Tax
New Irish tax measures in 2026
The Finance Act 2025 contains the changes to the Irish tax legislation that generally apply from 1 January 2026, unless otherwise indicated. It was enacted on 23 December 2025. In our Finance Bill Briefing, we highlight the key changes and business taxation measures. Of note this year are:
- Improvements to the new dividend participation exemption in an attempt to make it simpler to administer and more effective for taxpayers.
- The introduction of a new dividend withholding tax exemption for payments to Irish investment limited partnerships (ILP) or equivalent partnerships authorised in another EEA State.
- The reduction in the rate of tax on payments made from Irish funds and equivalent offshore funds and foreign life assurance products to Irish individual investors.
- A five per cent rate increase to the R&D tax credit bringing it from thirty to thirty-five per cent.
The Finance Act also contains changes to the Irish Pillar Two legislation that clarify some points that were causing uncertainty and technical amendments that were necessary to ensure the legislation operates as intended and ensures Ireland’s ability to administer the new tax in 2026. Many of these amendments will take effect for fiscal years beginning on or after 31 December 2023 (i.e. the first fiscal year within the scope of Pillar Two).
Global minimum tax and the adoption of the side-by-side package
In June 2025, the G7 leaders reached a political agreement that US parented multinational groups would not be subject to the extra territorial taxes of the Global minimum tax (contained in the OECD Pillar Two Model Rules). Therefore, the income inclusion rule (IIR) and the undertaxed profits rule (UTPR) would not apply to US parented multinational groups. The agreement was reached in return for the U.S. dropping the retaliatory taxes in Section 899 of the One Big Beautiful Bill and not invoking Section 891. While the G7 agreement was welcomed in terms of providing reprieve from the U.S. retaliatory taxes, the repercussions for the integrity of the Pillar Two Framework and the level playing field between EU and US headquartered groups is problematic.
On 5 January 2026, after months of negotiations and delays the OECD/G20 Inclusive Framework approved and adopted the Side-by-Side Package on Global Minimum Tax (the Package). The Package carves out US parented multinational groups from the scope of the extra-territorial taxes of Pillar Two with the creation of a new safe harbour, known as the Side-by-Side Safe Harbour (the SBS Safe Harbour). The SBS Safe Harbour applies to fiscal years commencing on or after 1 January 2026.
A new safe harbour exempting the profits in the jurisdiction of the ultimate parent entity (UPE) from being subject to the UTPR (UPE Safe Harbour) is also included subject to certain conditions being fulfilled by the jurisdiction in which the UPE is located. This is effective for fiscal years commencing on or after 1 January 2026.
The package also extends the existing transitional country-by-country reporting safe harbour by one year and creates a new permanent simplification consisting of a safe harbour based on a simplified effective tax rate calculation (the Simplified ETR Safe Harbour) is effective for fiscal years commencing on or after 1 January 2027, and in certain circumstances on or after 1 January 2026. This simplification is not as simple as people hoped for and many outstanding items remain to be clarified in this new safe harbour framework with further work expected in 2026.
Finally, the package introduces a new safe harbour known as the Substance-based Tax Incentives Safe Harbour, which allows for certain Qualified Tax Incentives (i.e. expenditure-based and certain production-based tax incentives) to be treated as an addition to covered taxes, up to a certain amount based on substance, which will be effective for fiscal years commencing on or after 1 January 2026.
In light of the serious concerns raised by European businesses on the competitiveness cost of the US carve out, the package contains a commitment to undertake a stocktake exercise to review the Side-by-Side System in 2029. The stocktake will also be accompanied by an assessment by the European Commission on the implementation and effects of the Side-by-Side System and its impact on EU Competitiveness as outlined in the Commission statement provided at the ECOFIN meeting on 12 December 2025.
In addition to competitiveness concerns, the legal basis from an EU law perspective has been widely questioned by stakeholders and leading academics. Equally, it is clear that much work is still needed to stabilise the Pillar Two Model Rules framework.
While the G7 agreement was welcomed in terms of providing reprieve from the U.S. retaliatory taxes, the repercussions for the integrity of the Pillar Two Framework and the level playing field between EU and US headquartered groups is problematic.
