recent changes to Irelandʼs R&D tax credit scheme

8 April, 2025

Introduction: The Transformed R&D Tax Landscape in Ireland

Ireland’s Research and Development (R&D) tax credit scheme has recently undergone significant modifications, reshaping the fiscal landscape for businesses engaged in innovation activities. These amendments, introduced through the Finance Act 2023, represent the most substantial overhaul of the R&D tax framework since its inception in 2004. The Irish government has implemented these changes not only to maintain compliance with international tax standards but also to enhance the attractiveness of Ireland’s innovation ecosystem. For companies currently benefiting from or considering investment in R&D activities in Ireland, understanding these modifications is crucial for effective tax planning and financial decision-making. This article examines the key changes, their implications, and strategic considerations for businesses navigating this transformed tax environment.

Historical Context: The Evolution of Ireland’s R&D Tax Incentives

The Irish R&D tax credit system has been a cornerstone of Ireland’s strategy to position itself as a global hub for innovation and technological advancement. Initially introduced to encourage corporate investment in scientific research, the scheme has undergone various iterations over the past two decades. Prior to the recent modifications, the system operated primarily on a volume-based model, offering a 25% tax credit on qualifying R&D expenditure, in addition to the standard corporation tax deduction of 12.5%. This effectively provided companies with a total tax benefit of 37.5% on qualifying expenditure. The scheme’s historical development reflects Ireland’s commitment to fostering a business environment conducive to innovation whilst maintaining competitiveness within the European Union tax framework. Companies that have established operations in Ireland have benefited substantially from these incentives, contributing to the country’s reputation as a favorable jurisdiction for R&D investment.

Key Modifications: Enhanced Rates and Refund Mechanisms

The most notable change to the R&D tax credit scheme is the increase in the headline rate from 25% to 30% for all qualifying expenditure incurred on or after 1 January 2023. This 5 percentage point increase represents a significant enhancement of the financial incentive for businesses to invest in research and development activities in Ireland. Additionally, the refund mechanism has been restructured to accelerate the benefit realization for companies in a pre-revenue or loss-making position. Under the new system, the previous restriction that limited the payable credit to the greater of the corporation tax paid in the preceding ten years or the payroll tax liability has been abolished. Instead, a new three-tier system has been implemented:

The first €25,000 of a qualifying R&D tax credit claim can be refunded in full in year one

The remaining balance, up to €100,000, can be refunded at a rate of 50% in year one

Any remaining amount above €100,000 will be refunded in installments over a period of three years

This reformed refund structure provides enhanced cash flow benefits for companies, particularly for startups and SMEs with limited tax liabilities.

Compliance with BEPS: Aligning with International Tax Standards

A key driver behind these modifications is Ireland’s commitment to aligning its tax incentives with the OECD’s Base Erosion and Profit Shifting (BEPS) framework, specifically the global minimum tax rate provisions under Pillar Two. The changes ensure that Ireland’s R&D tax credit qualifies as a "qualified refundable tax credit" under Article 10.1 of the EU Minimum Tax Directive, which implements Pillar Two in the EU. To achieve this status, the credit must be payable in cash or cash equivalents within four years from when the enterprise satisfies the conditions for receiving the credit. The revised refund mechanism, allowing for full refund within a maximum of three years, ensures compliance with this requirement. This alignment with international tax standards provides certainty for multinational enterprises operating in Ireland, assuring them that the benefits received from the R&D tax credit will be recognized in calculating their effective tax rate for global minimum tax purposes. Companies engaged in international tax planning should take particular note of these compliance aspects.

Pre-approval Process: Enhanced Certainty for Businesses

Another significant amendment to the scheme is the introduction of a pre-approval process for R&D tax credit claims. This innovation allows businesses to seek advance confirmation from Revenue (the Irish tax authority) regarding the eligibility of proposed R&D projects before substantial investments are made. The pre-approval mechanism represents a marked shift toward providing greater certainty for businesses planning R&D activities in Ireland. Under this system, companies can submit detailed project plans and receive binding determinations from Revenue regarding whether the proposed activities meet the scientific or technological advancement criteria required for tax credit eligibility. This process effectively reduces the risk of rejected claims and subsequent tax adjustments, which has been a concern for many businesses under the previous system. Companies considering establishing a business presence in Ireland should factor this enhanced certainty into their decision-making process.

