Governments all over Europe want to attract innovative business activity. Those are businesses that perform ground-breaking research and development (R&D) activities. European countries, and the EU as a whole, give incentives to these businesses. For example to create a more technologically advanced economy, stimulate job growth or tackle climate-related challenges. Such incentives are offered through direct support through government loans and investments. Another way governments stimulate innovation in their countries, is through tax breaks.
Below we will take a look at the various tax breaks European governments offer businesses for R&D activities.
3 common ways of stimulating R&D
Tax incentives for research and development (R&D) come in three general forms:
First of all, Patent boxes. These ‘boxes’ provide preferential tax rates on income derived from intellectual property, such as patents or trademarks. Roughly half of European countries have some sort of patent box regime. For example: France has a standard corporate tax rate of just over 25%, but qualifying income from innovative activities can apply for a reduced corporate tax rate of only 10%.
Secondly, R&D tax credits. Tax credits that are available for businesses that incur qualifying expenses related to their research activities, such as personnel costs or the purchase of necessary equipment.
Finally, super-deduction for R&D costs. Companies taking advantage of such special deductions for research and development (R&D) expenditure can deduct more than the actual value of their R&D costs when calculating taxable profits.
By taking advantage of these types of tax breaks, businesses can reduce their overall tax liability while also encouraging innovation and growth.
The Netherlands has a patent box regime called the Innovation Box. This incentive gives a large reduction in corporate tax on qualifying innovative activities.
|SME tariff||15% (up to €395.000)||19% (up to €200.000)|
|Standard tariff||25,8% (profits exceeding €395.000)||25,8% (profits exceeding €200.000)|
|Innovation Box||9% on profits derived from qualifying innovative activities||9% on profits derived from qualifying innovative activities|
Norway does not have a patent box and no decreased corporate income tax. This means that the standard rate is 22% on all corporate profits. There are other incentives, most importantly the SkatteFUNN scheme. SkatteFUNN is a government incentives program for companies who invest in research and development. It allows them to receive a reduction in taxes on their investments, so that they can reinvest more money into R&D. Companies who use the program are able to benefit from larger tax deductions, as well as access additional funds from the government. The aim of the program is to stimulate the growth of innovation in Norway and encourage companies to invest in new technology.
Ireland’s Knowledge Development Box (KDB) provides an attractive incentive for companies to conduct research and development activities. The KDB is a modified corporate tax regime that allows qualifying companies to enjoy effective tax rates of 6.25% on income from a ‘usable qualifying asset’. Such assets are for example a computer programme, an invention protected by a qualifying patent or UP for small companies certified as patentable but not patented.
Sweden does not have a lower corporate tax rate through a patent box. The standard corporate income tax is therefore always 20,6%. Forskningsavdrag (FoU-avdrag) is a tax credit in Sweden that incentivizes companies to invest in research and development. Companies receive a deduction from their taxable income when they invest in research and development, which allows them to reinvest the savings back into the business. The program is intended to support innovation and increase investment in R&D, as well as help Sweden maintain its position as an innovative hub for technology.Forskningsavdrag (FoU-avdrag)
Similar to the other Nordic countries, Denmark does not currently have a patent box. The Danish have a temporary 130% super-deduction R&D tax credit which will most likely become permanent. Furthermore, the country has favourable conditions to attract highly-skilled researchers and expats.
Finland does not currently have a patent box or anything similar in place. All taxable income received by a company is therefore taxed at the CIT rate of 20%, irrespective of its source.
The UK’s ‘Patent Box’ offers a 10% corporate income tax rate for profits earned from patented inventions. The regular rate corporate tax rate is currently 25%.
Italy scrapped its patent box in 2021. It replaced it with a super-deduction for R&D.
The only Baltic state with a patent box. A company can apply the reduced CIT rate of 5% if the innovation meets the criteria. The coutnry already has an advantageous CIT regime where businesses with fewer than 10 employees and gross annual revenue of less than €300,000 are eligible for a reduced corporate income tax (CIT) rate of 0% for the first year of operation and 5% for subsequent years. To take advantage of this incentive, certain conditions must be met in order to qualify.
Estonia does not currently have a reduced corporate income tax through a patent box regime.
Belgian Patent Box also known as Innovation Income Deduction is a tax relief scheme for innovative companies in Belgium. Corporation tax on profits from a company’s own innovations are reduced by up to 85%. The effective corporate income tax over profits from innovative activities can be as low as 3,75%.
Comparing Europe’s corporate tax rates and Patent Boxes
Around half of European countries have some sort of patent box regime. All work in a slightly different way. For example, some apply to profit derived from software, some IP and many to both software and IP inventions. Some of the regimes apply to other profits also. If you would like to have more information if you can apply for a tax reduction through a patent box, please contact us.
|Country||Corporate Income Tax Rate||Patent Box Regime (R&D rate)|
|Germany||30% on average. Combination of federal and municipal tax.||–|
|United Kingdom||19 – 20%||10%|
|Italy||28% approximately, based on national and regional taxes||–|
|Netherlands||19 – 25,8%||9%|
|Lithuania||5 – 15%||5%|
Do R&D incentives actually work?
The type of R&D incentive clearly leads to different outcomes. Stimulating R&D spending through tax credits or super-deduction will normally lead to higher R&D spending. On the other hand, a patent box regime could lead to a larger amount of registered innovations and patents. According to the Organisation for Economic Co-operation and Development (OECD), evidence suggests that R&D tax credits (input-based R&D incentives) more effective than patent boxes (output-based incentives). It is hard to prove whether R&D incentives in any form are an effective way of stimulating growth or achieving other specific goals. For example: the Nordic region hardly has government-driven R&D incentives (Finland has none whatsoever!). Yet, the Nordic countries belong to the top tier of R&D-spending nations in Europe.
It is important to remember that while R&D tax incentives can be an attractive option for businesses looking to start up or expand their operations, they are not the only factor that should be taken into account when making this decision. Other important considerations include the country’s overall economic stability and growth potential, its infrastructure and access to resources, its labor market and cost of living, its legal system and regulations, as well as its culture and political environment. All of these elements can have a significant impact on a business’s success or failure in a particular country. You can read more about this in our complete guide on the best countries to do business in Europe.
European Innovation Scoreboard ranking 2022
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