Robert Dever, Partner, Head of Tax, Eversheds Sutherland (Ireland) LLP: The recent publications from the Department of Finance not only evidence the importance of the R&D tax credit regime for the Irish economy and our FDI offering, but also further strengthen the justification for continued investment in, and development of, this key incentive. The R&D tax credit, which has been a feature of the Irish corporate tax code for over 20 years now, has been subjected to a number of amendments in more recent years. Many of these amendments sought to adapt the regime in response to the changes in the Irish corporate tax code made on foot of our international commitments at both an EU and OECD level. The challenging circumstances in which many R&D companies are operating at present, including the ongoing threat of tariffs which can disrupt investment plans and trade patterns and create global tensions, means that the need to ensure that the tax system continues to support investment and employment in the Irish economy is as strong as ever.

The Review of the R&D Tax Credit regime was carried out during 2025 and the report was published in January this year. The review sought to take a fresh look at the contribution which the R&D tax credit has on the Irish economy and the impact of the changes made to the regime in recent years. The glaring message arising from the review is that the R&D tax credit is a key driver for the attraction and retention of FDI, with over 85% of R&D expenditure in 2023 being conducted by foreign-owned companies, but that it is also an important support for domestic enterprises looking to grow in the international market. The cost of the R&D tax credit has increased substantially in the last decade with R&D expenditure accounted for by a relatively small number of multinational companies, although those companies are also significant contributors to the Exchequer in terms of corporation tax receipts. The review also notes that while the availability of the R&D tax credit is important, access to specialist talent is also a critical consideration for companies deciding whether to locate their R&D activities in Ireland.

The R&D Tax Credit and Innovation Compass, published last month, had been promised as part of the Budget 2026 announcement and sets out a medium-term pathway for further work in respect of the R&D tax credit and tax supports for innovation. In this regard, the compass should be seen as setting out the areas for future consideration rather than a roadmap of specific commitments. The compass highlights that the recent enhancement to the R&D tax credit have resulted in an increase in the number of claimant companies, particularly SMEs with micro, small and medium sized companies accounting for 89% of the total number of claims in 2023. However, the remaining 11% of claimant companies representing large companies accounted for 76% of the cost to the Exchequer that year. Echoing the review, the compass also notes that claimant companies are a significant contributor to the Exchequer with such companies accounting for 44% of total corporation tax liabilities in 2023.
The compass confirms that three broad areas for future policy work specific to the R&D tax credit regime will be reviewed in 2026 and beyond, as follows:

• Qualifying expenditure – An in-depth review will be undertaken during 2026 on the sub-contracting provisions of the regime, to include an examination of associated expenditure to third parties, associated expenditure to universities and institutes of higher education, and options to develop a new category of sub-contracting to allow activities between connected companies which will qualify for the R&D tax credits in certain situations. Other aspects of the qualifying expenditure rules to be reviewed include the types of expenditure which are not currently within scope and the policy rationale for any expansion of the current definition of qualifying expenditure.
• Capital expenditure – Consideration will be given to changes to the rules relating to expenditure on the construction or refurbishment of a building for qualifying R&D activities which several stakeholders had suggested as part of the consultation process. It is expected that this will include a review of the 35% de minimis usage test and the four-year period over which the de minimis usage must be met. Changes in relation to capital expenditure will be a medium-term priority having regard to the focus which is likely to be placed on qualifying current expenditure as mentioned above as well as the significant Exchequer cost which changes to the capital expenditure rules are likely to result in.
• Administration and simplification – There are a number of aspects of this heading which will need to be considered, most notably the impact of the transposition of the substance-based tax incentive safe harbour as part of the Pillar Two Side-by-Side package announced by the Inclusive Framework in January, a potential acceleration of payments of the R&D tax credit either for all claimants or for smaller R&D projects and a further increase to the first-year payment threshold, the interaction of the second and third instalments for the purpose of calculating preliminary tax obligations, and developing a list of qualifying overhead expenditure or allowing a qualifying overhead cost as a fixed percentage of wage costs.

Other areas to be considered which are not specific to the R&D tax credit include work on the development during 2026 of a tax-based support for innovation. This will occur in tandem with a proposed review of the Knowledge Development Box regime.

