Many countries, in their quest to foster innovation, incentivize business investment in research and development (R&D). This is often achieved through direct government funding for R&D activities. However, a significant number of jurisdictions also offer R&D tax incentives. These incentives generally take two forms: patent boxes and tax incentives for R&D expenditures. This article focuses on the latter, particularly in the European context.
The Organisation for Co-operation and Development (OECD) has developed a measure known as the implied tax subsidy rate to gauge the extent of expenditure-based R&D tax relief across countries. This rate measures the preferential treatment of R&D in a given tax system. The more generous the tax provisions for R&D, the higher the implied subsidy rates for R&D. An implied subsidy rate of zero means R&D does not receive preferential tax treatment.
The implied tax subsidy rates for large profitable firms vary significantly among countries that grant notable relief. For instance, Denmark offers a mere 1 percent, while Iceland leads the pack with a whopping 42 percent. Portugal, France, and Poland follow closely behind Iceland, with implied tax subsidy rates of 39 percent for Portugal and 36 percent for France and Poland.
On the other end of the spectrum, Denmark (1 percent), Cyprus (2 percent), Croatia (4 percent), and Turkey (6 percent) are the least generous of the countries that grant notable relief. Bulgaria, Estonia, Georgia, Latvia, Luxembourg, Malta, Romania, and Switzerland do not show any significant expenditure-based R&D tax relief.
Among the 33 major European countries with available data, the average implied subsidy rate for profitable large firms was 15.8 percent in 2023. In stark contrast, the United States only granted a subsidy rate of 3 percent to large profitable firms.
It’s worth noting that some countries’ R&D tax incentives include refunds and carryover provisions, which can alter the implied tax subsidy rates for loss-making firms relative to profitable firms. This has resulted in lower average implied tax subsidy rates for loss-making firms relative to profitable firms, both for SMEs and large firms.
Understanding these tax incentives is crucial for businesses looking to invest in R&D. It’s also a reminder of the importance of complying with tax laws and the potential benefits that can be reaped from doing so. As always, it’s advisable to seek professional advice when navigating these complex tax landscapes.
For more detailed information, visit the OECD’s data explorer.