Did you know that from the tax year 2023, there will be a completely new tax incentive for research and development activities? Companies can now benefit from an additional tax deduction of up to €1,000,000 and save €200,000 in tax payments. This is an opportunity not to be missed.
In this blog, we look at the new combined research and development (R&D) deduction made possible by the new law (1298/2022) and the related guidance from the Tax Administration.
THE COMBINED R&D DEDUCTION IN A NUTSHELL
From the tax year 2023, the combined research and development (R&D) deduction will be available to all companies operating in Finland that are engaged in business or agriculture. The size of the company or its sector of activity is irrelevant. To qualify for the deduction, the research and development activities must be related to the company’s own business activities. The combined deduction consists of two parts.
A general additional deduction:
▶ The amount of the general additional deduction is 50% of the wage and salary costs and purchased services eligible for the R&D deduction.
▶ The minimum deduction per tax year is EUR 5,000 and the maximum is EUR 500,000.
▶ Companies can claim the deduction for the first time in tax year 2023.
Additional supplementary deduction:
▶ The amount of the additional supplementary deduction is 45% of the increase in R&D expenses from the previous year eligible for the R&D deduction.
▶ The additional supplementary deduction may be made if R&D expenditure has increased compared to the previous tax year.
▶ The maximum amount per tax year is EUR 500,000, with no minimum.
▶ Companies can claim the deduction for the first time in tax year 2024.
WHAT IS MEANT BY RESEARCH AND DEVELOPMENT ACTIVITIES?
Research and development activities qualifying for the deduction are activities that are creative, systematic and aim at something substantially new. For example, the activity may be aimed at a new product, service or process. The development of existing products, services or processes may also involve something substantially new, for example, by seeking to make a product, service or process substantially better or different.
Systematic in this context means that an objective is set for the activity, the work is carried out in a planned way and the implementation of the activity is monitored.
WHAT EXPENDITURE IS ELIGIBLE FOR DEDUCTION?
The deduction can be made for both the wages of the company’s own staff and for purchased subcontracted expenditure on the company’s own R&D activities. The range of purchased services eligible for the deduction can be very wide. The main point is that the expenditure is based on a service provided by external staff, such as programming or consultancy services.
The amount of expenditure eligible for deduction is calculated as follows:
+ salaries of own staff for research and development activities
+ Purchased research and development services
= Total expenditure eligible for the combined deduction
The general additional deduction (50%) is calculated on the basis of the total amount of expenditure and the additional supplementary deduction (45%) on the basis of the increase in the total amount of expenditure compared to previous tax year.
HOW TO CLAIM THE DEDUCTION?
The combined deduction must be claimed on the company’s tax return. As a general rule, the tax return must be accompanied by a free-form statement describing the company’s R&D activities, the conditions for the deduction and the expenses for which the deduction is claimed.
Although the law entered into force on 1 January 2023, the general additional deduction may be claimed in full from the tax year 2023 onwards. This means that if, for example, the company’s financial year ended on 31 March 2023, the company can make the general additional deduction on its tax return filed on 31 July 2023.
EXAMPLES OF THE TAX ADVANTAGE OF THE COMBINED R&D DEDUCTION
Example 1
Start-up company A Ltd has incurred a total of EUR 8,000 in R&D expenses in tax year 2023 and EUR 50,000 in tax year 2024.
Tax year 2023
The amount of the general additional deduction calculated on the basis of the expenditure for the tax year 2023 would be EUR 4,000 (50% x EUR 8,000). Therefore, the amount of the expenditure does not exceed the minimum amount of EUR 5,000 per tax year for the general additional deduction, so that A Ltd cannot make any general additional deduction on its tax return for the tax year 2023.
A Oy can normally deduct R&D expenditure of EUR 8,000 on its tax return.
Tax year 2024
The general additional general deduction calculated on the basis of the expenditure for the tax year 2024 is EUR 25,000 (50% x EUR 50,000), which can be deducted by A Oy on its tax return for the tax year 2024.