Ireland will assume the Presidency of the Council of the European Union on 1 July 2026 at a crucial time in the European competitiveness and tax simplification agenda.
The Department of Finance has now published the first feedback statement containing a strawman proposal for the first phase of reform and stakeholders have until 16 January 2026 to submit written responses. An outline of draft legislation will be released on 16 April 2026 to invite further input.
Ruling on the legality of the Pillar Two UTPR due in 2026 from Europe’s top court
The Court of Justice of the European Union (CJEU) is expected to give a ruling in late 2026 on the compatibility of the undertaxed profits rule (UTPR) with EU primary law which could have significant implications for the enforceability of the UTPR, if it is not already severely curtailed under the new Side by Side system.
The ruling arises from a preliminary reference made in July 2025 by the Belgian Constitutional Court.
The challenge was brought by the American Free Enterprise Chamber of Commerce, a U.S.-based non-profit, arguing that the Belgian implementation of the UTPR imposes a disproportionate burden on Belgian entities of multinational groups as it makes them liable for undertaxed profits realised by other group entities in jurisdictions outside of Belgium without considering the financial capacity of those group entities within Belgium. They claim that this contravenes EU law, particularly the Charter of Fundamental Rights of the European Union, the EU fundamental freedoms of establishment and services, the principle of legal certainty, and the principle of fiscal territoriality.
Irish presidency of the council of the European Union 2026 and tax simplification agenda
Ireland will assume the Presidency of the Council of the European Union on 1 July 2026 at a crucial time in the European competitiveness and tax simplification agenda. This represents an important opportunity for Ireland to shape the European agenda and ensure that real simplification is achieved and that recommendations in the Draghi Report are actioned.
The European Commission plans to introduce a Tax Omnibus in the second quarter of 2026, meaning Ireland will chair meetings and direct progress of this file until the end of 2026. The Tax Omnibus is expected to reduce bureaucracy within the area of taxation by withdrawing legislative initiatives that are stalled, addressing duplication between various pieces of EU legislation, and by consolidating existing EU tax directives.
The Tax Omnibus is expected to include a recast of the Directive on Administrative Cooperation (DAC). The recast Directive aims to streamline the DAC framework by consolidating the existing nine DAC amended texts into a single text. The proposed rules to prevent the misuse of shell entities for tax purposes (or the Unshell Proposal), which were initially envisaged as an amendment to the ATAD is expected to be withdrawn in early 2026. It is expected that the ‘substance indicators’ suggested under the Unshell Proposal will now be incorporated as new hallmarks under the existing DAC6 and incorporated into the overall recast of the DAC framework. The European Commission is conducting a consultation in early 2026 on how best to incorporate these new hallmarks.
Additionally, the Commission has committed to evaluating the current Anti-Tax Avoidance Directive (ATAD) and further consider how the EU Pillar Two Directive will interact with wider EU tax legislation.
Domestic tax simplification agenda - reform of interest rules
The Irish Department of Finance is expected to run a number of consultations on tax simplification in 2026, most notably on the simplification of withholding taxes and reform of the taxation of interest.
The Department of Finance published its Action Plan for Reform of Ireland’s Taxation Regime for Interest in October 2025. The Action Plan identified three key proposals which will be given priority for reform and be considered under “Phase One” of the reform:
- The alignment of tax treatment between trading and passive interest income for income tax and corporation tax purposes, including a move to an accruals basis of assessment for interest income under Case III and Case IV of Schedule D.
- The introduction of a renewed and simplified test for the deductibility of interest, which would align the treatment between trading and passive interest expenses, for the purposes of computing corporation tax.
- The widening of the scope of interest deductibility to include “interest equivalent” amounts which are economically equivalent to interest expenses.
The Department of Finance has now published the first feedback statement containing a strawman proposal for the first phase of reform and stakeholders have until 16 January 2026 to submit written responses. An outline of draft legislation will be released on 16 April 2026 to invite further input, with a closing date for submissions on 15 May 2026. The final amended legislation reflecting phase one of the reform will be included in Finance Bill 2026.
Arthur Cox welcomes the opportunity to engage in this important simplification to the Irish tax system. An overview of the proposals and our initial views are contained in this are contained in this briefing on the feedback statement.
