The main tax incentives in Ireland are:
- 12.5% corporation tax rate on active business income.
- A 30% credit on qualifying R&D expenditures; total effective tax deduction of 42.5%.
- Ability to exploit IP at favourable tax rates.
- Accelerated tax depreciation allowances for approved energy efficient equipment.
- Ability to carry out investment management activities for non-Irish investment funds without creating a taxable presence in Ireland for such funds.
- An effective legal, regulatory, and tax framework to allow for the efficient redomiciliation of investment funds from traditional offshore centres to Ireland.
R&D tax credit
The changes introduced by Finance (No.2) Act 2023 means that a tax credit of 30% now applies to the full amount of qualifying R&D expenditure incurred by a company on qualifying R&D activities. Qualifying R&D expenditure includes qualifying operational R&D costs and qualifying R&D plant and equipment costs (there is also a separate R&D tax credit in relation to building which is referred to further below). This credit is in addition to the normal 12.5% revenue deduction available for the R&D expenditure thereby resulting in an effective benefit of 42.5%. The increase in the headline rate of the R&D tax credit rate from 25% to 30% ensures no net impact of the taxation of the R&D tax credit under the Pillar Two GloBE rules.
A separate R&D tax credit is available in respect of expenditure incurred on the construction or refurbishment of a qualifying R&D building. In order to qualify, 35% of the building must be used for qualifying R&D activities, and this threshold is measured over a four-year period (although this may be extended if use of the building was impacted by COVID-19). The credit for buildings is of particular relevance where R&D is carried on in a manufacturing environment as the building also needs to qualify for industrial buildings allowances. The credit available is equal to 30% of the proportion of the expenditure incurred on the construction or refurbishment of a qualifying building that aligns to the R&D use of the building over the measured four year period.
The R&D tax credit is a fully payable credit that is paid in three fixed instalments as follows:
- 50% of their credit in year one.
- 30% of their credit in year two.
- 20% of their credit in year three.
A company can claim to have each instalment paid out by Revenue in each year or a company can elect to treat part or all of each instalment in each year as an overpayment of tax and use this overpayment to offset tax liabilities due and payable (i.e. corporation tax, VAT, employment taxes) instead of having it paid out in cash. Updates made in Finance (No.2) Act 2023 means that companies can now claim the first EUR 50,000 (up from EUR 25,000) of an R&D tax credit claim as payable in the first year even if their first monetised instalment is lower than this based on the three-year fixed instalment rules outlined above.
Companies may account for the R&D tax credit as income in its profit and loss account or income statement in arriving at the pre-tax profit or loss. This immediately impacts the unit cost of R&D, which is the key measurement used by multinational corporations when considering the locations of R&D projects.
Companies that claim an R&D tax credit have the option, in certain instances, to reward key employees through an alternative use of that credit. In effect, subject to certain conditions and restrictions, the company may allocate a portion of their R&D credit to ‘key employees’ to reduce their effective rate of tax to 23% (the average effective rate of tax for such employees would typically be in excess of 40% in the absence of such R&D tax credit). In order to qualify as a ‘key employee’, the individual must perform 50% or more of their employment duties on qualifying R&D activities.
The R&D regime caters for pre-trading expenditure incurred on qualifying R&D activities. Where a company incurs R&D expenditure but has not yet commenced to trade, an R&D claim can be made within 12 months from the end of the accounting period in which the company first commences to trade.Companies have the ability to claim pre-trading expenditure as a payable credit over a three-year period from when a company commences to trade. Subcontracted R&D costs of up to the 15% of qualifying in-house R&D expenditure incurred by a company or EUR 100,000 (whichever is greater) can qualify for the R&D tax credit.
Payments to third level institutions (located in the EU, European Economic Area or United Kingdom) of up to 15% of qualifying in-house R&D expenditure incurred by a company or EUR 100,000 (whichever is greater) can qualify for the R&D tax credit.
Expenditure incurred on the acquisition of intangible assets that qualify for capital allowances under the IP regime and expenditure incurred in registering/applying for legal protection for intangible assets that are developed as a result of R&D activities do not qualify for the R&D credit.
Digital Gaming Tax Credit
The Digital Games Tax Credit provides an incentive to digital games developers to produce games that contribute to the promotion and expression of Irish and European culture. The credit can be claimed as a cash refund on projects which commenced on or after 22 November 2022.
The relief is available for expenditure incurred on the design, production and testing of eligible digital games provided certain conditions are met. Subcontractor payments of up to €2m and certain capital costs may also qualify for relief. The credit is in addition to any corporation tax deduction which may be claimed for the expenses in computing the developer’s taxable trading profit.
