International Tax Bulletin - Focus on R&D tax incentives

30 July 2014

Focus on R&D tax incentives

In this issue: Belgium & Luxembourg, France, Germany, Italy, The Netherlands, UK

A significant number of countries now offer the critical operational pre-requisites for conducting research and development (R&D), i.e ., access to growing markets/customer base, access to talent, intellectual property protection, stable economy/government and IT infrastructure. This has led many countries to promote relocation of R&D operations to their country as part of their innovation-led economic development strategies. R&D tax incentives are an important component of these strategies and thus tax competition amongst European countries in respect of IP and related activities has become increasingly the norm.

The debate is often centered on tax rates and special IP regimes – such as the IP box regimes in Belgium, the Netherlands, Luxembourg, Spain, Malta, Cyprus, Switzerland or the UK. Similar regimes are likely to spread throughout Europe – witness the recent introduction of the patent box regime in the UK from 2013 onwards.

Another important side of the equation is R&D expenses. Given that much R&D will never get to the stage of producing profitable assets, many companies are more concerned with obtaining the best treatment of R&D expenditure. Being taxed on potential future income is by comparison a nice problem to have.

R&D can be incentivised or supported through various reliefs focusing on the R&D phase: increased deduction of R&D expenditure, tax credits, capital allowances, exemption from payroll tax remittance, investment deductions, grants and subsidies, expatriate tax status for R&D researchers, etc.

In order to pinpoint the various reliefs that could be beneficial to a company engaged in R&D activities, we have set out a comparison table with some high R&D activity jurisdictions and their respective R&D relief arsenal. The definition of R&D may vary from country to country or even from relief to relief, but since the basic definition of R&D is similar across many countries, we have not entered into detail on the distinctions that may exist within the sovereign laws.

This issue of the International Tax Bulletin will focus on R&D tax incentives in selected European jurisdictions.

It is worth noting that a jurisdiction like Germany has opted not to participate in a R&D tax incentive competition (please see the short report from Germany in the following).

Do not hesitate to contact your local Bird & Bird expert for any questions. Further, please feel free to join any of our seminars or webinars on tax aspects of R&D and international tax-planning with intangibles. 

Belgium and Luxembourg - in comparison to France

The following chart gives an overview of main R&D tax characteristics available in Belgium and Luxemburg and compares those to French tax incentives. For a more detailed description of the situation in France, please see the article on French tax incentives further below.

 

BELGIUM

LUXEMBOURG

FRANCE

Increased R&D expenditure deduction

The R&D investment deduction consists of a one-time tax deduction (at 13.5% of R&D expenditure) or a deferred deduction spread over the amortisation period (at 20.5%), in addition to the regular deduction of the R&D expenses, including acquisition cost of patents and R&D assets (both tangible assets as certain capitalised expenditure such as salary costs). Patent expenses are not eligible for the spread deduction.

Excess deductions may be carried forward indefinitely or converted into a tax credit (see below).

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Option for immediate and full deduction of R&D expenditures incurred during the financial year provided that R&D expenditures do not constitute an abnormal act of management (i.e. expenditures shall not be excessive, shall be justified and incurred in the interest of the company).

Licensee can fully deduct paid royalties if it is demonstrated that the licensed right is effective and creates added value. Otherwise, royalties paid are only deductible up to 15/33,33% of their amount.

Accelerated depreciation of R&D capital / investments

The declining balance amortisation allows a 40% depreciation of the residual value to be amortised. This method is excluded for cars, trucks, sea ships, intangible assets or assets to be leased out.

The accelerated depreciation scheme allows an up to 40% depreciation of the residual value to be amortised. This method is subject to conditions.

The straight-line depreciation (“ amortissement linéaire” ) allows a full depreciation of the residual value to be depreciated during five years. This depreciation applies to R&D investment expenses. In addition, there is an exceptional depreciation for software . This method allows a full depreciation over 12 months following the acquisition.

R&D tax credits

The R&D tax credit is basically the same as the R&D investment deduction (with the same conditions and rates applicable), except that it is applied as a credit (i.e. the investment deduction must be multiplied by 33.99% and then offset against the income tax) and must be (irreversibly) elected as alternative to the investment deduction. In addition, any unused portion of credit which could not be offset during a 5 year period is refundable.

The R&D tax credit allows a credit against corporate income tax equal to 7% (up to 150.000 EUR) and 2% (above this threshold) against corporate income tax, subject to certain conditions.

3 tax credits exist:

1. The R&D tax credit allows offsetting a tax credit against corporate income tax (the “ CIT ”) equal to 30% of R&D expenses limited to €100m, and 5% for the portion exceeding €100m.

The R&D expenditures shall be limited to an eligible R&D project as approved by the French Government Ministry of Research in a ruling.

R&D expenses are as follow:

  • depreciation deductible from fixed asset and intangible (patents…)
  • wages (including social security charges) paid to engineers
  • operating expenditures
  • costs related to subcontracted research….

