Nov 3
The Knowledge Development Box (KDB) lets a company taxed in Ireland pay an effective 10% corporation tax rate, instead of 12.5%, on profits from intellectual property it developed through its own R&D. That IP can be patented inventions, copyrighted software or, for smaller companies, certified inventions. The saving is 2.5 percentage points on qualifying profit only. So the claim tends to be worth making when your IP income is substantial, most of the R&D was done by the claimant company itself, and your records can link spend to each asset. The regime is also about to run for longer. Finance (No. 2) Bill 2026 extends the KDB by a further five years, so it will apply to accounting periods commencing on or before 1 January 2032.
That’s the short version. The rest of this guide explains how the relief works, where the maths quietly shrinks your claim, and how to decide whether the compliance effort pays for itself.
The KDB is an Irish corporation tax relief for income from qualifying IP created through R&D. It works by giving you an extra deduction on the share of profit that the rules treat as coming from your own R&D effort. Since October 2023, that share is effectively taxed at 10%. Everything else your company earns stays at the normal 12.5% trading rate.
The rate used to be lower. When the regime launched in 2016, the effective rate was 6.25%. That changed when a commencement order implementing Finance Act 2022 amendments took effect from 1 October 2023, and qualifying profits now attract a deduction equal to 20% of those profits, which equates to an effective rate of 10%.
This matters more than most guides admit. A lot of older content still quotes 6.25%. If someone built a business case on that figure, the saving they were promised has fallen by more than half.
Revenue only gives relief on specific types of IP, and the IP must result from qualifying R&D within the meaning of the Irish R&D tax credit rules. According to the Intellectual Property Office of Ireland, the qualifying assets are:
What does not qualify is just as important. Marketing-related IP such as trademarks, brands and image rights cannot be a qualifying asset, and short-term patents are excluded.
The software category is where the KDB differs most from the UK. The UK Patent Box needs a granted patent, and software is rarely patentable in its own right. Ireland’s regime recognises copyrighted software directly. For a SaaS or embedded software business, that’s often the difference between having a claim and having nothing.
Smaller companies get an extra route that larger ones do not. If you meet the size tests, an invention that has the features of a patent can qualify without going through the patent process, as long as it is certified.
For KDB purposes, a small company has IP income below €7,500,000 in a 12-month accounting period, belongs to a group with turnover under €50,000,000, and is a micro, small or medium-sized enterprise under the EU definition. The figures are in euro because this is an Irish relief. Groups reporting in sterling will need to translate carefully.
Certification is not a formality. You have to show the invention is novel, non-obvious and useful, so expect to put real effort into the application.
The nexus fraction limits your relief to the share of IP profit that reflects R&D your company did itself. Spending on R&D by your own staff, or work outsourced to unconnected parties, counts in full. Buying in IP or paying group companies to do the work reduces the fraction. A capped uplift softens the reduction, but rarely removes it.
The formula takes your qualifying expenditure plus any uplift, divides it by overall expenditure on the asset, and multiplies the result by the profit attributable to that asset. The uplift is the lower of 30% of qualifying expenditure or the aggregate of acquisition costs and group outsourcing costs.
Here is a simplified example for an Irish software company:
| Item | Amount |
|---|---|
| Profit attributable to the software | €1,000,000 |
| Qualifying expenditure (own staff and unconnected subcontractors) | €600,000 |
| Acquisition costs (bought-in code) | €200,000 |
| Group outsourcing (work done by a UK sister company) | €100,000 |
| Overall expenditure | €900,000 |
| Uplift: lower of 30% of €600,000 or €300,000 | €180,000 |
| Nexus fraction: (€600,000 + €180,000) ÷ €900,000 | 86.7% |
| Qualifying profits | €866,667 |
| Tax at 12.5% | €108,333 |
| Tax at the 10% KDB rate | €86,667 |
| Annual saving | €21,667 |
Two things stand out. Using a group company for part of the build cost real relief. And the profit line is the hardest number to defend. Where software is embedded in a product or bundled with services, you have to strip out the routine returns that aren’t attributable to the IP. That allocation needs to follow arm’s length principles, and it’s where Revenue is most likely to push back.
It is worth claiming when your annual qualifying profits are large enough that the 2.5 point saving clearly exceeds the cost of building and maintaining the claim. In practice, that usually means profitable, IP-driven companies with R&D done largely in-house. Early-stage or loss-making companies often gain little, because the regime ring-fences the specified trade and its losses.
The KDB is not a light-touch relief. Since its introduction in 2016, the regime has been widely regarded as extremely complex and restrictive, largely because it has to comply with OECD rules. You need asset-by-asset tracking of expenditure, a defensible profit attribution and a claim that holds up years later.
We often see business owners assume that any software company should claim. The better question is whether the numbers survive the nexus fraction and the cost of the paperwork. As a rough sense check, €200,000 of qualifying profit saves €5,000 a year. Spending time and fees to save that may not make sense. At €2,000,000 the saving is €50,000, and the conversation changes.
The KDB is more likely to be worth exploring if:
That last point matters for larger groups. Where Pillar Two applies, a 10% rate can simply be topped up elsewhere, which removes the benefit. That is the main reason the Finance Bill now offers an exit route, covered below.
