The 25% Research and Development Tax Credit for Irish Companies explained

By Andrew Lambe, 4th September 2012. (Updated 7th December 2012)

A very attractive feature of registering a company in Ireland is the 25% R&D tax credit that is available.

December 2012 Update: The entire system relating to research and development credits is to be reviewed in 2013.  In the interim, the amount of expenditure eligible for the 25% credit will be doubled from €100,000 to €200,000.  This builds upon similar changes in Finance Act 2012.

The Irish Revenue Commissioners features the 25% tax credit for qualifying Research and Development expenditure (Section 766 TCA 1997) for companies which are engaged in in-house qualifying research and development undertaken within the European Economic Area (EEA).

In the case of an Irish tax resident the expenditure must not qualify for a tax deduction under the law of another territory. The tax credit is in addition to any allowable deductions for R&D expenditure in the accounts of the company. This credit may be set against a company’s Corporation Tax liability. In the case of group companies, the tax is available on a group basis. Companies which claim the R&D tax credit are not required to hold the intellectual property rights resulting from the R&D work.

The tax credit is available on incremental R&D expenditure. The Finance (No 2) Act 2008 set 2003 as the base year for all accounting periods. For expenditure incurred on an accounting period commencing on or after 1/1/2009 the relief is calculated as 25% of this qualifying expenditure. The credit is then used to first reduce the liability to Corporation Tax for that accounting period.

For example, in the 12 months ended 31/12/2011 BCF Ltd incurred €350,000 R&D expenditure. In the 12 months ended 31/12/2003 they incurred €200,000 R&D expenditure.

Expenditure in relevant period ended 31/12/2011: €350,000

Minus Threshold Amount: €200,000

Qualifying Expenditure: €150,000

Tax Credit €150,000 @ 25%: €37,500

Any expenditure which is met directly or indirectly by any grant from the State, any board established by statute, any public or local authority or any other agency of the State does not qualify for relief. Expenditure incurred by a company which is a member of the group for a part of the threshold period shall only be included in the threshold amount if the expenditure was incurred at a time when the company was a member of the group.

There are two situations where the law provides for relief for a company that has not carried out the research and development itself. The first is that a company which incurs expenditure on research and development, and pays a sum to a university or institute to carry out such activities in a relevant Member State, can claim relief. Relief will be restricted to 5% of the expenditure incurred by the company itself on research and development activities. The second is that a company which incurs expenditure on research and development, and pays a sum to another person (other than in 1 above) who is not a connected person, in order for that person to carry on research and development activities, can claim relief. Relief will be restricted to 10% of the expenditure incurred by the company itself on research and development activities. Relief will only be granted where the subcontracted person does not also claim this relief.

Expenditure on research and development does include expenditure on plant and machinery. However where plant and machinery which is used for R&D and other purposes form part of the claim, the cost of the plant and machinery should be apportioned on a just and reasonable basis.

For more information on the benefits of registering a company in Ireland, please don’t hesitate to contact ‘Company Bureau’ for a free consultation.

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