Effective tax rate for the Knowledge Development Box (KDB) increases from 6.25% to 10%

A commencement order to implement Finance Act 2022 amendments to the Knowledge Development Box (KDB) from 1 October 2023 was signed on 5th September 2023. This order implements as expected, the provision in last years Finance Act to increase the KDB regime’s effective tax rate from 6.25% to 10%.

This amendment is another step in the implementation of Pillar Two of the OECD Agreement on the Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, as part of Ireland’s continuing commitment to agreed international tax reforms.

The KDB is an OECD-compliant intellectual property (IP) regime, which provides relief from corporation tax on income arising from qualifying assets such as computer programs, inventions protected by a qualifying patent, or certified inventions for SMEs.

For companies with global group revenues in excess of €750 million, who will be within the scope of the new Pillar two 15% effective tax rate from 1 January 2024, it is likely that a KDB claim for these companies will have a limited benefit as any benefit realised may be effectively eroded by the imposition of the relevant top-up tax bringing the overall effective tax rate to 15%. Companies currently claiming KDB relief should consider modelling the future impact of this change on future benefits.

For companies with global group revenues of less than €750 million, who will not be within the scope of the new Pillar two 15% minimum effective tax, the benefit these companies can expect to realise on their KDB profits will fall from 6.25% to 2.5%. Although the KDB effective tax rate has increased and therefore the benefit has fallen, where the qualifying profits of these companies are significant, there should still be a significant cash tax saving arising.

For additional information with respect to this alert, please contact the following: