Minister for Finance Pascal Donohoe announced a welcome and significant increase in the Research and Development Corporation Tax (RDTC) rate from 30 per cent to 35 per cent in Budget 2026. This adjustment not only enhances Ireland’s attractiveness for foreign R&D investment but also provides substantial benefits to indigenous companies, underscoring the RDTC’s crucial role across both sectors. The increase in tax relief available for businesses engaged in R&D activities reflects the government’s commitment to fostering innovation and bolstering economic growth.
R&D Compass
However, there is more to a competitive R&D tax incentive than the headline rate alone and we hope the R&D Compass, which is due to be published in the coming weeks, will point to some future potential enhancements to the RDTC regime, seeking to address some of the shortcomings that currently exist.
Ireland’s RDTC has played a pivotal role in driving innovation and economic growth. As per Ireland’s Innovation Index 2025, 61 per cent of Irish RD&I companies expanded their research due to State funding, and 47 per cent reported increased employment. Among multinationals, over half stated that without the RDTC, only 10 per cent or less of their R&D would occur in Ireland, underscoring its importance for the 623,000 people MNCs employed in 2022.
While large firms account for 80 per cent of R&D spending, Irish SMEs comprise 87.5 per cent of RDTC claimants, with SME R&D spending rising 13.5 per cent from 2022 to 2023 – outpacing large companies. The recent rate increase should help to sustain this growth trend.
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Ireland’s global position
Global competition for R&D investment is intensifying. The introduction of Pillar 2 (raising the effective corporate tax rate to 15 per cent or those in scope) and international tariffs volatility bring new uncertainty, threatening to shift R&D to alternative jurisdictions – notably the US, particularly in life sciences. Recently, we have seen some large US pharmaceutical firms announcing production moves back to the US.
Although Ireland’s performance in both the European Innovation Scoreboard (up two places to fifth of EU countries in 2025) and the Global Innovation Index (up one place to 18th in 2025) have improved in recent years, competing countries such as Switzerland, Sweden, the UK, and the Netherlands, all rank higher on these indices and offer strong infrastructure and R&D incentives. These countries outperform Ireland in R&D expenditure in the public sector (universities and Government), direct and indirect Government support of business R&D, and industry-academic collaboration.
Countries like Singapore, with growing tech ecosystems and favourable investment policies, are increasingly attracting R&D investment through strong support for innovation.
The increased RDTC rate strengthens Ireland’s global position and brings several advantages. For example, the higher rate helps Irish subsidiaries compete internally within multinational groups for R&D investments, it also supports more ambitious projects and helps Ireland work towards becoming an innovation leader again. And since more R&D activity creates high-value jobs and upskills the workforce, this benefits the exchequer directly via payroll taxes and indirectly via spillover spending in the local towns and cities.
The Minister referred to the publication of an “R&D Compass” which will consider targeted changes to the RDTC to better align with industry practices, for example, in the areas of outsourcing and qualifying expenditure definitions. These are important areas for consideration as, since the introduction of the R&D tax credit in 2004, there has been a significant narrowing in the interpretation of ‘qualifying expenditure’. More clarity and alignment to current practices is critical to provide the certainty that claimant companies want.
In respect of outsourcing, the Irish RDTC regime currently doesn’t allow for any outsourcing to connected companies, something that does not align with how companies operate today. For MNCs, even where the IP created through the R&D effort is located in Ireland, group outsourcing costs are not allowed for R&D tax credit purposes. There are also restrictions on the amount of R&D activity that can be outsourced to third parties. This can be particularly impactful on SMEs, who are generally more reliant on external expertise.
R&D enhancements
Other R&D enhancements which we would like to see reflected in the R&D Compass are:
- Removing outsourcing limits for universities: Eliminating caps on outsourcing to higher education institutions would foster greater collaboration, with negligible impact on costs.
- Agency staff flexibility: Exempting agency staff costs from current outsourcing restrictions would address flexible workforce dynamics.
- Cash refund accelerations: Further increasing the scope to fully monetise the R&D tax credit in year one, rather than over three years, will be a boost to many companies.
- Streamlined audit timelines: Reducing Revenue’s window for initiating technical audits to two years after claim submission would provide certainty.
The Minister also noted that the R&D Compass will “set a pathway for development of innovation supports.” This may set out some detail on what shape an Innovation Tax Credit could take. Many innovative efforts such as user experience design, circular economy projects, digital-first business models, and customer experience transformation, fall outside the existing R&D tax credit regime. Other countries like Belgium, France, Spain, and Portugal already have innovation incentives. The current lack of a similar measure in Ireland is a missed opportunity to stay competitive and support a wider range of innovative activity. Likewise, there is growing potential in digital transformation. A Digitisation Tax Credit could incentivise companies to invest further in these areas.
The increase in the RDTC rate to 35 per cent marks a significant step forward, reaffirming Ireland’s commitment to innovation and international competitiveness. The spillover effects from locating R&D here are significant and we know from experience the advantages that are available to companies from co-locating R&D operations with manufacturing operations. This has had particular significance for the life sciences sector over the last 20 years and the rate increase should help it continue, despite tariff pressures.
However, further low-cost, targeted reforms can unlock additional benefits, reduce administrative burden and make the RDTC regime more dynamic and accessible, especially for ambitious SMEs. Additionally, introducing measures such as an Innovation Tax Credit would ensure Ireland remains at the forefront of global innovation. In a rapidly evolving international environment, these strategic enhancements are vital for sustaining economic growth, job creation, and world-class research. The hope is that the R&D Compass will provide clear direction for these developments.
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