Documentation Requirements: Increased Emphasis on Record-Keeping

With the enhanced benefits come increased responsibilities for taxpayers in terms of documentation and substantiation. The Revenue has strengthened the requirements for contemporaneous documentation to support R&D tax credit claims. Businesses must now maintain comprehensive records that clearly demonstrate how their activities satisfy the definition of "qualifying R&D activities" under the legislation. This includes documentation of the scientific or technological uncertainty being addressed, the systematic approach to resolution, and evidence of advancement in the field. The documentation should also clearly delineate eligible expenditure, including staff costs, materials, and subcontractor payments. These enhanced requirements necessitate robust internal processes for tracking and documenting R&D activities from inception through to completion. Companies should consider implementing dedicated systems for capturing this information as part of their regular business operations, rather than attempting to compile documentation retrospectively at the time of filing tax returns. For businesses undertaking cross-border operations, maintaining consistent documentation standards is particularly important.

Sectoral Impact: Different Industries, Different Outcomes

The impact of these changes varies significantly across different industry sectors. For pharmaceutical and technology companies with substantial R&D budgets, the increased credit rate represents a material financial benefit, potentially amounting to millions of euros in additional tax relief annually. These sectors, which typically invest heavily in innovation, stand to gain the most from the enhanced scheme. Conversely, for smaller businesses or those in less R&D-intensive industries, the primary benefit may come from the accelerated refund mechanism rather than the rate increase. The automotive, manufacturing, and renewable energy sectors are also positioned to benefit substantially, as they increasingly focus on innovation to address challenges such as decarbonization and automation. Financial services firms developing new fintech solutions may find that previously borderline activities now more clearly qualify under the refined guidelines. It’s worth noting that different sectors face varying challenges in documenting and supporting their R&D claims, with software development often presenting particular complexities in demonstrating scientific or technological advancement beyond routine programming. Companies operating across multiple jurisdictions should consider how these sectoral impacts align with their global R&D strategy.

Comparison with International R&D Incentives: Ireland’s Competitive Position

The enhancements to Ireland’s R&D tax credit scheme must be viewed in the context of international competition for R&D investment. The increase to a 30% credit rate positions Ireland favorably compared to many other European jurisdictions. For instance, the UK offers a 13% Research and Development Expenditure Credit (RDEC) for large companies and a 230% super-deduction for SMEs, while France provides a 30% credit up to €100 million of qualifying expenditure and 5% thereafter. When combined with Ireland’s 12.5% corporation tax rate, the effective tax benefit for R&D expenditure in Ireland is now approximately 42.5%, which compares very favorably internationally. However, pure tax incentives are not the only factor in R&D location decisions. Access to talent, infrastructure, academic partnerships, and specific industry clusters also play crucial roles. Ireland continues to invest in these complementary factors, particularly through initiatives like the Science Foundation Ireland (SFI) research centers and industry-academic collaboration programs. Companies considering international expansion should evaluate Ireland’s offering within this broader context.

Strategic Implications for Multinationals: Tax Planning Considerations

For multinational corporations, these changes necessitate a reassessment of their global R&D tax planning strategies. The enhanced Irish scheme may influence decisions about where to locate new R&D facilities or expand existing operations. However, such decisions must be made within the constraints of substance requirements and transfer pricing regulations, which require that R&D activities be genuinely conducted in the jurisdiction claiming the tax benefit. Multinationals should also consider how the Irish changes interact with their home country tax systems, particularly regarding foreign tax credits and controlled foreign company rules. There may be opportunities to structure global R&D operations to maximize the benefit of Ireland’s enhanced scheme while ensuring compliance with both Irish and home country tax laws. Additionally, companies should review their existing R&D contracts and intercompany arrangements to ensure they properly reflect the economic reality of where R&D is being performed and align with the requirements for claiming the enhanced credit. Organizations with complex international structures should seek specialized advice to navigate these considerations effectively.

