Research and Development Tax Credit and Innovation Compass: Corporate tax insights

The Compass identifies four areas of future enhancement: refining qualifying R&D expenditure rules, reconsidering capital provisions, simplifying administration and payment mechanisms, and exploring innovation supports.

Updates signal a continued commitment to ensuring Ireland remains competitive for high‑value global R&D investment.

A fresh perspective on Ireland’s R&D regime

On 16 February 2026, the Government released the Research and Development Tax Credit and Innovation Compass, presenting a strategic framework for the evolution of Ireland’s R&D tax regime. The Compass aims to maintain competitiveness in attracting and retaining high‑value research and development activities, recognising their role in economic growth, innovation and high‑skilled employment. It outlines priority areas for potential reform to strengthen the tax system’s support for both domestic and multinational enterprises.

Structural review of qualifying expenditure

1. Subcontracting provisions

The Compass highlights the limitations associated with current subcontracting rules. Under existing legislation, third‑party and university subcontracting costs are capped at 15% of internal R&D expenditure or €100,000, whichever is greater, alongside restrictions for connected parties.

Policymakers signalled a possible review of:

• Increasing or eliminating the 15% restriction.
• Reassessing the €100,000 threshold.
• Redefining the relationship between in‑house and subcontracted expenditure.
• Allowing certain forms of connected‑party subcontracting to qualify.

These changes aim to reflect new industry dynamics, support specialised R&D collaborations and enhance Ireland’s competitiveness relative to international R&D frameworks.

2. Definition of qualifying expenditure

Stakeholder feedback suggests amending the current definition of “expenditure on R&D” by replacing the phrase “in the carrying on by it of” with “for the purposes of." Such a change could expand eligible expenditure to include costs associated with broader R&D processes that are not directly tied to carrying out qualifying activities.

Additionally, the Compass acknowledges that technological fields of science and technology may require modernisation to reflect scientific advancements. Policymakers may review these categories to ensure alignment with emerging technologies and innovation practices.

Reconsideration of capital expenditure

Ireland’s current regime allows certain construction or refurbishment costs of R&D‑dedicated buildings to qualify for tax credit relief, provided a 35% usage test and minimum four‑year qualifying period are met.

Stakeholders have proposed reviewing:

• Whether the 35% threshold is still appropriate.
• The four‑year usage requirement.
• Whether capital allowance linkages remain fit‑for‑purpose.
• Additional supports for infrastructure‑heavy or manufacturing‑based R&D investments.

Although not the highest short‑term priority, capital expenditure enhancement remains firmly on the medium‑term agenda. 

Administration and simplification

Feedback emphasises a need for a more streamlined system, particularly for companies with smaller R&D projects.

1. Potential acceleration of credit payment

Currently, the R&D tax credit operates on a three‑instalment repayment schedule. Proposals include increasing payable credit proportions in earlier years or offering full first‑year payment for smaller claims. Some stakeholders suggested increasing the First‑Year Payment Threshold (FYPT) to between €100,000 and €500,000.

However, the Compass notes the need for careful examination of fiscal impacts and potential Exchequer risks.

2. Preliminary tax interaction

Stakeholders have requested that the second and third instalments, currently excluded, be considered for preliminary tax calculations. Policymakers recognise the potential complexity of such a change, noting its implications for Exchequer exposure and alignment with existing legislation.

3. Overhead cost treatment

The treatment of indirect overheads remains a prominent challenge in R&D claims. Proposals include:

• Creating a defined list of qualifying overhead costs.
• Allowing a fixed percentage of wage costs (e.g., 20%) as deemed qualifying overheads.

The Compass acknowledges the administrative benefits but highlights concerns around deadweight costs and the difficulty of designing a universal rate applicable across diverse industries.

Innovation support measures

Policymakers are considering the introduction of a new tax‑based incentive to support innovation activities not fully covered by the current R&D regime. Proposals under review include incentives for:

• Digital transformation.
• Green and sustainability‑focused investment.
• Post‑R&D developmental expenditure leading to commercialisation.
• Software and cybersecurity infrastructure.

Given the broad nature of innovation, the Compass stresses the importance of a robust definition and an operational model that ensures additionality while avoiding excessive deadweight costs.

Knowledge Development Box (KDB)

The KDB is an IP tax regime designed to encourage companies to develop Intellectual Property in Ireland. A review of the KDB regime is to be carried out during 2026 to inform potential changes and a possible extension beyond its current legislated end point for accounting periods commencing before 1 January 2027.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Forvis Mazars corporate tax team below: