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R&D tax incentives: European OECD countries

Many countries encourage business investment in research and development (R&D), with the aim of fostering innovation. A common approach is to provide direct government funding for R&D activities. However, a significant number of jurisdictions also offer R&D tax incentives.

These usually take two forms, namely patent boxes—taxation Income derivatives of intellectual property at a rate lower than the statutory corporate tax rate and R&D tax incentives expenses. Today’s map will focus on the latter, showing the extent to which European OECD and EU countries provide expenditure-based R&D tax breaks.

The Implicit Tax Subsidy Rate, developed by the OECD, is a way to measure the extent of expenditure-based R&D tax relief in countries. This implicit tax subsidy rate measures the extent of the preferential treatment of R&D in a given tax system. The more generous the tax provisions for R&D, the higher the implicit subsidy rates for R&D. An implicit subsidy rate of zero means that R&D does not benefit from preferential tax treatment.

Implicit tax subsidy rates for large, profitable firms vary widely across countries that provide notable relief, ranging from 0.06 in Turkey to 0.55 in Slovakia. Portugal and France offer the second and third most generous relief after Slovakia, with implicit tax subsidy rates of 0.39 and 0.37, respectively.

Of the countries granting notable relief, Turkey (0.06), Croatia (0.07) and Denmark (0.07) are the least generous. The implicit tax subsidy rates of Bulgaria, Cyprus, Estonia, Finland, Latvia, Luxembourg, Malta and Switzerland show no significant tax relief for expenditure-based R&D.

The OECD also provides implicit tax subsidy rates for loss-making companies and for small and medium-sized enterprises (SMEs). Most countries covered by the current map provide the same expenditure-based R&D tax relief to large corporations and SMEs. Only France (in the case of loss-making companies), Iceland, the Netherlands and the United Kingdom are relatively more generous towards SMEs than towards large companies. Croatia offers slightly higher relief to large companies than to SMEs.

Some countries’ R&D tax incentives include refunds and deferral provisions, changing the implicit tax subsidy rates for loss-making versus profitable companies. This translated into lower average implicit tax subsidy rates for loss-making firms compared to profitable firms, for both SMEs and large firms.

Implicit tax subsidy rates on R&D expenditure by large profitable firms in European OECD and EU countries, 2020
SME Large companies
The country Profitable Deficit Profitable Deficit
Austria (AT) 0.17 0.17 0.17 0.17
Belgium (BE) 0.16 0.15 0.15 0.14
Bulgaria (BG) 0 0 0 0
Croatia (HR) 0.04 0.03 0.07 0.05
Cyprus (CY) -0.01 0 -0.01 0
Czech Republic (CZ) 0.21 0.15 0.21 0.15
Denmark (DK) 0.07 0.06 0.07 0.06
Estonia (EE) 0 0 0 0
Finland (FI) 0 0 0 0
France (FR) 0.37 0.37 0.37 0.3
Germany (DE) 0.19 0.18 0.19 0.18
Greece (GR) 0.29 0.22 0.29 0.22
Hungary (HU) 0.18 0.17 0.19 0.17
Iceland (IS) 0.42 0.42 0.3 0.3
Ireland (IE) 0.27 0.22 0.27 0.22
Italy (IT) 0.2 0.15 0.2 0.15
Latvia (LV) 0 0 0 0
Lithuania (LT) 0.31 0.25 0.31 0.25
Luxembourg (LU) -0.02 -0.02 -0.02 -0.02
Malta (MT) -0.01 -0.01 -0.01 -0.01
Netherlands (NL) 0.39 0.38 0.15 0.14
Norway (NO) 0.22 0.22 0.22 0.22
Poland (PL) 0.22 0.18 0.22 0.18
Portugal (PT) 0.39 0.31 0.39 0.31
Romania (RO) 0.08 0.07 0.08 0.07
Slovak Republic (SK) 0.55 0.43 0.55 0.43
Slovenia (SI) 0.21 0.17 0.21 0.17
Spain (ES) 0.33 0.26 0.33 0.26
Sweden (SE) 0.11 0.1 0.11 0.1
Switzerland (CH) -0.01 -0.01 -0.01 -0.01
Turkey (TR) 0.06 0.05 0.06 0.05
United Kingdom (GB) 0.27 0.27 0.12 0.12
Austria (AT) 0.17 0.17 0.17 0.17

Source: OECD, “R&D Tax Incentive Indicators: Implied Tax Subvention Rates on R&D Expenses”, March 10, 2022, https://stats.oecd.org/Index.aspx?DataSetCode=RDSUB.