The credit may be claimed either on an interim basis as the game is being developed or in full on completion of the game. In order to claim the credit, an application must be made to the Department of Tourism, Culture, Arts, Gaeltacht, Sport and Media to obtain the applicable cultural certification.
The credit offers a cash injection of up to 32% of eligible expenditure subject to a minimum qualifying spend of €100,000 and a cap of €25 million per project.
Intellectual property (IP) regime
Legislation provides for a tax deduction for capital expenditure incurred by a company, which is carrying on a trade, on the acquisition of qualifying IP assets. The definition of IP assets is widely drafted and includes the acquisition of, or the licence to use, the following:
- Patents and registered designs.
- Trademarks and brand names.
- Know-how (broadly in line with the OECD model tax treaty definition of know-how).
- Domain names, copyrights, service marks, and publishing titles.
- Authorisation to sell medicines, a product of any design, formula, process, or invention (and rights derived from research into same).
- Applications for legal protection (e.g. applications for the grant or registration of brands, trademarks, patents, copyright, etc.).
- Expenditure on computer software acquired for commercial exploitation.
- Customer lists acquired, other than ‘directly or indirectly in connection with the transfer of a business as a going concern’.
- Goodwill, to the extent that it relates directly to the assets outlined above.
Capital allowances will be available at the same rate as the depreciation/amortisation charge for financial accounting purposes. Alternatively, the company may elect to claim allowances over a period of 15 years. Capital allowances must not exceed an arm’s-length amount.
A shorter write-off period of eight years has also been retained for acquired software rights under the existing capital allowances regime where the rights are not acquired for commercial exploitation (i.e. were acquired for end use by the company).
Capital allowances on capital expenditure incurred on qualifying IP on or before 10 October 2017 are available for offset against income generated from exploiting qualifying IP assets, up to a maximum deduction of 100% of the relevant IP profits.
Capital allowances on capital expenditure incurred on qualifying IP on or after 11 October 2017 are available for offset against income generated from exploiting qualifying IP assets, up to a maximum deduction of 80% of the relevant IP profits. The remaining 20% is taxable at the 12.5% corporation tax rate on the basis that the company is carrying on a trade.
Any IP amortisation that is not claimed in a year (i.e. an excess amortisation charge over the 100% or 80% qualifying profits in a year) can be carried forward for offset against the relevant trading IP profits of a company in future years.
Specified intangible assets
All capital expenditure incurred on the provision of specified intangible assets on or after 14 October 2020 will be subject to a balancing charge on a subsequent disposal, regardless of when the balancing event may occur. In other words, all capital expenditure incurred on the provision of specified intangible assets on or after 14 October 2020 will be fully within the scope of the normal balancing charge rules.
No balancing charge will arise on the disposal of specified intangible assets where capital expenditure was incurred on the provision of those specified intangible assets prior to 14 October 2020 and where those specified intangible assets have been held for more than five years.
Knowledge Development Box (KDB)
The KDB provides an effective 10% corporation tax rate on profits arising from qualifying assets (including copyrighted software and patented inventions) where some or all of the related R&D is undertaken by the Irish company. A Ministerial Commencement Order was signed in October 2023 to increase the effective tax rate on KDB profits from 6.25% to 10% from 1 October 2023 in order to prepare for the implementation of Pillar Two. The relief applies for accounting periods up to 31 December 2026.
Exemption for new start-up companies
A corporation tax holiday applies to certain start-up companies that commence to trade between 2009 and 2026. The relief applies for three years where the total amount of corporation tax payable does not exceed EUR 40,000 in each year. Marginal relief is available where corporation tax payable is between EUR 40,000 and EUR 60,000. The relief available is linked to the amount of employer’s PRSI paid by a company in an accounting period as it is intended to provide relief at companies generating employment.
The exemption also allows unused relief arising in the first three years of trading (due to insufficiency of profits) to be carried forward for use in subsequent years.
Section 110 company
Ireland has a favourable securitisation tax regime for entities known as Section 110 companies. A Section 110 company is an Irish resident special purpose company that holds and/or manages ‘qualifying assets’, which includes ‘financial assets’. The term ‘financial asset’ is widely defined and includes mainstream financial assets, such as shares, loans, leases, lease portfolios, bonds, debt, derivatives, and all types of receivables, as well as assets such as carbon offsets and plant and machinery.