SME Perspectives: Accessibility and Cash Flow Benefits

The revisions to the R&D tax credit scheme offer particularly significant advantages for small and medium-sized enterprises (SMEs). The accelerated refund mechanism addresses one of the primary criticisms of the previous system – that it favored established, profitable companies over startups and growth-phase businesses that often operate at a loss while developing innovative products or services. Under the new system, an early-stage company investing €100,000 in qualifying R&D could receive an immediate cash refund of up to €62,500 (first €25,000 at 100% plus 50% of the next €75,000), with the remainder following in subsequent years. This represents a substantial improvement in cash flow management for resource-constrained enterprises. Furthermore, the pre-approval process provides valuable certainty for SMEs, which typically have less capacity to absorb the financial impact of rejected tax credit claims. The enhanced rate and refund mechanism may also make it easier for innovative SMEs to attract external investment, as the improved cash flow profile strengthens their financial projections. Startups considering setting up a limited company in the UK or Ireland should evaluate these benefits as part of their incorporation strategy.

Application Process: Navigating the Claims Procedure

The process for claiming the enhanced R&D tax credit remains broadly similar to the previous system, though with additional options and requirements. Companies can still make claims through their annual corporation tax returns, with a deadline of 12 months from the end of the accounting period in which the expenditure was incurred. However, businesses now have the additional option of seeking pre-approval for planned R&D activities. The pre-approval application should include detailed information about the proposed project, including:

The scientific or technological uncertainty to be addressed

Why existing knowledge or capabilities are inadequate to resolve this uncertainty

The systematic approach to be employed

The scientific or technological advancement anticipated

For companies pursuing the standard claim process without pre-approval, comprehensive contemporaneous documentation remains essential. This should include project plans, laboratory notebooks, technical specifications, test results, and financial records that clearly identify qualifying expenditure. Claims are subject to review by Revenue’s specialist R&D units, which include technical experts capable of assessing the scientific or technological merit of claimed activities. Companies engaging in international tax planning should ensure their application processes are aligned across jurisdictions.

Qualifying Activities: Clarifications and Boundary Cases

The recent changes have also brought welcome clarifications regarding what constitutes "qualifying R&D activities" under the scheme. The fundamental criteria remain consistent with the OECD’s Frascati Manual definition, requiring activities to:

Involve systematic, investigative, or experimental activities

Be in the field of science or technology

Seek to resolve scientific or technological uncertainty

Aim to achieve scientific or technological advancement

However, Revenue has provided additional guidance on boundary cases that have historically created confusion. For instance, the distinction between qualifying R&D and routine product development has been further elaborated, with emphasis on identifying the specific technical challenges that go beyond standard industry practice. Similarly, clarification has been provided regarding software development activities, with guidance on distinguishing innovative technical solutions from routine programming or implementation of existing technologies. The treatment of failed projects has also been addressed, confirming that expenditure on unsuccessful R&D efforts can qualify for the credit, provided the activities themselves meet the eligibility criteria. These clarifications help businesses better identify potentially qualifying activities and document them appropriately. Companies engaged in complex corporate structures should ensure consistent application of these criteria across their organization.

Eligible Expenditure: What Costs Qualify for the Enhanced Credit

The definition of qualifying expenditure remains largely unchanged, though with some administrative refinements. Eligible costs continue to include:

Staff costs for employees directly engaged in R&D activities (salary, benefits, employer social security contributions)

Materials consumed or transformed in the R&D process

Certain plant and machinery used for R&D purposes

Subcontractor payments (subject to specific limitations)

Certain overhead costs directly related to R&D activities

The treatment of subcontractor payments continues to be restricted, with only the first €100,000 of outsourced R&D qualifying for the credit without prior approval, and payments to related parties subject to specific limitations. For payments to universities or research institutions, a higher cap of €200,000 applies. It’s worth noting that capital expenditure on buildings used for R&D purposes is not eligible for the R&D tax credit but may qualify for separate capital allowances. The rules regarding apportionment for staff who only spend part of their time on R&D activities remain in place, requiring careful time recording and documentation. Companies with international payroll arrangements should ensure compliance with these eligibility requirements.

Practical Examples: Case Studies of Enhanced Benefits

To illustrate the practical impact of these changes, consider the following case studies:

Case Study 1: Pharmaceutical Company
A large pharmaceutical company with annual R&D expenditure of €10 million would have received a tax credit of €2.5 million under the previous 25% rate. With the enhanced 30% rate, this increases to €3 million, representing an additional €500,000 in tax benefit annually. As a profitable enterprise, the company would typically use this credit against its corporation tax liability.

