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Ireland’s interest deductibility regime
The Department of Finance published a feedback statement in November 2025 for phase one of the reform of Ireland’s taxation regime for interest setting out an alternative approach to the taxation and deductibility of interest.
Following on from that consultation process, the Bill introduces a number of practical adjustments and clarifications to the existing Section 247 and Section 249 Taxes Consolidation Act (TCA) 1997 regimes. It remains to be seen whether further amendments will be introduced as the Bill progresses through committee stage. We note that the consultation is ongoing and there may be further amendments in next year’s Finance Act with a view to further simplification. Unless otherwise stated, the changes apply for accounting periods beginning on or after 1 January 2027. The main changes proposed are as follows:
Recovery of capital provisions contained in Section 249 are to be amended to provide greater flexibility where capital is recovered following an investment qualifying under Section 247. A recovery of capital should not result in a restriction of interest relief where the relevant amount is used on or within six months after the recovery to make a new qualifying investment (an acquisition of qualifying shares or a new qualifying loan) or is used to repay the relevant Section 247 loan or another loan to which Section 247 applies. The amendments also extend the circumstances in which reinvestment can be made by the company concerned or an intermediate holding company. Technical issues in relation to the risk of multiple recoveries arising on the same event can arise in certain instances. The Bill seeks to manage this by providing that recoveries are allocated across loans proportionately (unless allocated differently in a return or returns) with the restriction capped at the amount recovered. The changes to the recovery of capital provisions apply to accounting periods beginning on or after 1 January 2027.
The Bill introduces a new Section 247(3A) to prevent duplicative interest relief where amounts are reinvested for the purposes of the recovery of capital provisions. Where borrowed funds are used to make a new investment such that the reinvestment prevents a restriction of interest relief on the original loan, relief will not be available under Section 247 in respect of interest on the borrowing used to fund that reinvestment.
The common director test is to be abolished such that Section 247 relief will no longer depend on a common director between the investing and investee companies. This requirement will be removed in relation to existing and future Section 247 loans for accounting periods commencing on or after 1 January 2027.
The Bill makes a number of amendments to the existing “defray money applied” wording in Section 247, replacing it with references to a loan being “used” for the relevant qualifying purpose, and replacing references to “money” lent with an “amount” lent. These changes apply to loans made on or after 1 January 2027. Existing loans remain subject to the current wording. This should mean that the commercial and administrative issues of flowing funds borrowed under a Section 247 loan are now more practically manageable.
The Bill introduces an amendment to the meaning of “company” for the purposes of Sections 247 and 249 to exclude a foreign body corporate that, having regard to its characteristics and the rights and obligations of its members, is substantially similar to an Irish partnership. Such entities are of the type at which Section 1009A, introduced in Finance Act 2025, is aimed.
The Bill amends Section 247(4) for loans made on or after 1 January 2027 so that interest relief is intended to be restricted only to the extent that interest accrues while the loan is applied for a non-qualifying purpose. Where unpaid interest relates to both qualifying and non-qualifying periods, the interest accruing earliest will be treated as paid first. The Bill also clarifies that a foreign currency conversion or currency swap will not constitute a non-qualifying use where the converted funds are applied for a qualifying purpose within a reasonable period.
The Bill amends the restrictions in Section 247(4F) applying to on-lending arrangements to companies outside the charge to corporation tax, whether directly or through another company to a connected company. The amendments disapply these restrictions where the relevant lending arrangement is within the scope of the transfer pricing rules in Section 835C. The changes take effect for accounting periods beginning on or after 1 January 2027.
Loans from Section 76E-type finance companies will be carved out from the restrictions in Section 247(4E) on connected party asset acquisitions, where the finance company’s only business (other than holding shares in investing companies) is on-lending debt borrowed from unconnected lenders. The Bill also contains an amendment to the restriction on interest relief for connected party asset acquisitions funded by connected party loans, in circumstances where the debt of the seller already qualified for a deduction or relief. Both amendments are backdated to acquisitions of assets on or after 1 January 2024.
Capital Gains Tax
It was announced on Budget Day that the standard rate of CGT would be reduced from 33% to 31%. The reduced rate applies to disposals made on or after 7 October 2026. The separate 33% CGT rate applicable to disposal of development land remains unchanged and will continue to apply to gains falling within that regime.
Pillar Two
The Bill implements OECD Administrative Guidance issued during 2026, while also introducing a number of updates to the existing Irish Pillar Two rules.
