General overview of the innovation incentives
Alongside R&D, there are other tax incentives, including Patent Box. This allows for a reduced tax liability on income from the exploitation of certain intangible assets, such as patents, or rebates on social security contributions for research personnel.
There are also tax benefits for 'technological innovation'. These are similar to the R&D tax benefits.
Types of tax incentives offered
Are there specific industries that qualify or are there reliefs that require a particular industry focus?
The tax incentives related to R&D are generally applicable to all taxpayers provided the requirements are met.
There are also tax credits available for film productions and live performing arts and musical shows.
Do you have to apply for incentives prior to conducting the research or claiming the benefit?
No. R&D tax benefits are applied/requested when filing the company's CIT tax return.
Are there specific documentation or reporting requirements for claiming incentives?
No, there are no specific requirements. However, in practice, companies often use the following documentation to justify the tax credits applied:
- Report from an internal or external consultant.
- Report from a certifying entity.
- Reasoned reports and certificates issued by public authorities, which are binding for the tax authorities.
Benefit available in terms of R&D spend
The level of benefit varies depending on the amount of expenditure and the consideration or categorisation of the expense itself.
Claim deadline
If the amount of tax benefit is higher than €50,000, there is a formal obligation to file an additional annex. This annex is filed with the annual CIT return in which the tax benefit is applied/claimed.
Qualification criteria for claiming R&D tax incentives
The R&D tax incentive is not just available to corporate entities. R&D tax incentives are also applicable to 'natural persons' who develop economic activities for personal income tax purposes, with equal percentages and deduction limits (there are some minor exceptions).
Tax incentives are generally applicable regardless the size of the taxpayer. In some cases, it is necessary to maintain the average number of personnel dedicated to R&D or technological innovation for 24 months following the end of the tax period in which the tax credit was applied/claimed.
Types of activities that qualify as R&D
What are the criteria that define activities that qualify as R&D, and who determines the criteria?
The CIT Law defines what activities qualify as R&D. In summary,
it covers activities whose aim is to discover new scientific and technological knowledge for the development of new materials, products, processes or production systems.
Regarding technological innovation, the CIT Act defines 'technological innovation' as activity whose result is a technological advance in obtaining new products or production processes or substantial improvements to existing ones.
Do the R&D activities have to be performed within the country to qualify? If not, is there a distinction made between the country where the claimant company is resident, EU countries, and non-EU countries?
Eligible R&D activities must be carried out in Spain or in any EU or EEA member state.
Does the intellectual property need to reside in the country granting the incentives or in the company claiming the incentives?
The CIT Act does not make any distinction.
Does the tax authority have to review the resultant developments to allow a deduction or credit?
No. However, the authorities have the right to review and audit the R&D benefit claim or application.
Types of expenditure that qualify for R&D
Eligible expenditure includes expenditure that it is directly related to the R&D activities in question that can be specifically identified on a project-by- project basis. Overheads are not usually eligible. Expenditure can be both revenue and / or capital in nature.
Moreover, the public subsidies that would be received for funding R&D and TI and technological innovation projects reduce the base of the deduction.
The cash / tax benefit of making an R&D claim
Are the incentives temporary or permanent?
The R&D tax credits are permanent but there are also certain temporary benefits.
How is the benefit obtained?
The benefit is obtained through a deduction (tax credit) in annual CIT. In some cases, it is also possible to obtain the credit as a cash refund.
In addition to R&D and technological innovation tax credits, there are other tax benefits, such as the freedom of depreciation. This allows the taxpayer to apply the depreciation without the limitations stablished by the CIT Act regarding tangible and intangible fixed assets, excluding buildings, assigned to research and development activities.
The freedom of depreciation is also applicable to R&D expenditure capitalised as intangible fixed assets, excluding the depreciation of assets qualifying for free depreciation. However, these incentives are temporary since the additional depreciation needs to be reverted via adjustments to the CIT base.
Are the incentives incremental in nature or volume-based?
Volume-based.
Are there general rules for estimating the value of the incentives?
- In general, 25% of the expenses incurred in the tax period from R&D activities. If those expenses are higher than the average R&D expenses incurred by the company during the previous two years, the tax credit is 42% for the excess amount.
- Additionally: 17% qualified research personnel costs exclusively ascribed to R&D activities and 8% investments in tangible and intangible assets, excluding buildings and lands, as long as they are exclusively related to R&D activities.
- Technological innovation activities currently give the right to deduct from the gross tax due 12% of the expenses incurred in the tax period.
Process for making an R&D claim
- Determine if project qualifies
- Confirm quantification of the expense
- Obtain the relevant reports
- Prepare a CIT return in which the tax incentive is applied/claimed
Limitations on the amount of R&D tax incentives that can be used each year
Is there a cap on the maximum level of benefit that can be received per year, per company, or for all the qualifying taxpayers together?
The applicable tax credit is limited to 25% of CIT after the application of international double taxation deductions (DDI) and any applicable tax rebates. However, the limit rises to 50% when the amount of R&D deductions in the current tax period exceeds 10% of CIT, after the application of DDI and any tax rebates.
As well as, for taxpayers whose Net Turnover is at least €20 million during the 12 months prior to the date on which the tax period begins, the minimum CIT taxation of 15% of the tax base operates in practice as a limitation for the application of the R&D deduction apart from the monetisation, which is not limited to this minimum CIT taxation.
Are tax credits refundable?
Yes, in certain circumstances. This procedure is commonly known as R&D monetisation
If an entity applies for a tax credit refund, the R&D credit can be excluded from the limitations described above. However, in this case, a discount of 20% from the total tax credit amount is applied.
Additionally, R&D monetisation requires compliance with certain conditions. These include, among others, maintaining the average number of personnel dedicated to R&D or technological innovation for 24 months following the end of the tax period in which the tax credit was applied/claimed, and, the most important, to obtain the reasonable report issued by the Spanish Ministry of Science and Technology which gives the qualification of the R&D or technological innovation to the project
Can surplus incentives be carried back or forward and used in years other than the origination years?
Any tax credits not applied can be carried forward for 18 years.
Are there any other types of limitations?
With technological innovation monetisation claims, the credit to be applied or refunded cannot exceed €1 million per year.
For combined R&D and technological innovation claims, the threshold is €3 million.
If the R&D expenses incurred in the current year are higher than 10% of turnover, an additional €2 million can be applied/claimed without limitations if certain requirements are met.
These limits shall apply to all companies within the same group, as defined in Article 42 of the Spanish Commercial Code, regardless of their tax residence or obligation to prepare consolidated annual accounts.
Are the R&D costs deductible when deriving taxable income?
No, they need to be capitalised according to Spanish accounting rules.
Our dedicated team of tax experts can guide your business through the complex process of claiming available tax credits and incentives from the applicable governments and authorities.
Contact our advisors below to discuss.
Want to know more?
Nuria Sancho Belza Tax Partner - Barcelona
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