Ireland has long positioned research and development at the heart of its competitive industrial strategy, with tangible results including consistently high levels of foreign direct investment and strong performances in respected benchmarks such as the European Innovation Scoreboard.
One of the key elements of this has been our R&D tax credit regime, with industry welcoming the increase to 35 per cent of eligible expenditure in the 2026 budget announcement. But with competitor countries increasingly noting our status and snapping at our heels, is this enough to maintain our strong position?
Mark O’Sullivan of BDO sees positives and potential negatives in this area. “On the plus side, Ireland leads the EU in the proportion of the population with third-level education, underscoring decades of investment in higher education and our success in attracting international talent.
“Government support for R&D has also grown in recent years. Enhancements to the R&D tax credit regime, alongside direct funding mechanisms, have strengthened our offering. Moreover, Ireland excels in fostering collaboration: our high scores for public-private co-publications and SME partnerships show that the ecosystem supports connections between start-ups, established firms and world-class research institutions.”
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However, persistent weaknesses threaten to undermine our progress, he acknowledges.
“Public-sector R&D expenditure remains critically low at just 16.7 per cent of the EU average, highlighting a heavy reliance on indirect incentives rather than direct public investment. Ireland also lags on intellectual asset creation, with patent, trademark and design application rates trailing EU norms. These gaps risk eroding the foundation of our innovation economy over time.
While the R&D tax credit is a cornerstone of our competitive offering, it may not be enough, he says.
“The recent increase in the credit rate to 35 per cent for 2026 is a step forward, but global competition is fierce. Countries like Canada and Australia offer higher refundable rates, while Germany and the UK are actively enhancing and simplifying their regimes. Ireland’s fully refundable, relatively simple system is an advantage, but resting on our laurels is not an option.”
O’Sullivan sees several areas where Ireland can and should go further.
The current cap on subcontracted R&D spend (the greater of €100,000 or 15 per cent of internal R&D) restricts partnerships with external entities, including universities. Broadening these rules would encourage more ambitious collaborations. Expanding and modernising what counts as eligible R&D activity, including activities in the digitalisation and sustainability spaces, meanwhile, would bring Ireland in line with international best practice and ensure the credit remains relevant as business focus evolves.
Other helpful initiatives which could include raising the first-year payment threshold further for SMEs, beyond the current €87,500, would help smaller firms facing tight cash flows during the early stages of R&D and administrative simplification by allowing a flat-rate overhead for claims which would provide much-needed certainty for businesses.
“The impact of these improvements would be significant. For FDI, they would strengthen Ireland’s standing as a global innovation hub, attracting new investment and top talent. For indigenous industry, particularly SMEs, easier access and broader eligibility would empower more firms to undertake R&D, scale up and create high-value jobs,” O’Sullivan says.
The 35 per cent rate is among the highest headline R&D tax credit rates globally and this certainly helps to offset other cost pressures such as housing and infrastructure deficits, but there is scope for more to enhance our competitive position, agrees Stephen Merriman, tax partner at PwC.
“There are specific strategic initiatives that should be focused on to sustain Ireland’s economy into the future. Firstly, there is a need to extend the R&D incentive more broadly to encompass innovation activities in key areas that the international community wants to invest in, such as digitalisation and decarbonisation. This enhancement would support activities such as AI, low-code development, digital twins for manufacturing lines, and smart-factory IoT implementation – all of which would create sustainable growth.
“Secondly, more flexibility is required in the R&D tax credit rules to encourage the creation, ownership and commercialisation of IP [intellectual property]. R&D capital projects of scale also need additional flexibility to accelerate the return on investment to encourage investment decisions.
“Focused enhancements combined with a clear industry policy that aligns to multinational demand will help maintain Ireland’s success as a location for R&D and stimulate broader centres of excellence that will trigger regional cluster opportunities for indigenous companies to collaborate and grow,” he concludes.
