A Budget boost for R&D in 2026

In a turbulent year for global trade, Budget 2026 delivered a clear signal of support for innovation. Damien Flanagan outlines how the enhanced R&D tax credit regime strengthens Ireland’s competitiveness

This year has presented many challenges for companies operating in Ireland. 2025 began with rising tensions between global trading superpowers, resulting in disruption to global supply chains and increased uncertainty in international markets.

The introduction of tariffs, shortly after, has added to the uncertainty companies are facing.

On the same day the US Government announced the introduction of tariffs applying to certain jurisdictions (Liberation Day), the Department of Finance launched its Public Consultation on the R&D Tax Credit and Other Options to Support Innovation. The purpose of the consultation was:

1. To review the effectiveness of the Research and Development Corporation Tax Credit (R&D tax credit) against its intended policy objectives; and
2.  To consider other options to incentivise innovation in a targeted manner and in line with Government objectives.

Given the choppy waters businesses have navigated since the turn of the year, the hope was that Budget 2026 would provide some relief in these uncertain times.

Rate increase

Minister for Finance Paschal Donohoe’s Budget 2026 speech welcomed enhancements to the R&D tax credit and, most significantly, the announcement of an increase to the headline relief rate from 30 to 35 percent.

Moving to a 35 percent rate is a significant step, providing certainty to both multinational corporations (MNC) and indigenous companies that Ireland is still a great location to undertake R&D activity.

This is particularly true for companies faced with competitive options from other international locations for R&D investment as it is the headline rate that catches the attention of senior leadership, often beyond these shores. The hope is that the increased rate will help tip the scales in Ireland’s favour.

On a macro-level, the new 35 percent rate will provide an additional incentive for companies to increase R&D investment in Ireland, helping to boost Gross Expenditure on R&D (GERD), closing the gap in the Government’s plan to have GERD account for at least 2.5 percent of Gross National Income by 2030.

R&D Compass

We had been hoping for the publication of the outcome of the Department of Finance’s Public Consultation on the R&D Tax Credit and Other Options to Support Innovation.

While this has not been released at the time of writing, Minister Donohoe referred to the publication in the coming weeks of an R&D Compass which will “consider targeted changes” to the R&D Tax Credit to better align with industry practices, for example in the areas of outsourcing and qualifying expenditure definitions.

These are key areas for consideration for most companies that claim the R&D Tax Credit.

Since the introduction of this tax credit in 2004, there has been a significant narrowing in the interpretation of ‘qualifying expenditure’. More clarity and alignment to current practices is critical to provide the certainty claimant companies need.

In respect of outsourcing, the Irish R&D tax credit regime currently does not allow for any outsourcing to connected companies and restricts the amount that can be outsourced to unconnected third parties and universities.

This does not align with how companies operate today and doesn’t always reward the creation of Intellectual Property occurring in Ireland.

The Minister also noted that the R&D Compass will “set a pathway for development of innovation supports”.

As the Department of Finance’s Public Consultation also sets out to consider other options to incentivise innovation, we expect that this R&D Compass may set out some detail on what shape a proposed Innovation Tax Credit or Digitalisation Tax Credit could take.

This is an opportunity to encourage investment by companies in key strategic areas, such as digitalisation and environmental/green technologies.

Setting Ireland apart

Ireland continues to be an excellent location for companies to do business and offers competitive R&D incentives for those who locate their R&D operations here.

The spillover effects from locating R&D here are significant and from experience, we have seen the advantages available to companies from co-locating R&D operations with manufacturing operations.

For Ireland, this often means significant manufacturing investment opportunities follow where R&D operations are established, particularly in the life sciences sector.

The increase in the R&D tax credit rate to 35 percent sends a strong message to the international business community that sets Ireland apart from its competitors. It reinforces our commitment to innovation and ensures we remain globally competitive.

However, further low-cost, targeted reforms are needed to unlock additional benefits, improve administration and make this regime more dynamic and accessible, especially for ambitious SMEs.

Hopefully, we will see this addressed within the R&D Compass. Let competitiveness be Ireland’s North Star.

Damien Flanagan is Tax Partner at KPMG