This list is not limitative

and is given for information purposes only.

If after 3 fiscal years the tax credit cannot be offset against CIT, the company may obtain its reimbursement.

2. The innovation tax credit for SMEs allows offsetting a tax credit against CIT equal to 20% of innovation expenses limited to €400,000 per year, that is to say that the maximum tax credit a company may obtain is equal to €80,000.

3. A specific tax credit allows expenses related to the costs of collection incurred by companies operated in textile, clothing and leather sector . However, this tax credit falls in the scope of the De Minimis Aid .

R&D allowance

Certain R&D capital investments or interest subsidies granted by the Regions (Flanders, Wallonia and Brussels) may be tax exempt .

R&D intensive entities may receive cash grants and interest subsidies from the government.

Some subsidies may be granted by the French Government to a company in respect of R&D project. These subsidies may be taxable.

Companies located in competitiveness clusters benefit from a full exemption of CIT the first three fiscal years and, a 50% exemption the two following fiscal years. This tax credit falls also in the scope of the De Minimis Aid .

Reduction in R&D worker’s wage tax and social security contributions

The payroll tax remittance relief allows companies employing certain researchers to retain 80% of the regular payroll tax withheld from the researchers' wages, which results in an immediate cash advantage. However, the cash advantage may not be used for financing existing R&D projects. The legislature aimed to stimulate new R&D projects.

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No specific reduction exists but wages are comprised in the R&D tax credit basis (see above).

Patent box

The patent box deduction allows for a 0% to 6.8% effective tax rate on qualifying royalty income (patents, related know-how).

The IP box allows for a 5.84% effective rate on qualifying royalty income (patents, software copyrights, trademarks or brands, design & models, domain names).

The patents and IP are submitted to long term capital gain regime i.e. to a reduced CIT rate of 15%.

Others

The expatriate regime provides for a special tax status for foreign key researchers allowing certain lump sum amounts to be paid tax free (allowing a reduced employment cost for identical gross salary).

Additionally, companies may be granted temporary innovation premiums for their employees, thereby eliminating tax and social security withholding requirements.

The expatriate regime provides for a special tax status for highly qualified and skilled employees recruited from abroad allowing certain costs to be reimbursed tax fee and/or a tax-free allowance of the lower of EUR 50.000 or 30% of the total salary package.

It does not exist any specific expatriate regime for engineers. A global expatriate regime allows a full exemption of wages paid to an engineer working abroad.

Thus, an impatriate regime exists for foreign workers detached in France.


France

R&D tax incentives in France
France actively supports companies to invest in R&D activities, mainly through the R&D tax credit. The R&D tax credit decreases the cost of R&D activities in France. According to several surveys, it reduces the cost of a researcher by one third, effectively placing the French researcher among the most efficient in the world. The R&D tax credit makes France one of the most competitive European countries. According to the OECD, France has one of the best R&D incentives in the world, ahead of the USA and Japan.
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Germany

R&D tax incentives in Germany
On an annual average, German companies register more than 25.000 patents per year. As an industrialized nation with a significant substance of manufacturing and other businesses Germany’s tax law framework is not primarily focused on attracting foreign investments by specific tax breaks. One important exception are substantial tax subsidies available for Eastern Germany and the City of Berlin. Other than that, the more important objective of German tax law regulations is protecting the German tax base against erosion and profit shifting.
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Italy

Tax credit for research and development investments

Article 3 of the Decree Law no. 145/2013 (so called “Decreto Destinazione Italia”) introduced a new tax credit for research and development investments.

The aforesaid law provides for the introduction of a tax credit, equal to a maximum yearly amount of Euro 2,500,000, for companies, without limitations related to their legal form, industrial sector or accounting system applied, whose annual revenues are lower than Euro 500 million and that bear an amount of costs for research and development higher than Euro 50,000 per fiscal year.
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The Netherlands

R&D incentives in the Netherlands
The Netherlands actively promotes engaging in R&D activities through a favourable corporate income tax regime and specific R&D tax incentives which are available to companies operating in the Netherlands. Please find below a high-level overview of the main tax incentives available which could significantly lower your companies R&D cost and taxable base.
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UK

R&D tax reliefs
This note sets out a brief overview of the corporate tax regime for spending on research and development. The UK offers relief under the capital allowance regime for capital expenditure and there have historically been two types of relief for income expenditure, depending on whether the entity was a small or medium enterprise (SME) or a large company. From 1 April 2013 an above the line tax ("ATL") tax credit has been brought in for large companies. This is to run in tandem with the historic large company relief until it replaces it in April 2016. In addition there is a vaccine research relief for large companies (which we do not consider in detail in this note). In more detail, the R&D reliefs are as follows...
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Contact Us

If you have any queries on the issues covered in the Update or any other matters please do not hesitate to contact a member of our International Tax Team.