Paschal Donohoe (Dublin Central, Fine Gael)
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The KDB is an Intellectual Property (IP) regime for companies which was introduced in Finance Act 2015. The objective of the KDB is to encourage companies to develop IP in Ireland and thereby engage in substantive operations that have a high ‘value-add’ for the Irish economy. The KDB complements the existing suite of initiatives and supports that Ireland offers to create a business-friendly environment.

The KDB provides for an effective 6.25% rate of corporation tax on income arising from qualifying assets. Qualifying assets in respect of the KDB are:

- Computer programs;

- Inventions protected by a qualifying patent; or

- Certified inventions for SMEs.

To qualify for the KDB, the qualifying assets must result from qualifying R&D activities carried out by the company in Ireland. This meets the OECD’s ‘modified nexus standard’, an approach which provides that a taxpayer may only benefit from an IP regime to the extent it can clearly show that it incurred expenditure that resulted in the qualifying asset(s).

The KDB regime is currently available to companies for accounting periods commencing before 1 January 2023. I announced in Budget 2023 that Finance Bill 2022 will provide for the extension of this sunset provision to accounting periods commencing before 1 January 2027.

In preparation for the implementation of the Pillar Two Subject to Tax Rule (STTR), Finance Bill 2022 will also provide for an increase in the effective rate of the KDB to 10%, to be brought into effect by commencement order when agreement is reached at the OECD on implementation timelines for the STTR.

This will allow for the retention of the KDB incentive within the Irish tax system, where it will continue to deliver a benefit for those companies that are eligible to claim it, while also putting in place necessary preparations for implementation of the Pillar Two agreement.

Paschal Donohoe (Dublin Central, Fine Gael)
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An evaluation of the R&D tax credit and the Knowledge Development Box (KDB) took place this year in line with my Department’s Tax Expenditure Guidelines.

As part of that review, my Department held a public consultation on the R&D tax credit and the KDB, closing on 30 May 2022. Twenty-one submissions were received from a range of respondents, including companies engaged in R&D activities, advisory firms, and other Government Departments.

The submissions received are all now available online at the following link: www.gov.ie/en/consultation/d12cb-public-consultation-on-the-research-development-tax-credit-and-the-knowledge-development-box-april-2022/

The completed review can also be found online at www.gov.ie/en/publication/ccc22-budget-2023-taxation-measures/, in the Report on Tax Expenditures 2022, which was published on Budget Day.

I announced a number of amendments to the R&D tax credit in Budget 2023, primarily to align the operation of the credit with new international standards. The changes all relate to the manner and timing of payment of the credit and do not affect the quantum of credit that a company is entitled to claim. As a result, the changes are net neutral in budgetary terms. The changes are as outlined below:

- The current system of offset of the R&D tax credit against corporation tax liabilities and payment in three payable instalments is being changed to a new, fixed three-year payment system.

- A company will have an option to call for payment of their eligible R&D tax credit or to request for it to be offset against other tax liabilities.

- Existing caps on the payable element of the credit are being removed.

- The first €25,000 of a claim will now be payable in full in the first year, to provide a cash-flow benefit for smaller R&D projects and encourage more companies to engage with the regime.

- Transitional measures will be in place for one year, to smooth the transition to the new payment system for companies that are already engaged in research & development activities.

With regard to the KDB, I provided in Budget 2023 for the extension of the relief for a further four years, making it available for accounting periods commencing before 1 January 2027. In preparation for the implementation of the Pillar Two agreement, I also provided for an increase in the effective rate of the KDB to 10%, to take effect from a commencement date which I will prescribe via a commencement order. This will be linked to international agreement on implementation of the Pillar Two Subject to Tax Rule, which is expected in 2023.