In addition to the general additional deduction, A Oy may make an additional supplementary deduction for increased R&D expenditure in the tax year 2024. For the tax year 2024, A Oy’s R&D expenditure has increased by a total of EUR 42 000 (EUR 50 000 to EUR 8 000). A Oy can make an additional supplementary deduction of EUR 18 900 (0.45 x EUR 42 000) for this increase in expenditure.
In the tax year 2024, A Oy can therefore deduct EUR 43,900 as a combined R&D deduction in addition to the normal EUR 50,000.
Tip: For R&D activities of small and growth-oriented companies, it is good to take into account the possibilities and also the limitations of the combined deduction. It is advisable to take advantage of the additional deductions in each tax year and to ensure that the legal requirements are met and thresholds are exceeded.
Example 2
Technology company B Ltd has a three-year research project which has resulted in the following personnel and consultancy costs:
▶ Fiscal year 2022 / EUR 500.000
▶ Fiscal year 2023 / EUR 1.200.000
▶ Fiscal year 2024 / EUR 700,000.
Fiscal year 2022
The possibility to make a general additional deduction only applies to the tax year 2023, so no additional deduction can be made. B Ltd will normally be able to deduct EUR 500,000 of expenditure in its tax return.
Tax year 2023
B Ltd has incurred expenses of €1,200,000, of which it can make a general additional deduction of €500,000 on its tax return. The maximum amount of the general additional deduction is EUR 500,000, so B Oy cannot deduct more than this.
No additional supplementary deduction can be made for the tax year 2023, even though the R&D expenditure has increased compared to the previous tax year (as the additional supplementary deduction is only available from tax year 2024 onwards). Therefore, B Oy will normally be able to deduct R&D expenditure of EUR 1,200,000 plus an additional general deduction of EUR 500,000.
Tax year 2024
B Ltd has incurred expenses of EUR 700,000, of which it is allowed to make a general additional deduction of EUR 350,000 (50% x 700,000) on its tax return.
B Ltd will not be able to make an additional supplementary deduction as its R&D expenditure has decreased compared to the previous tax year. Therefore, B Ltd is allowed to deduct the normal R&D expenditure of EUR 700,000 plus the general additional deduction of EUR 350,000.
Tip: for long development projects and large R&D expenditures, it is advisable to plan the scope of R&D activities over a long period of time to ensure that the full tax benefits of the combined R&D deduction are available.
WHAT SPECIFIC SITUATIONS SHOULD BE TAKEN INTO ACCOUNT?
In addition to the above, the following situations should be taken into account when planning for the combined R&D expenditure deduction:
▶ If the company has received public subsidies for R&D activities, the combined deduction cannot be claimed for the subsidies.
▶ In cases of corporate reorganisation, special attention should be paid to which company’s expenses are involved when calculating the combined deduction.
▶ Tax legislation enables relatively free capitalization and elimination of research and development expenses during two or more tax years. If the company decides to capitalize R&D expenses, with regard to the calculation of the expenses that form the basis of the combined deduction, companies must be careful about which tax year the expenses in question can be calculated according to the new rules.
▶ If the company is part of a group and receives or distributes a group contribution, the calculation of taxable income should take into account the different calculation order of the combined deduction in the calculation of taxable income. In the future, a company may have taxable income and a recognised loss in the same tax year.
REMEMBER THIS
▶ Make sure that the research and development activities carried out in the company for which the deduction is to be claimed are considered research and development activities within the meaning of the law.
▶ If necessary, the nature of the activity must be verified by an application for a preliminary ruling.
▶ Calculate the expenditure eligible for deduction by tax year.
▶ Claim the deduction on the tax return and prepare a free-form statement of the grounds for the deduction.
▶ The deduction must be claimed before the end of the tax year
▶ It is not possible to claim it retrospectively, e.g. by means of an adjustment claim.
▶ Make sure that the R&D deduction calculation takes into account any special situations.
We recommend that you consider well in advance the possibilities for the tax year 2023 in order to utilize the R&D tax incentive to the extent possible.
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