The KDB and the R&D tax credit are separate reliefs that work at different stages, and you can claim both. The R&D credit rewards spending on development as it happens. The KDB rewards profits once the IP earns income. The UK Patent Box is the closest equivalent across the border, but it only covers patented inventions.
| Feature | Irish Knowledge Development Box | Irish R&D tax credit | UK Patent Box |
|---|---|---|---|
| What it rewards | Profits from qualifying IP | Qualifying R&D spend | Profits from patented inventions |
| Headline benefit | Effective 10% rate on qualifying profits | 35% credit on qualifying spend | 10% rate on relevant IP profits |
| Covers copyrighted software | Yes | Not relevant (spend based) | Generally no |
| Small company route without a patent | Yes, with certification | Not applicable | No |
| Nexus fraction applies | Yes | No | Yes |
| Claim timing | Within 24 months of the period end | Within 12 months of the period end | Election through the company tax return |
If you are weighing up the UK side, our guide to Patent Box for manufacturing and engineering businesses explains when the UK regime is worth the effort. For the spend side in both jurisdictions, see what qualifies for R&D tax credits in the UK and Ireland.
The Bill does more than extend the deadline. It gives existing claimants a one-off chance to leave the regime, and it restricts the value of KDB losses used against other profits.
On the exit, an existing claimant can make an irrevocable election to leave the KDB for all existing qualifying assets in a specified trade, for a single accounting period starting between 1 January 2027 and 1 January 2028. Written notice must reach Revenue within 24 months of the end of that period.
The catch is losses. If you opt out, unused KDB losses from earlier periods are effectively lost, although new qualifying assets developed later can still be claimed as a new specified trade. For companies that stay in, KDB losses set against non-KDB profits will be restricted by reference to the KDB rate when used, for accounting periods starting on or after 1 January 2027.
All of this is still a Bill and could change before enactment. Our overview of Irish Budget 2027 for cross-border businesses covers the wider package.
The KDB is only available to a company within the charge to Irish corporation tax that carried out the R&D behind the asset. A Northern Ireland or GB company cannot claim it for its own development work. That makes structure important for groups trading on both sides of the border.
In our experience working with UK and Irish SMEs, the problem is rarely the KDB rules themselves. It’s that the group’s development work has drifted between entities without anyone documenting who owns what. A developer employed by the NI company spends half her time on the Irish product. A UK subsidiary builds a module. Code gets reused across both companies. Each of those choices affects the nexus fraction and the intercompany charges.
Moving IP into Ireland to claim the KDB is rarely a quick win. Acquisition costs reduce the fraction, and the transfer itself can trigger tax on both sides. If you are reviewing where IP should sit, read our guides on intercompany charges between UK and Irish companies and the 2026 transfer pricing changes first. Where a wider group reorganisation is already being considered, for example after a difficult trading period, our company restructuring specialists can make sure IP ownership is part of that plan rather than an afterthought.
Revenue’s guidance notes on the Knowledge Development Box expect you to track and trace R&D expenditure and income to each qualifying asset, or to a family of assets where that is permitted. In practice, that means:
A KDB claim must be made within 24 months of the end of the accounting period it relates to. That extra time is useful, but only if the records were kept as the work happened. Rebuilding 2 years of time allocation from memory rarely produces a claim you’d want Revenue to examine.
Strong processes help beyond the KDB itself. A review by our internal audit services team can test whether project costing and time recording are reliable enough to support claims. Your external audit services provider will also want the capitalisation and cost allocation in the accounts to line up with what has been claimed. If an IP valuation is ever disputed between shareholders or in a sale, forensic accounting support can rebuild the expenditure trail independently.
The effective rate is 10% on qualifying profits from 1 October 2023, delivered through a deduction equal to 20% of those profits at the 12.5% trading rate. Before that date, the effective rate was 6.25%. Guides still quoting 6.25% are out of date.
Yes. Copyrighted computer programs that result from qualifying R&D are qualifying assets, which makes the Irish regime more useful to software businesses than the UK Patent Box. The profit has to be attributable to the software itself, so routine returns from services, support or hosting need to be stripped out.
Yes. The R&D tax credit relates to qualifying spend in the period it is incurred, and the KDB relates to profits later earned from the resulting IP. Records that support the R&D credit also feed the nexus calculation, so it makes sense to plan both claims together.
A company within the charge to Irish corporation tax that earns income from a qualifying asset and created that asset through its own qualifying R&D. Smaller companies meeting the €7.5 million IP income and €50 million group turnover tests can also claim for certified unpatented inventions.
The KDB can be valuable, but only when the numbers survive the nexus fraction and your records can support them. Before you spend time on a claim, it’s worth knowing roughly what it will save and what it will take to defend.
SCC’s dual-qualified tax team works across Ireland, Northern Ireland and the UK. We can model your KDB position alongside your R&D credits and Patent Box options, and give you a straight answer on whether it is worth pursuing. Speak to our specialist tax incentives team, or if you want broader support with project costing and reporting, our SME business solutions team can help you build the records first.
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