Finance (No. 2) Bill 2026: corporate tax updates

The Finance (No. 2) Bill 2026 introduces a number of changes to Ireland’s corporation tax landscape, combining enhancements to key business incentives with important developments in the domestic and international tax framework. With changes across Pillar Two, R&D, the Knowledge Development Box, interest relief, preliminary corporation tax and start-up company relief, businesses should review the proposals against their existing structures and activities to identify both potential opportunities and areas requiring action or further consideration.

Pillar Two  

Finance (No. 2) Bill 2026 (the Bill) transposes the OECD’s January 2026 Side-by-Side (SbS) Package into Irish legislation. The SbS packages includes the new Side-by-Side Safe Harbour, the UPE Safe Harbour and a Substance-Based Tax Incentive Safe Harbour, effective for accounting periods commencing on or after 01 January 2026. Key elements of the package are as follows:

• Side-by-Side Safe Harbour: The Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) is deemed to be nil if the Ultimate Parent Entity (UPE) of a multinational group is located in a jurisdiction that has been recognised by the OECD as operating a qualified side-by-side regime. 
• UPE Safe Harbour: Where the UPE jurisdiction has a qualified UPE regime, any UTPR top-up tax attributable to the entities located in the UPE jurisdiction may be deemed to be nil. This is again subject to the OECD qualification and election requirements.    
• Substance-Based Tax Incentive Safe Harbour: Introduction of a Qualified Tax Incentives (QTIs) which is generally available by reference to expenditure incurred or the quantity of tangible property produced, subject to a number of exclusions. Where a group elects to apply the safe harbour, the top-up tax attributable to QTIs is deemed to be zero, with an adjustment required to the covered taxes using the lower of the QTIs used and a substance cap.
• Simplified ETR Safe Harbour: An MNE group that qualifies and elects into the simplified ETR will be deemed to have a nil top-up tax where the jurisdiction’s Simplified ETR (Simplified Taxes divided by Simplified Income) is at least 15%, or where the jurisdiction reports a Simplified Loss. The effective date is for fiscal years commencing on or after 31 December 2026, with earlier application from 31 December 2025 in specified circumstances.
• Extension of the Transitional CbCR Safe Harbour: The transitional CbCR safe harbours will remain available for fiscal years beginning on or before 31 December 2027 but will not include a fiscal year that ends after 30 June 2029.

Impact for businesses: Groups within scope of the Pillar Two rules will need to carefully assess the application of the new safe harbours, and the compliance obligations arising to Irish Constituent Entities, where the safe harbours are available. Groups benefitting from the R&D Tax Credit should carefully model the impact of the substance-based tax incentive safe harbour against the existing Qualified refundable tax credit regime, as it is possible to elect into the substance-based tax incentive safe harbour. 

Preliminary corporation tax changes

Finance (No. 2) Bill 2026 proposes several changes intended to provide greater flexibility and certainty for companies in meeting their preliminary corporation tax obligations.

• More companies will qualify as “small companies”: The prior-period corporation tax liability threshold will increase from €200,000 to €350,000. Companies below the revised threshold may continue to make a single preliminary tax payment based on either 100% of the prior-period liability or 90% of the current-period liability. The increase should reduce the number of companies required to operate the two-instalment regime.  
• New top-up facility: Where a company has paid at least 80% of its final current-period liability by the final preliminary tax due date, it may avoid late-payment consequences by making a top-up payment within four months of the accounting period end, bringing total preliminary tax paid to 100% of the final liability. This mechanism will apply to both small and large companies and should reduce the risk of interest arising where the year-end tax position cannot be finalised by the normal preliminary tax deadline.  
• Fairer interest calculation for large companies: Where a large company underpays its final preliminary tax instalment, the amount treated as due for the first instalment may be calculated using the lower of 45% of the current-period liability or 50% of the corresponding prior-period liability. This should limit circumstances in which an underpayment of the final instalment retrospectively creates a deemed underpayment of the first instalment. 

Impact for businesses: The amendments should simplify preliminary tax compliance, improve cash-flow flexibility and reduce exposure to interest where the final corporation tax liability is difficult to estimate before year end. Companies should review their preliminary tax classification and payment processes for accounting periods commencing on or after 1 January 2027, when the proposed changes are due to apply.  