Deirdre Barnicle, Partner, McCann FitzGerald: Both the Review of the R&D Tax Credit Regime (the “Review”) and R&D Tax Credit and Innovation Compass (the “Compass”) are comprehensive reports which highlight the attractiveness of Ireland’s R&D regime, as well as the areas that are ripe for further improvement. A key point noted in both reports is that most R&D expenditure is carried out by a relatively small number of large MNEs. Although it is a testament to Ireland’s success as a commercial hub that it has attracted so many large innovative foreign-owned companies to carry out their research and business activities here, it is important not to let one of the other key aims of our R&D regime fall by the wayside i.e. to foster the growth of indigenous businesses who will hopefully be the MNEs of the future.

Especially as Ireland approaches its EU Presidency term, the references made in the Review to Draghi’s Competitiveness Report and the underinvestment across the EU in software, computers and biotechnologies are particularly pertinent. Care would have to be exercised to avoid introducing a sector-specific element in the R&D credit (as this could be considered a targeted measure for State aid purposes). However, given Ireland’s strong R&D track record, its EU presidency could offer an opportunity to develop measures which foster high-technology research investment, both in Ireland and across the EU.

A key issue identified by the Review and the Compass is the appetite for extending the applicability of the R&D regime to activity that is not carried on by the claimant company itself. In light of this, the decision to conduct an in-depth review of sub-contracting as a whole, rather than looking at each element individually, to ensure a coherent approach to any further development of this aspect of the R&D tax credit is a positive development.

In particular, the proposals put forward to curb any potential abuse of the extension appear both practical and feasible e.g. the suggestion to introduce a geographic limitation so that sub-contracting is only included where it is with connected parties in the European Economic Area or a country with which Ireland has a Double Taxation Agreement, and to require the claimant company to own any IP arising from the R&D activities.
One suggestion noted in the Review is that penalties and interest should not apply in cases of technical disagreements, to encourage SMEs to participate in the R&D regime. Care would need to be taken to ensure that any such change would not be abused. However, it is certainly an astute observation that smaller businesses without the legal and professional support that larger companies enjoy are likely to be dissuaded from participating in the regime by the resources that are required to succeed in a Revenue technical challenge and the potentially negative consequences that can stem therefrom.

John Burke, Director, R&D Tax Credits, Forvis Mazars: The Department of Finance’s recently published Review of the R&D Tax Credit regime and the Compass provide an updated assessment of a long-standing cornerstone of the country’s corporation tax architecture. The analysis reaffirms the central role the R&D tax credit has played since 2004 in attracting high-value foreign direct investment and supporting the expansion of domestic innovation capacity. The Review highlights that the regime remains highly effective in anchoring globally mobile R&D activity, with more than 84% of Ireland’s R&D expenditure in 2023 undertaken by foreign-owned enterprises, an indication of Ireland’s continued competitive position in an increasingly challenging global landscape.

The 2025 stakeholder consultation process confirms that recent legislative enhancements have materially improved the regime’s usability. The increase in the R&D tax credit rate and the uplift in the first-year payment threshold have delivered meaningful cash flow benefits, particularly for smaller and early-stage claimants. These refinements have also strengthened the ability of Irish operations of multinational groups to secure internal funding for new mandates, while broadening engagement among SMEs. At the same time, stakeholders noted that administrative complexity, including documentation requirements and audit uncertainty, remains a barrier to wider SME participation, reinforcing the need for clearer guidance and more predictable processes.

A significant theme emerging from the Review concerns the limitations of current outsourcing rules. The requirement that R&D be largely performed in-house, combined with the restrictive cap for outsourced activities to universities or unconnected third parties, is viewed as misaligned with modern collaborative R&D models. Stakeholders have called for revisions of the caps currently in place and for the inclusion of research institutes within the permitted scope. The Department has signalled that these proposals will be examined, recognising the potential to support more flexible innovation models while safeguarding Exchequer exposure.

The Innovation Compass further broadens the forward policy lens by highlighting the growing need for a complementary incentive to support innovation activities beyond strict R&D definitions. Areas such as the green transition, digital transformation, post-R&D commercialisation and cybersecurity infrastructure are identified as priority themes for future policy development.

Overall, the Review and Compass suggest a measured evolution rather than a fundamental redesign of the regime. Targeted refinements combined with exploration of a new innovation-focused incentive offer practical opportunities to strengthen Ireland’s position as a competitive, innovation-driven economy in a rapidly shifting global tax environment.

This article appeared in the March 2026 edition of the Irish Tax Monitor.