Case Study 2: Technology Startup
A pre-revenue technology startup investing €200,000 in qualifying R&D would generate a tax credit of €60,000 under the new 30% rate. Under the previous system, this credit would have been refunded over three years, subject to payroll tax limits. With the new refund mechanism, the company could receive €25,000 + €17,500 (50% of the next €35,000) = €42,500 in year one, with the remaining €17,500 paid over the following years. This accelerated refund significantly improves cash flow for the startup.

Case Study 3: Manufacturing SME
A manufacturing SME spending €500,000 on qualifying R&D to develop new production techniques would generate a tax credit of €150,000 under the new rate. If the company had sufficient corporation tax liability, it could offset the credit directly. If not, under the new refund system, it could receive €25,000 + €37,500 (50% of the next €75,000) = €62,500 in the first year, with the remaining €87,500 refunded over the following years.

These case studies demonstrate how different types of businesses benefit from the enhanced scheme. Companies considering setting up an online business in the UK or Ireland can use these examples to model potential benefits.

Audit and Compliance: Managing Revenue Scrutiny

With the enhanced benefits of the revised scheme comes increased scrutiny from Revenue. R&D tax credit claims have been identified as a focus area for tax audits, with particular attention paid to the scientific or technological basis of claims and the allocation of costs. Companies should prepare for potential audits by:

Maintaining robust contemporaneous documentation of R&D activities

Ensuring technical staff are involved in preparing and reviewing claims

Implementing clear time-recording systems for staff working on R&D projects

Establishing methodologies for allocating shared resources and overheads

Retaining evidence of scientific or technological uncertainty and advancement

Where possible, obtaining third-party validation of the innovative nature of R&D activities, such as through academic partnerships or industry recognition, can strengthen a claim’s defensibility. Companies should also consider the potential benefits of seeking pre-approval for significant projects, as this provides a degree of protection against subsequent challenges. The statute of limitations for Revenue to examine R&D tax credit claims is generally four years from the end of the accounting period in which the claim was made, meaning businesses should maintain documentation for at least this period. Organizations engaged in international tax planning should ensure their audit readiness extends across all relevant jurisdictions.

Knowledge Development Box: Complementary IP Incentive

The enhancements to the R&D tax credit scheme should be viewed alongside Ireland’s Knowledge Development Box (KDB), which offers a reduced 6.25% corporation tax rate on profits derived from qualifying intellectual property developed through R&D activities in Ireland. While the R&D tax credit provides relief on the input side (the cost of performing R&D), the KDB offers benefits on the output side (the profits generated from successful R&D). Recently, the KDB has been extended until 2027 and modified to ensure compliance with international tax standards. For companies developing commercializable intellectual property, the combination of the enhanced R&D tax credit and the KDB can provide a highly attractive fiscal environment. The qualifying criteria for the KDB are aligned with those for the R&D tax credit, meaning activities that qualify for one will generally qualify for the other, provided they result in eligible intellectual property. This creates a coherent incentive system that supports the full innovation lifecycle from research through to commercialization. Businesses engaged in IP development should consider how these complementary incentives can be integrated into their intellectual property strategies.

Future Outlook: Potential Further Developments

Looking ahead, several factors may influence the further evolution of Ireland’s R&D tax incentives. The implementation of the OECD’s Pillar Two global minimum tax provisions continues to develop, and Ireland will likely make additional refinements to ensure its tax incentives remain compliant with these international standards while maximizing their attractiveness to businesses. The European Commission’s ongoing scrutiny of member states’ tax regimes, particularly those that could potentially constitute state aid, may also influence future developments. Additionally, as part of its economic strategy, the Irish government has committed to increasing national R&D intensity (R&D expenditure as a percentage of GDP) to 2.5% by 2025, which may drive further enhancements to the scheme. Companies should monitor policy discussions and budget announcements for indications of potential changes. In the medium term, the broad structure of the enhanced scheme is expected to remain stable, providing a reliable basis for business planning. Organizations with international operations should stay informed about global tax developments that may impact their R&D strategy.

Administrative Considerations: Managing the Transition

For businesses already claiming under the previous scheme, the transition to the enhanced system requires careful administrative management. The increased rate automatically applies to qualifying expenditure incurred from January 1, 2023, but the new refund mechanism may require adjustments to cash flow forecasting and financial planning processes. Companies should review their existing R&D record-keeping systems to ensure they meet the enhanced documentation requirements, potentially investing in improved project management and time-recording systems if necessary. For multinational groups, coordination between Irish operations and global tax functions is essential to ensure alignment with transfer pricing policies and to maximize the group-wide benefit of the enhanced credit. Companies that have previously had R&D tax credit claims challenged or rejected should assess whether the clarifications provided alongside the scheme changes address the issues raised and consider whether previously disallowed activities might now qualify. Businesses engaged in international corporate structures should ensure their administrative systems are aligned across jurisdictions.

