There are just two months left until the deadline for filing corporate income tax returns and for taking some of the increasingly scarce tax incentives available. It’s time to sit down and analyze whether any of the projects underway at your company could qualify for the R&D&I tax credit.
These incentives for research, development and technological innovation projects are one of the ways the Spanish government encourages R&D&I efforts at companies.
The tax credit is regulated in article 35 of the current Corporate Income Tax Law (Law 27/2014, of November 27, 2014) and is one of the most favorable of any OECD country. In Spain, companies can receive tax credits for up to 42% of their direct investment in a qualified research or development project.
The main advantages of these tax credits compared to other R&D&I incentives are as follows:
- Their economic impact is comparable to a tax-free subsidy.
- They can be applied across the board (for any company) and freely (for all types of knowledge areas and expenditure levels).
- The tax credits are not subject to a competitive process requiring a predetermined budget.
- The tax credit generated is proportional to the R&D&I activities carried out and is applied in the annual corporate income tax settlement, up to certain limits of gross tax payable (25% in general and 50% if R&D&I expenditure for the year exceeds 10% of gross corporate income tax payable).
Tax credits generated and not applied in a given year are not lost, but rather can be applied over the next 18 years.
More recently, the government realized that allowing Spanish companies to apply pending tax credits in future years might not be sufficient incentive for these businesses to step up their investments in R&D&I initiatives in the middle of a recession period. To give an additional incentive for the tax credit, Entrepreneurs Law 14/2013 introduced a change in the tax credit rules whereby, in certain circumstances, any company can apply their R&D&I tax credits generated with a 20% discount on the amount, up to 100% of gross corporate income tax payable (thereby reducing it to 0%). If, after that, the company still has tax credits pending application, it can request to have the amount credited through its corporate income tax return. This has been called the “monetization” of the R&D&I tax credit.
The combined sum of the tax credit taken or paid, in the case of technological innovation activities, is limited to €1 million per year. In addition, the combined sum of the tax credit taken or paid for research and development and technological innovation activities is limited to €3 million per year. Both limits are calculated taking into account all of the companies forming part of a corporate group (as “group” is defined in article 42 of the Commercial Code), regardless of residence and the obligation to prepare consolidated financial statements.
The following requirements must be met to apply the established mechanisms:
- The tax credit cannot have been applied within at least one year following the end of the tax period in which it was generated.
- The average headcount or, alternatively, the average headcount assigned to R&D&I activities cannot be reduced from the end of the tax period in which the tax credit was generated until the end of the period mentioned in point c) below.
- In the 24 months following the end of the tax period for which the tax return includes the tax credit or application for payment, an amount equal to the tax credit taken or paid must be used for R&D&I expenses or investments in property, plant or equipment or intangible assets exclusively used for such activities, excluding real estate.
- The company must have obtained a reasoned report on the classification of the activity as research and development or technological innovation, or an advance pricing agreement on the expenses and investments relating to those activities, in the terms established in article 35.4 of Law 27/2014.