Research & Development (R&D) Tax Credit changes

Finance (No. 2) Bill 2026 proposes a number of enhancements to the R&D Tax Credit regime aimed at improving access to the credit, increasing flexibility for claimants and supporting innovation investment.

• Increased subcontracting limits: The existing limits for qualifying R&D activities outsourced to universities, institutes of higher education and unconnected third parties will increase from the greater of 15% of in-house R&D expenditure or €100,000 to the greater of 20% of in-house R&D expenditure or €200,000. This should allow companies to claim relief on a greater level of outsourced R&D activity and support collaboration.
• Additional recognition for R&D payroll costs: A new provision will permit companies to treat 105% of qualifying R&D emoluments as qualifying R&D expenditure, subject to certain conditions. This is intended to recognise additional support costs associated with undertaking R&D activities and will be particularly beneficial to businesses with significant R&D-related employee costs.  
• Increased first-year cash refund threshold: The amount of an R&D tax credit claim that can be paid in full in the first year will increase from €87,500 to €105,000, improving cash flow for smaller and medium-sized R&D projects.  
• Improved interaction with preliminary tax: Companies will be able to take certain second and third instalments of R&D tax credit repayments from prior claims into account when calculating preliminary corporation tax liabilities, where the instalments are treated as overpayments of tax. This should provide an additional cash flow benefit for companies utilising the credit against corporation tax liabilities.

Impact for businesses: The proposed measures enhance the attractiveness of Ireland's R&D Tax Credit regime by increasing the amount of qualifying expenditure, improving cash flow and providing greater flexibility for companies undertaking R&D activities. The changes should be particularly beneficial for businesses that outsource elements of their R&D, have significant R&D payroll costs or rely on the credit as a source of funding for continued investment in innovation.  

Most substantive changes are proposed to apply to accounting periods where the specified return date falls on or after 23 September 2028. 

Knowledge Development Box (KDB) changes

Finance (No. 2) Bill 2026 proposes to extend the availability of the Knowledge Development Box (KDB) and introduce additional flexibility for existing claimants.

• Extension of the regime: The KDB is proposed to be extended for a further five years, allowing companies to claim the relief for accounting periods commencing on or before 1 January 2032. This provides continued access to the effective 10% corporation tax rate on qualifying income from eligible intellectual property assets.
• New option to elect out of the regime: Existing KDB claimant companies will have a one-off opportunity to irrevocably elect out of the KDB regime in respect of their existing qualifying assets. While the election would permanently remove those assets from the KDB, companies may still establish a new KDB claim in the future in respect of newly developed qualifying assets.  
• Technical amendments to loss utilisation: The Bill includes amendments to clarify the treatment of KDB losses carried forward and utilised against future profits, providing greater certainty in the operation of the regime.

Impact for businesses: The extension provides long-term certainty for innovative businesses investing in the development and exploitation of intellectual property in Ireland. The new opt-out mechanism may be particularly relevant for groups assessing the interaction between the KDB and the OECD Pillar Two rules, allowing companies to reassess whether continued participation in the regime remains beneficial in light of their broader tax profile.  

The extension and opt-out provisions are proposed to take effect from the date of enactment, while certain technical amendments will apply for accounting periods commencing on or after 1 January 2027. 

Interest deductibility reforms

Finance (No. 2) Bill 2026 introduces the first phase of a broader programme to simplify and modernise Ireland's interest deductibility regime. The current changes focus primarily on the operation of section 247 interest relief and certain related provisions, with the objective of reducing complexity and improving flexibility for corporate financing arrangements.  

