Press release
Minister McGrath signs Commencement Order to implement Finance Act 2022 amendments to the Knowledge Development Box from 1/10/23
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Minister McGrath signs Commencement Order to implement Finance Act 2022 amendments to the Knowledge Development Box from 1 October 2023.
The Minister for Finance Michael McGrath has signed an Order to commence a Finance Act 2022 provision, providing for an increase of the effective tax rate for the Knowledge Development Box, with effect from 1 October 2023.
The signing of this Order 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 Knowledge Development Box (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.
Minister McGrath commented:
“This is an important step in the implementation of the OECD Two Pillar agreement. Ireland is fully committed to agreed international reforms. Work is continuing to transpose the EU Minimum Tax Directive in Ireland in the Finance Bill this autumn, to provide for the 15% minimum effective corporation tax rate element of Pillar Two.”
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. To qualify for the KDB, the qualifying assets must result from qualifying R&D activities carried out by the company in Ireland.
The KDB will be impacted by the Pillar Two Subject to Tax Rule (STTR), which allows for the levying of additional tax on certain connected party payments when such payments are not subject to an adjusted nominal tax rate of at least 9% in the country of residence of the recipient. Section 40 of Finance Act 2022 therefore provided for an increase in the effective rate applicable to profits qualifying for the KDB to 10%, to come into effect when agreement was reached at OECD on STTR implementation. Following agreement at the OECD Inclusive Framework in July, this Order now provides for the measures to take effect from 1 October 2023.
Preparations are also well underway to transpose the EU Minimum Tax Directive in Ireland in the Finance Bill this autumn, to provide for the 15% minimum effective corporation tax rate element of Pillar Two. Implementation of the Directive is a complex undertaking, requiring a significant commitment of resources in both the Department of Finance and the Office of the Revenue Commissioners. Extensive stakeholder engagement has been, and continues to be, an important part of this process.
Two Feedback Statements on Pillar Two implementation have been published this year, containing draft approaches in respect of key elements of the implementing legislation and the administration of the new rules. Responses to both consultations are informing the continuing development of the final domestic legislation. The feedback statements and responses can be viewed at the links below:
Feedback Statement 1
Feedback Statement 2
Certain technical aspects of how Pillar Two will operate remain under discussion at the OECD, and it is expected that this will be an ongoing process over at least the coming year. Ireland continues to be an active participant in these discussions.