More specifically, the Bill implements the OECD’s January 2026 Side-by-Side Package by introducing the Side-by-Side, Ultimate Parent Entity (UPE) and Substance-Based Tax Incentive Safe Harbours from 1 January 2026, extending the Transitional Country-by-Country Reporting (CbCR) Safe Harbour by one year and introducing a permanent Simplified Effective Tax Rate (ETR) Safe Harbour. The Side-by-Side Safe Harbour eliminates Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) top-up tax on a group-wide basis where the UPE is located in a qualifying jurisdiction, while the narrower UPE Safe Harbour removes UTPR top-up tax in the UPE jurisdiction only.
The introduction of the Pillar Two Substance-Based Tax Incentive (SBTI) provisions is welcome. It is expected that the R&D tax credit should be regarded as a SBTI and not, therefore, taxable as Global Anti-Base Erosion (GloBE) income up to the level of the substance-based thresholds.
Finally, under the Simplified ETR Safe Harbour, top-up tax is deemed to be zero in a jurisdiction where the simplified ETR is at least 15% or the jurisdiction reports a simplified loss.
The implementation measures in respect of the OECD’s May and September 2026 Administrative Guidance include rules on the application of the Transitional UTPR Safe Harbour for 52–53-week fiscal years, the removal of qualified status from top-up taxes that are explicitly conditional and updated rules on the operation of the Qualified Domestic Minimum Top-up Tax (QDMTT) safe harbour.
For Irish QDMTT purposes, the local financial accounting standard rule already deems a qualifying entity’s accounting period to align with the fiscal year of the consolidated financial statements where a mismatch arises from a formation, liquidation, merger, division, acquisition, or the establishment of a permanent establishment. Previously, this deeming provision extended to the following fiscal year only for acquisitions. The Bill now extends it to the following fiscal year for all of these events.
Finally, the Bill updates the penalty framework for failures relating to the GloBE Information Return (GIR) and associated notifications.
Research and Development (R&D) Tax Credit Regime
The Bill introduces a number of enhancements to Ireland’s R&D regime as announced on Budget Day. These include a 5% uplift on qualifying R&D labour costs to cover non-qualifying costs. This is being introduced with effect for accounting periods ending on or after 23 December 2027. This essentially provides an additional R&D tax credit rate of 1.75% on qualifying labour costs. The uplift applies provided that a company has incurred non qualifying R&D costs in the same trading activity at least up to that 5% level. We would expect all companies to benefit from this given the level of non-qualifying costs incurred by companies in carrying on their trading activities that incorporate R&D.
For accounting periods ending on or after 23 December 2027, the limit on third-party subcontracted R&D expenditure will increase from the greater of “15% or €100,000” to “20% or €200,000” and the minimum first instalment payment will increase from €87,500 to €105,000. In addition, companies will be able to take account of their first, second, and third R&D tax credit instalments for preliminary tax purposes where they specify these as overpayments of tax and offset them against their corporation tax payable for the accounting period.
These measures provide further flexibility for companies and will be of particular benefit to small and medium-sized enterprises (SMEs) that rely on R&D third-party outsourcing, and for which accelerated cash flow is much needed. They will also benefit larger multinational enterprises that rely on R&D outsourcing to supplement their own R&D employee activity in Ireland, particularly those with intensive R&D development spikes.
One further amendment flagged in the Budget documents relates to regulated clinical trial activity being deemed to meet the science test. We expect to see this amendment being introduced at committee stage of the Bill following a technical assessment of the required legislative wording.
Finally, the introduction of the Pillar Two SBTI provisions provided for in the OECD Side-by-Side agreement with effect from the start of 2026 is welcome. It is expected that the R&D tax credit should be regarded as a SBTI and not, therefore, taxable as GloBE income up to the level of the substance-based thresholds.
Knowledge Development Box
The KDB is to be extended for five years to 1 January 2032. A time-limited option to opt-out of the KDB in respect of existing qualifying intellectual property (IP) assets that were elected into the KDB has been introduced. The opt-out election can only be made in respect of a specified accounting period that commences on or after 1 January 2027 and before 1 January 2028. The election must be made in writing and within 24 months of the end of the specified period. This amendment is very welcome as currently once a company elects into claiming the relief on a qualifying KDB IP asset, it must continue to claim the relief regardless of whether the IP is generating profits.
