qualifying R&D activities undertaken by the claimant. However, uptake has been limited due to the regime's complexity and other practical considerations. The Bill introduces a number of technical amendments, including an irrevocable election to opt out of the regime, which may be relevant for groups within the scope of Pillar Two, where the 15% minimum effective tax rate may reduce or eliminate the benefits of the KDB.