Specialist Support: Navigating the Complexity

Given the technical complexity of both the scientific or technological assessment and the tax aspects of R&D claims, most businesses benefit from specialist support when preparing and submitting claims under the enhanced scheme. This typically involves a multidisciplinary approach, combining:

Technical specialists who can identify qualifying R&D activities and articulate the scientific or technological uncertainty and advancement

Tax professionals who understand the detailed provisions of the scheme and can ensure compliance with all requirements

Financial specialists who can accurately identify and allocate qualifying expenditure

Many professional service firms have dedicated R&D tax credit teams that combine these capabilities, while some businesses prefer to develop internal expertise supplemented by external validation. The cost of professional support should be weighed against the increased likelihood of successful claims and the reduced risk of compliance issues. For substantial claims, the return on investment in specialist support can be significant. Companies with complex international operations should consider advisors with cross-border expertise.

Strategic Recommendations: Maximizing Benefits

To maximize the benefits available under the enhanced scheme, businesses should consider the following strategic recommendations:

Conduct a comprehensive review of all activities to identify potentially qualifying R&D, looking beyond traditional research departments to areas such as production engineering or software development

Implement robust documentation systems that capture relevant information contemporaneously, including technical uncertainties, approaches tested, and outcomes achieved

Consider seeking pre-approval for significant R&D projects to obtain certainty regarding eligibility

Review staffing structures to ensure optimal allocation of personnel to qualifying activities

Explore complementary incentives such as the Knowledge Development Box for commercialized intellectual property

Align R&D claim processes with other tax compliance procedures to ensure consistency

Build awareness of R&D tax credit criteria among technical staff to improve identification and documentation of qualifying activities

Develop a multi-year R&D strategy that maximizes the benefit of the enhanced scheme

By adopting a strategic approach to R&D tax planning, businesses can significantly enhance the return on their innovation investments. Companies engaged in international tax planning should ensure their strategies are coordinated across all relevant jurisdictions.

Conclusion: A Strengthened Innovation Ecosystem

The recent changes to Ireland’s R&D tax credit scheme represent a significant enhancement of an already attractive innovation incentive. The increased rate, accelerated refund mechanism, pre-approval process, and clarified guidance collectively strengthen Ireland’s position as a favorable location for R&D investment. For businesses already engaged in R&D in Ireland, these changes offer enhanced financial benefits and improved cash flow. For companies considering where to locate future R&D activities, the revisions provide additional reasons to select Ireland. The modifications also ensure that Ireland’s R&D tax incentives remain compliant with evolving international tax standards, providing certainty for businesses in an increasingly complex global tax environment. As innovation continues to drive economic growth and competitive advantage, Ireland’s commitment to supporting R&D through a world-class tax incentive system positions both the country and the businesses that invest there for future success.

Expert Guidance for International Tax Planning

Navigating the complexities of R&D tax credits across different jurisdictions requires specialized expertise. If you’re looking to maximize the benefits of Ireland’s enhanced R&D tax credit scheme or explore similar incentives in other jurisdictions, expert guidance is essential for optimal results.

We at LTD24 are a boutique international tax consulting firm with advanced expertise in corporate law, tax risk management, asset protection, and international audits. We offer tailored solutions for entrepreneurs, professionals, and corporate groups operating globally.

Book a session with one of our experts at $199 USD/hour and get concrete answers to your tax and corporate questions. Our specialists can help you develop a comprehensive R&D tax strategy that aligns with your broader business objectives. Schedule your consultation today.

Alessandro Piccolo

Director at 24 Tax and Consulting Ltd | + posts

Alessandro is a Tax Consultant and Managing Director at 24 Tax and Consulting, specialising in international taxation and corporate compliance. He is a registered member of the Association of Accounting Technicians (AAT) in the UK. Alessandro is passionate about helping businesses navigate cross-border tax regulations efficiently and transparently. Outside of work, he enjoys playing tennis and padel and is committed to maintaining a healthy and active lifestyle.