Preliminary corporation tax requirements
There are some welcome amendments to the preliminary corporation tax payment rules. The threshold below which a company is regarded as a ‘small company’ for preliminary tax purposes will increase from €200,000 to €350,000. This change is effective for accounting periods beginning on or after 1 January 2027 and effectively extends the simplified payment arrangements for small companies to a broader range of businesses.
The ability for all companies to mitigate the charge to interest on underpayments of preliminary corporation tax by making a top-up payment is also broadened and certain other amendments are made to the computation of interest on underpayments of preliminary corporation tax by large companies.
Sporting bodies
The Bill introduced new CGT, stamp duty, and Capital Acquisitions Tax (CAT) reliefs to facilitate the incorporation of unincorporated sporting bodies as companies limited by guarantee (CLGs).
The CGT relief applies to approved bodies within the meaning of Section 235 TCA 1997 and provides for assets to transfer on a no-gain/no-loss basis, subject to specified conditions. The stamp duty exemption applies where the entire undertaking, assets and liabilities of a qualifying sporting body are transferred to a CLG in accordance with the statutory requirements. The CAT relief exempts benefits arising to a qualifying CLG from such a transfer, subject to the relevant statutory conditions.
As there was doubt that the existing legislation facilitated a tax-neutral incorporation as a CLG, these measures will be a welcome development for many unincorporated sporting bodies.
A number of changes were also introduced in relation to the rules for donations to certain sports bodies. The primary change of note is the imposition of an upper limit on tax-relieved donations made by an individual in a year of assessment of €1 million or, where the donor is associated with the approved sports body, 10% of the donor’s total income. The Bill also proposes to allow sports bodies to establish a fundraising body for the purposes of receiving donations for approved projects.
Other miscellaneous measures
The Bill introduces a number of further technical amendments, including:
Section 138 TCA 1997 contains provisions relating to the tax treatment of dividends on certain preference shares. The existing legislation provides an exclusion for unquoted preference shares which carry similar rights to fixed-rate dividend shares quoted on a stock exchange in the State. Following the delisting of certain shares from Irish markets, the availability of securities capable of being used as comparators for this purpose has become limited. The Bill amends the definition of ‘preference shares’ in Section 138(1)(b) by replacing the requirement for comparator securities to be “quoted on a stock exchange in the State” with a requirement that such securities be “admitted to trading on a regulated market in an European Economic Area (EEA) State”. By extending the scope of qualifying comparator securities to include securities admitted to trading on regulated markets across the EEA, the amendment should better align the legislation with the realities of modern capital markets and improve the operability of Section 138 by broadening the pool of securities potentially available for comparison purposes.
The Bill amends Part 35D TCA 1997 to extend the deadline for making, and withdrawing, interest limitation rule elections (including the equity ratio, group ratio, and interest group elections) from the return filing deadline to two years after the end of the relevant accounting period for accounting periods commencing on or after 1 January 2027. The Bill also makes related changes to the interest group return filing date and minor technical corrections.
The Bill brings into effect a new double taxation agreement (DTA) with Liechtenstein and a protocol to the existing DTA with Sweden. These measures expand and update Ireland’s treaty network and will govern the allocation of taxing rights and the elimination of double taxation between Ireland and the relevant jurisdictions.
The Bill also amends the existing legislation to account for changes to the European Union (EU) list of non-cooperative jurisdictions for tax purposes. The revised list removes Panama and Vietnam, with no new jurisdictions added. As the EU Council updates this list twice yearly (February and October), companies should ensure they refer to the appropriate list for the relevant accounting period.
Key actions
Review existing financing structures
Groups should review existing financing arrangements in light of the amendments to Sections 247 and 249. The changes simplify a number of long-standing conditions for interest relief, including the removal of the common director requirement, while also providing greater flexibility where recovery events take place or where loans are repaid or refinanced.
Pillar Two
Groups within scope should assess the availability of the new safe harbours and consider their impact on both their Pillar Two position and compliance obligations.
Preliminary corporation tax
The proposed changes to the preliminary tax regime should provide greater flexibility for companies seeking to manage cash tax payments and interest exposure. Businesses should review existing tax forecasting and payment processes to determine whether they can benefit from the increased small company threshold and the new top-up payment mechanism, which will allow taxpayers to correct underpayments without interest arising in a broader range of circumstances.
We’re here to help you
Finance (No. 2) Bill 2026 contains a number of important measures that will impact corporates operating in Ireland and internationally. As the tax and business landscape continues to evolve, our tax team is here to help you understand the implications for your organisation and plan with confidence. Get in touch today.
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