• Section 247 qualifying-purpose rules: Section 247 provides tax relief for interest on borrowings used for certain qualifying investments, such as acquiring shares in, or lending to, trading and rental companies.  
  • The proposed changes are intended to make the relief easier to apply where funding is invested directly or passed through an intermediate company, particularly in multi-tier acquisition and refinancing structures.
  • Companies will still need to meet the relevant ownership, relationship and use-of-funds conditions for the period in which relief is claimed. It will therefore remain important to maintain clear records showing how the borrowed funds moved through the structure and were ultimately used. The changes provide greater flexibility, but do not create a general tax deduction for acquisition debt.
• Recovery-of-capital rules: Section 249 can restrict section 247 interest relief where capital connected with a qualifying investment is returned to the investing company or another relevant person.  
  • Under the proposed changes, relief should be preserved where the recovered amount is, within six months, either reinvested in another qualifying investment or used to repay the related section 247 borrowing.  
  • The Bill also clarifies how a recovery should be allocated where more than one qualifying loan is involved. In practice, companies should review any proposed distribution, repayment, disposal or reorganisation in advance and retain clear evidence showing how the recovered funds were used within the six-month period.
• Connected-company financing and asset acquisitions: The Bill makes targeted amendments to the anti-avoidance restrictions governing interest paid within connected-company structures, including rules relevant where borrowed funds finance the acquisition of assets from a connected person.  
  • The technical effect should be considered separately from the core section 247 qualifying-purpose test: a borrowing may be applied for an apparently qualifying investment, but relief may still be restricted where the connected-party provisions apply.  
  • The commencement rules are particularly important, as certain amendments concerning connected-party asset acquisitions are proposed to apply to acquisitions made on or after 1 January 2024, whereas other changes apply by reference to accounting periods commencing, or loans entered into, on or after 1 January 2027.
  • Existing and proposed structures should therefore be analysed by reference to the acquisition date, loan date, identity of the lender and vendor, and the use of the underlying asset.
• Removal of the common-director condition and entity classification: For accounting periods commencing on or after 1 January 2027, the investing company and investee company will no longer be required to have a director in common.
  • This removes the formal governance condition that could prevent relief despite the existence of the required economic and ownership connection.  
  • The Bill also clarifies that a foreign-incorporated entity with characteristics substantially similar to an Irish partnership is not treated as a company for section 247 purposes or for the associated capital-recovery rules. Cross-border structures should therefore confirm the legal and tax classification of each entity in the funding chain; removal of the common-director test does not displace the other statutory conditions or resolve classification issues involving transparent or hybrid entities.
• Interest Limitation Rule elections: The Bill extends the period for making or withdrawing specified elections under the Interest Limitation Rule, including Interest Group, Equity Ratio and Group Ratio elections, to two years after the end of the relevant accounting period rather than requiring the election by the corporation tax return filing deadline.  
  • The amendment provides additional time to finalise consolidated financial information, group calculations and supporting evidence before selecting the relevant basis of relief. It does not, however, reduce the substantive evidential requirements or remove the need to model the consequences for all Irish group members.  
  • Groups should maintain a central record of elections, revised elections and supporting computations, and should consider the interaction with carried-forward interest capacity, disallowed interest amounts and any changes in group composition.

Impact for businesses: These changes should reduce the administrative burden associated with claiming interest relief and provide greater certainty for groups using debt to fund acquisitions, investments and intra-group financing arrangements. The more flexible treatment of recovered capital and the extended timelines for ILR elections should improve financing flexibility and allow companies additional time to assess the most beneficial tax position. Groups with existing section 247 structures should review their financing arrangements to determine whether the proposed changes create new planning opportunities or simplify compliance requirements.  

Most changes will apply from 1 January 2027. However, certain connected-party asset acquisition rules will apply from 1 January 2024, while some provisions will apply only to loans entered into on or after 1 January 2027.

Relief for Certain Start-Up Companies extended to 2030

Finance (No. 2) Bill 2026 proposes to extend the Relief for Certain Start-Up Companies (section 486C TCA 1997) for a further four years. The relief was previously due to expire for trades commencing after 31 December 2026, but the Bill extends eligibility to qualifying new trades commencing up to 31 December 2030. To note, the Bill does not propose any material changes to the operation of the relief itself.

Under the existing regime, qualifying start-up companies can obtain relief from corporation tax during their first five years of trading where their annual corporation tax liability does not exceed €40,000, with marginal relief available where the liability falls between €40,000 and €60,000. The relief remains subject to the existing limitation by reference to employer PRSI contributions.

Impact for businesses: The extension provides welcome certainty for entrepreneurs and early-stage businesses by preserving access to corporation tax relief for new trading companies established over the next four years. The measure should continue to support business formation, investment and employment growth by reducing the corporation tax burden during the critical early years of trading. Companies considering the commencement of a new trade should review their eligibility for the relief and the interaction with the employer PRSI cap when forecasting the value of the incentive.

The extension is proposed to apply to new trades commencing between 1 January 2027 and 31 December 2030.