EU proposes Europe-wide tax breaks for R&D

European Commission has put forward rules on how R&D could be supported through an ambitious new tax system. In an example given by the Commission, a company that spends €30 million on R&D could deduct €42.5 million from its taxable income

The European Commission is proposing to put in place pan-European incentives for research and development across Europe.

Under draft legislation, the full cost of R&D for big companies would be 100 per cent deductible, while an additional 50 per cent deduction will be offered for R&D expenses of up to €20 million and a further 25 per cent deduction will be allowed for R&D spending over €20 million.

In an example given by the Commission, a company that spends €30 million on R&D could deduct €42.5 million from its tax base. 

The proposal is aimed at corporations with annual turnover of more than €750 million and which are tax-resident in a European country.

Smaller companies that voluntarily elect to join the scheme will be allowed to deduct up to 200 per cent of their R&D costs.

The proposal also aims to incentivise investment by giving equity and debt equal tax deductions, to encourage companies to finance their activities through markets rather than through debt.

“It’s a great incentive for the open innovation policy of [EU Research Commissioner] Carlos Moedas,” said Kurt Deketelaere, secretary-general of the League of European Research Universities.

Almost all EU governments have some kind of R&D tax credit scheme, and research suggests that they can stimulate investment. The new proposal represents a big play by the EU, which in the past has limited its role to providing guidance on these R&D tax incentives.

Reaching a deal will be a big challenge however, as tax proposals require unanimous backing by EU governments before becoming law. The process is likely to take years.

Controversial corporate tax plan

Harmonised rules on R&D incentives form one part of the so-called common consolidated corporate tax base (CCCTB), a renewed push to create an overarching corporation tax regime in Europe, with the aim of clamping down on aggressive tax planning by multinationals.

Under the terms of the CCCTB, multinationals would rely on a single method for calculating income, avoiding the cost of complying with different rules in each EU country where they file a return.

The proposal was launched in 2011 but shelved after it faced opposition from several countries, most prominently Ireland and the UK, which wanted to maintain national control over their tax systems.

The resurrected legislation will be resisted by Ireland again, with the government wary of Britain dramatically lowering its corporation tax after leaving the EU.