It is possible to establish a Section 110 company as an onshore investment platform for cross-border investments. The Section 110 regime has been in existence since the early 1990s and, with appropriate structuring, effectively allows for corporation tax neutral treatment, provided that certain conditions are met. The regime is used by international banks, asset managers, and investment funds to facilitate securitisations, investment platforms, collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and capital markets bond issuances.
The range of investments in which a Section 110 company can invest (e.g. financial assets, commodities, plant and machinery) is significant. In particular, the inclusion of plant and machinery has secured Ireland as the leading global centre of excellence for aircraft financing transactions.
Specific rules exist for Section 110 companies engaged in a ‘specified property business’ that involves the holding, managing, or both the holding and managing of so-called ‘specified mortgages’. A specified mortgage is defined as including loans and shares that derive their value, or the greater part of their value, from land in the State (meaning Ireland). In effect, the Section 110 company’s ‘specified property business’ is to be treated as a separate business from any other business the company may carry on and, with certain exceptions, no interest above a reasonable commercial rate of return will be deductible in computing the taxable profits of that part of the business. The profit calculated will be taxable at the 25% of corporation tax. These specific rules also include carve-outs where the Irish property business carried on is either a CLO transaction, a CMBS / RMBS transaction, a loan origination business, or a sub-participation transaction.
Section 110 companies are within the scope of Irish transfer pricing rules, although, helpfully, the rules provide that profit participating notes and loans are specifically outside the scope of transfer pricing. As Section 110 companies are already subject to an arm’s-length requirement, the impact of this change should be limited. The main implication for Section 110 companies is typically additional documentation requirements for related-party transactions.
Irish tax legislation contains anti-hybrid rules. In summary, these rules are aimed at preventing companies from benefiting from differences in the tax treatment of payments on hybrid financial instruments and on payments by, or to, hybrid entities. It will be necessary for Section 110 companies to consider the impact, if any, of the anti-hybrid rules.
There are two Section 110 anti-avoidance provisions to note. Firstly, the definition of a ‘specified person’ includes situations where a noteholder directly or indirectly holds more than 20% of the principal value of the profit participating loan / note and exercises ‘significant influence’ (defined) over the Section 110 company. Secondly, the general anti-avoidance provision Revenue to challenge situations where profit participating loan arrangements were not entered into for bona fide commercial reasons.
As noted earlier, Ireland’s tax legislation includes interest limitation rules. As Section 110 companies are typically heavily debt funded, the impact of these rules will need to be carefully considered.
As noted above, Ireland introduced legislation in relation to Pillar Two. The rules apply to in-scope businesses with accounting periods beginning on or after 31 December 2023. Section 110 companies can be in scope for Pillar Two if they meet the relevant criteria and do not qualify for a ‘carve out’ such as the ‘investment entity’ carve out.
Cash grants may be available for capital expenditures on machinery and equipment and industrial premises, training of employees, creation of employment, rent subsidies, R&D, manufacturing and exporting products, providing services to customers overseas, etc. The level of grant aid depends on a number of factors and is specific to each project. Rates depend on the location of the new industry.
Foreign tax credit
Foreign taxes borne by an Irish resident company (or Irish branch of an EEA resident company), whether imposed directly or by way of withholding, may be creditable in Ireland. The calculation of the credit depends on the nature of the income item, but for income sources other than dividends and some related-party interest, the credit is limited to the Irish tax referable to the particular item of income. A system of onshore pooling of excess foreign tax credits applies to dividends from 5% or greater corporate shareholdings, and excess credits in the dividend pool can be carried forward indefinitely. A similar pooling system applies to some related-party interest and also to foreign branch income.
An Irish resident company with a branch or branches outside Ireland is generally taxable in Ireland on the foreign branch profits with a credit for foreign taxes paid on those profits. A unilateral form of credit relief for foreign taxes paid by foreign branches operating in countries with which Ireland does not have a tax treaty is also available. To the extent that there were foreign taxes on branch profits that were not utilised in the relevant period (that is, where credit for foreign tax exceeds the Irish tax payable), these unused credits can be carried forward indefinitely and credited against corporation tax on foreign branch profits in future accounting periods.
A form of pooling of tax deductions in relation to foreign tax on royalties may be applicable where the royalty income is taken into account in computing the trading income of a trade carried on by the company.
An additional tax credit is available on certain dividends received by an Irish Holdco from an EU/EEA subsidiary that is subject to either the 12.5% or 25% rate of Irish tax.
The additional tax credit will provide for a credit up to the amount of Irish tax in instances where the Irish nominal rate is lower than the nominal rate of tax on the underlying profits in the country where the profits are sourced.