Planned Irish tax benefits offer boost to multinationals

The draft bill includes the tax measures announced in the budget, as well as other tax changes not specifically flagged, with the majority of the changes to take effect on 1 January 2026.

The highlight for international businesses may be the changes to Ireland’s research and development tax credit regime, particularly the higher rate of the credit – an increase from 30% to 35% - for accounting periods starting on or after 1 January 2026. This change will result in an effective tax benefit of 47.5% for businesses within the scope of Irish corporation tax that carry out qualifying R&D activities.

Other enhancements include an increase of around 16% in the first-year minimum payment amount, simpler measures for calculating R&D employees’ salaries, and confirmation that costs of constructing laboratories for R&D use are included in qualifying building expenditures.

The Irish government will soon publish an R&D compass that will consider targeted changes to the credit to better align it with industry practices, including in outsourcing. These changes, coupled with the R&D compass direction that sets a pathway for developing innovation support, will help Ireland maintain its international competitive edge.

The bill also will change the participation exemption for foreign distributions. In most cases, this will be more favourable than the previous “tax and credit” approach – although that continues to apply where a corporate taxpayer doesn’t elect into the exemption for an accounting period.

Corrective measures

However, the participation exemption in its original form has shown some drawbacks, and it’s encouraging that the bill will correct many of these or reduce the practical issues in operating the exemption.

The most glaring issue is the current restriction of the exemption to distributions received from subsidiaries in the EU/EEA or double tax treaty jurisdictions.

The bill expands the geographic scope to qualifying distributions from subsidiaries in jurisdictions that apply a non-refundable dividend withholding tax.

This means that, where foreign tax at a rate greater than 0% is directly chargeable on distributions made by and received from a relevant subsidiary, then the Irish parent should be eligible for the exemption - provided that tax is paid and doesn’t fall to be repaid.

Right now, a foreign subsidiary must be resident in the relevant territory when the distribution is made, and for the previous five years, for it to qualify for the exemption. This “lookback” period will be reduced to three years.

Other useful amendments include clarifying a distribution won’t be excluded if a relevant subsidiary acquires shares in another company during the lookback period.

While all these changes are encouraging, it’s unfortunate that no firm commitment or timeline to introduce an equivalent exemption for foreign branches has been given or proposed in the draft bill.

International impact

Multinationals will welcome other employment-related amendments in the bill.

The special assignee relief program that provides income tax relief for certain employees assigned to work in Ireland from abroad will be extended to the end of 2030. Although the minimum income threshold will increase from €100,000 to €125,000 for those arriving from 2026, upcoming administrative changes should alleviate some of the practical issues for multinationals.

In another positive move, the foreign earnings deduction, which provides income tax relief for employees carrying out some of their duties abroad, will be extended to the end of 2030, with the maximum amount of the deduction being increased to from €25,000 to €50,000 from 1 January 2026.

Other measures for international businesses include a proposed enhanced film tax credit for visual effects and changes to the digital games tax credit. Both will require EU State Aid approval before they can take effect.

With the visual effects measure, there will be a new 40% credit rate for qualifying projects with a minimum of €1 million in eligible expenditures, with relief applied on expenditures of up to €10 million per project. The digital games tax credit will be extended to the end of 2031 and widened to allow for claims involving post-release digital content.

Taxing issues

There is a growing need to simplify the Irish tax code and reduce tax compliance burdens on businesses.

Legislative changes over the past decade, primarily driven by Ireland’s OECD and EU commitments, often resulted in a new set of rules being overlaid on existing (and often complex) ones.

An action plan for reforming Ireland’s tax regime for interest alongside Budget 2026 is a positive move toward simplifying the tax code. The Irish government soon will publish a feedback statement on this topic, with a view to the first phase of reforms being implemented in 2026.

Other important consultations include potential reform of the Irish withholding tax regime as well as Ireland’s planned implementation of the EU’s VAT in the Digital Age package.

The bill advances Ireland’s implementation of the OECD Pillar Two framework (including the guidance published by the Inclusive Framework in January) and updates Ireland’s Pillar Two rules in line with EU obligations under the Minimum Tax Directive and DAC 9.

This is an area that multinationals need to focus on now that Ireland has introduced Pillar Two rules into its tax code. Further changes may be needed, depending on the outcome of OECD negotiations on the “side-by-side” solution, which could exclude US parented groups from the income inclusion rule and undertaxed profits rule.

The Irish government has been keen to implement tax policies aimed at attracting and retaining inward investment in Ireland, while abiding by its OECD and EU commitments.

While Budget 2026 represents some missed opportunities – Ireland’s capital gains tax rate of 33% remains one of the highest of OECD countries, which can hinder investment - international businesses will welcome most of the bill’s proposed measures, particularly the proposed amendments to the R&D tax credit regime and participation exemption.

A version of this article was first published by Bloomberg Tax.