The Irish Finance Bill brought good news for international businesses operating in Ireland. The Pillar Two side-by-side package excluding US-headquartered groups was implemented with effect from 1 January 2026, the R&D tax credit regime has been further enhanced, and some flexibility has been introduced to the Irish rules for deducting interest.
Further changes are expected to be included as the Bill passes through the legislative process. It is anticipated that the Bill will be passed into law before the end of the year.
Pillar Two
The full Pillar Two package agreed at OECD level in January 2026 has been implemented in the Irish Bill:
- The side-by-side safe harbour (which excludes US-headquartered groups from Pillar Two top-up taxes) will apply from 1 January 2026. The Irish qualifying domestic top-up tax (“QDMTT”) will continue to apply to those groups in line with what was agreed at OECD level.
- The Transitional Country-by-Country Reporting safe harbour will be extended into 2027.
- The Substance-based Tax Incentive safe harbour (which improves the Pillar Two treatment of qualifying tax incentives such that reduced top-up taxes arise) and the Ultimate Parent Entity safe harbour (which excludes certain headquarter jurisdictions from Pillar Two top-up taxes) will apply from 1 January 2026.
- The Simplified Effective Tax Rate safe harbour is also legislated for and can apply from 1 January 2026.
The Bill also legislates for the developments included in the Administrative Guidance issued by the OECD in September 2026. In line with that guidance, taxes that only apply if a group would otherwise be subject to Pillar Two taxes will not be treated as covered taxes for the purposes of Ireland’s Pillar Two rules.
The September 2026 Administrative Guidance had also adjusted the rules that apply when selecting the accounting standard to be used to calculate QDMTT. In general, the local financial accounting standard (“LFAS”) can be used unless there is a mismatch between a local entity’s accounting period and the fiscal year of the consolidated financial statements (“CFS”). In practice, a range of corporate events (e.g., incorporation, dissolution, merger, division or acquisition) can result in such a mismatch. Last year, Ireland legislated for those types of mismatches and confirmed that QDMTT would be calculated using the LFAS where the mismatch arose as a result of a corporate event. The requirement to use LFAS applied for the year during which the corporate event occurred, unless the corporate event was an acquisition, in which case it applied for the year of the acquisition and the following year. That provision has now been amended so that the taxpayer is required to use LFAS both during the year in which the corporate event occurs and the following year. As drafted, the change applies to corporate events occurring during accounting periods beginning after 31 December 2023.
R&D tax credit
The Irish R&D tax credit, which allows taxpayers to claim a refund of 35% of their spend on research and development, has been further enhanced:
- Expenditure on R&D that is outsourced is currently capped. Those caps are increasing for R&D outsourced to universities and third parties. Taxpayers will now be permitted to claim up to 20% of qualifying in-house R&D expenditure or €200,000, whichever is higher. Stakeholders continue to push for some relief to be given for expenditure on R&D that is outsourced to related parties.
- In order to be eligible for the R&D tax credit, expenditure must meet strict thresholds. This results in companies having a category of expenditure that is necessary to support the R&D but in respect of which the credit cannot be claimed. In recognition of this, taxpayers claiming the R&D tax credit will be permitted to make an additional claim. That additional claim for non-qualifying expenditure will be capped at 5% of the payroll costs for R&D employees.
- It has also been announced that the administrative requirements that typically apply for proving the ‘science test’ (which must be satisfied for all categories of R&D expenditure) will be relaxed for clinical trials that are regarded as ‘regulated’. That legislation is currently under development and is expected to be published early in November.
Interest provisions
Ireland is in the process of reviewing its rules for taxing interest. While full implementation of that review has been postponed to next year’s Finance Act, some improvements have been made.
Ireland’s regime for allowing relief for groups borrowing to expand their business (known as ‘interest as a charge’ and provided for in section 247 of the Taxes Consolidation Act 1997) is the focus of the changes. Those provisions are notoriously cumbersome and include strict conditions unconnected to the purpose of the loan that are known for tripping up taxpayers. Many of those requirements are being removed (e.g., the requirement to have common directors on the board of the borrowing company and the company in which the group invests, and the requirement to apply the proceeds immediately to fund the business expansion). Further, the so-called ‘recovery of capital’ rules, which can result in the relief being lost, have been relaxed to allow businesses to reinvest the proceeds that are treated as recovered.
A very welcome improvement was made to Ireland’s rules implementing the EU interest limitation rule. Taxpayers will now have a longer timeline to make elections under those provisions. This is a pragmatic and welcome improvement.
Other relevant changes
International tax matters
A new provision is included for Irish taxpayers who agree bilateral or multilateral advance pricing agreements (“APAs”) that result in Irish tax being treated as underpaid for past tax years that are subject to the APAs. Under the proposed changes, that underpaid tax will be treated as being due 30 days after an assessment is issued to give effect to the APA. This is a welcome clarification for the increasing number of taxpayers participating in Ireland’s APA programme.
The Bill provides for the ratification of (i) a new double tax treaty with Liechtenstein and (ii) a Protocol to the existing double tax treaty with Sweden.
Administrative matters
Under the Irish corporate tax system, two prepayments of tax must be made during the tax year (the first at six months and the second at 11 months). Those payments (known as preliminary tax) are, for the most part, based on estimates of the company’s final tax liability for the same year. Given that the amounts due are based on estimates of the full tax liability for the year, it is not unusual for preliminary tax to be underpaid. The interest provisions currently operate to deem preliminary tax to be underpaid from the first payment date, even where the underpayment only arose at the later date. Overall, the current requirements give rise to unnecessary jeopardy for taxpayers. A number of improvements are made to the operation of preliminary tax in the Bill. Taxpayers will now be permitted to top up their preliminary tax within a four-month window, provided that, by the time of the second prepayment date, they have discharged at least 80% of the current-year tax bill. The interest provisions have also been improved so that they do not deem the first payment to be underpaid. The changes are pragmatic and will be welcomed by Irish taxpayers.
In 2024, a new payroll reporting system was introduced in Ireland, requiring employers to report to Revenue certain benefits-in-kind given to employees on a real-time basis. Complying with the real-time requirements has been almost impossible in practice. The Finance Bill will allow employers to opt to report instead on a monthly basis. This change reflects over three years of continuous advocacy by business groups.
The Bill also includes the architecture to introduce a significant VAT modernisation programme, which will require businesses to implement e-invoicing procedures and report those invoices to Revenue in real time. The VAT modernisation programme is being introduced to comply with an EU-wide reform. It will begin to apply to large businesses from November 2028.
Rate changes
Tax on chargeable gains is reduced from 33% to 31%. The rate change applies for disposals occurring on or after 7 October 2026.
Tax on investment funds and life policies is reduced from 38% to 35%. The rate change applies from 1 January 2027.
Next steps
The Bill will be debated by the Irish legislature (the Oireachtas) over the coming months. New amendments are expected to be proposed at Committee Stage, which is anticipated to take place in early November. It is expected that the Bill will be passed into law before the end of the year.
If you would like to discuss any of the proposed changes, please speak to any of our Tax partners or to your usual Matheson contact.
