Tax incentives for research

22 November 2006: Commission Communication "Towards a more effective use of tax incentives in favour of R&D" – Press release – Full text [ - 153Kb]. Accompagnying Commission Staff Working Document.

Well-designed tax incentives are intended to support R&D investment and innovation in a simpler and more predictable way than grants.

Since 2004, a number of Member States have introduced new tax incentives or substantially improved existing ones to stimulate investment in research. They now constitute a substantial part of the total public effort to support business R&D in several Member States.

However, the design and implementation of tax incentives, which falls under the responsibility of Member States, reflects national preoccupations. As a consequence, the European fiscal landscape is fragmented, excessively complex and sometimes discriminatory against foreign organizations and multinational R&D partnerships.

Identifying and disseminating good practices could improve the effectiveness of tax incentives in Europe and ensure their compliance with Community law. Consistent approaches should be promoted across the EU for common issues such as:

• Cross-border outsourcing of research
• Expansion of young research-intensive firms, which most often involves transnational expansion
• Synchronisation of national support to large European research projects

To this end, the Commission adopted on 22 November 2006 a Communication defining guidance to bring about a more effective, stable and concerted use of R&D tax incentives across Europe. (see above)

This guidance was elaborated on the basis of a dialogue with Member States, notably in the context of the open method of co-ordination. It addresses the following topics:

• The design, implementation and evaluation of R&D tax incentives
• The compliance of national R&D tax incentives with Community law
• The design and implementation of specific tax incentives for the following target groups:
  
  
  1. Companies participating in large-scale EU R&D projects, e.g. Technology Initiatives and Eureka projects in order to ensure timely and synchronized financial support to industrial participants
  2. Young R&D-intensive SMEs to support the growth of R&D-intensive start-ups and make them more attractive to venture capital

In a follow up of the November 2006 Communication "Towards a more effective use of tax incentives in favour of R&D" (COM(2006)728), the expert group "R&D tax incentives evaluation" was established to address the need to improve the evaluation of R&D tax incentives, both at individual firm level and on the economy at large,  building on identified best practices from the EU and abroad. The key issue examined was the coherence between the methodologies used for evaluating the effectiveness of R&D tax incentives in Europe as to facilitate the comparison of evaluation results and foster mutual policy learning amongst Member States. Findings are summarised in the following report:
Expert Group on R&D Tax Incentives Evaluation - Comparing Practices in R&D Tax Incentives Evaluation - Final Report [ - 812Kb]

In 2009, the tax expert group re-examined the current guidelines on the design and evaluation of R&D tax incentives (first developed in 2005), assessed the impact of tax incentive schemes on R&D investment location, and analysed the relationship between tax incentives schemes and R&D collaboration. The work of the group also examined the role of financing constraints on the ability of firms to undertake R&D investments. A one day workshop with national experts from Member States was held in Brussels in October 2009.

The final report of the group [ - 621Kb] comprises a main report and annexed papers covering:

• the effect of R&D tax incentives on location of R&D investment, [ - 246Kb]
• tax incentives for industry-science collaboration, [ - 194Kb]
• financing constraints for industrial innovation, [ - 189Kb]
• and summaries of R&D tax incentive schemes in EU and non-EU countries. [ - 159Kb]

It provides important insights for ongoing policy discussions on best-practice in the design, implementation and evaluation of R&D tax incentive schemes.