R&D expenditure: a common EU framework
Anti-Tax Avoidance Directive and R&D expenditures
The proposal introduces a new common framework for the tax treatment of research and development expenditure into the Anti-Tax Avoidance Directive (EU) 2016/1164 (ATAD), in the form of a R&D allowance. The main points are as follows:
- R&D allowance as a minimum standard across the EU;
- full deductibility is granted for capital expenditure on tangible assets used for R&D;
- expenditure may be deducted in the year it incurred or over the following four years; and
- Member States remain free to provide more favourable treatment, subject to the State aid rules.
Qualifying expenditures
The allowance will apply to qualifying expenditure. The qualifying expenditure is defined as capital expenditure on plant, machinery and other tangible assets, net of deductible value added tax. The expenditure must incurred by or on behalf of the taxpayer and used in its direct business interest either to carry out or provide facilities for R&D.
R&D is defined to include: basic research, applied research and experimental development. Accordingly, the allowance will apply to tangible assets only and will not extend to current research costs, such as staff costs and consumables, or to intellectual property.
The amount of the allowance is equal to the qualifying expenditure and is deductible from the taxable base. It may be claimed in the tax period in which the expenditure is incurred or in any of the four subsequent tax periods, after which no claim may be made. Where a disposal value arises in respect of the expenditure, the amount of the allowance is limited to the amount by which the expenditure exceeds that disposal value.
Real Estate
Certain expenditure are excluded. In particular expenditure on the acquisition of land or rights over land and on residential property do not qualify. Expenditure on a building or structure already constructed, on rights over it, and on plant or machinery forming part of it may, however, qualify.
Where a building includes a residential property, the expenditure on the entire building may qualify provided that the parts other than the residential property are used for R&D and that no more than 20% of the expenditure is attributable to the residential property. Above this 20% only the part used for R&D qualifies.
Minimum use period
To ensure that the allowance reflects genuine investment, the qualifying expenditure must be used wholly and exclusively for R&D for a continuous period of at least three years. If these conditions are no longer satisfied, other than due to force majeure or circumstances beyond the taxpayer’s control, the allowance is withdrawn and added back to the taxable base. On a subsequent disposal, demolition or cessation of ownership of the asset, the disposal value is brought into account and a balancing charge may arise, limited to the lower of the amount by which the disposal value exceeds any unclaimed allowance and the allowance actually claimed.
The allowance operates as a minimum level of harmonisation. Member States are allowed to, subject to the state aid rules, provide for more favourable tax treatment of qualifying expenditures.
The calculation of EBITDA for the purposes of the interest limitation rule is correspondingly adjusted, so that amounts deducted under the allowance are added back, in the same way as depreciation and amortisation, and do not reduce the taxpayer’s capacity to deduct interest. For more on interest limitation rule see Interest limitation rule: a uniform standard - Forvis Mazars
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