According to the Corporation Tax Act, cost incurred in Research and Development (“R&D”) projects enjoy a tax credit of 25 %, although the tax credit can be as high as 42 % in some cases. However, the application of this tax credit is limited to the 60 % of the tax liability prior to the application of the tax credit. The excess can be applied in the next 18 years.
To incentivize the activities of R&D, the Government has passed a proposal of bill which contains very important measures. The aim of said measures is to help companies finance R&D activities by means of an anticipation of the application of the tax credits for R&D.
Thus, the tax credit for research and development activities, excluding technological innovation, generated in tax years beginning on or after January 1, 2013, may, optionally, be excluded from the limit on the total tax liability – generally 60% of this- and applied in the same tax year when generated with a haircut or discount of 20 percent of their value.
This is an update for 2018: read this post to know more about the allowance for Research and Development in Spain
In the event that the “discounted” tax credit is higher than the tax liability , the tax payer would be entitled to apply for the refund of the excess, through this tax return corresponding to the following year (i.e, for the refund there is a one year tax holiday).
However, the amount of the tax credit so treated shall not exceed EUR 3 million annually. This limit will apply to the entire group of companies.
To apply for this treatment, the tax payer must meet the following requirements:
a) The cash refund can only be awarded once at least one year from the end of the tax period in which the tax credit was generated without being used to reduce the tax liability.
b) The average number or alternatively, the average staff assigned to research and development activities is not reduced since the end of the tax period in which the tax credit was generated until the end of the time period referred to in point c) below .
c) To allocate an amount equal to the tax credit applied or refunded, to research and development expenses or investments in tangible fixed assets or intangible assets exclusively linked to research and development activities, excluding real estate, in the 24 months following the end of the tax period in which the tax credit is applied or refunded.
d) the tax payer has received an affidavit conforming that the activity qualifies for research and development
Example: A company has a tax liability of 300,000 Euros and generated in the tax period 2013 a tax credit for R & D of 500,000 Euros.
The general limit to apply tax credits would be € 180,000 (60% of 300,000). However, the company can absorb the full tax liability as detailed below:
Tax credit for R & D within the limit: 180.000 €
Additional Tax credit : 320,000 * 80%: € 256,000
Total tax credit generated in 2013: € 436,000
Therefore, it would absorb 100 % of the tax liability for 2013 and in the tax return for the tax year 2014, it may request the refund of the amount not used in 2013, amounting to € 136,000, provided, of course, such tax credit is not applied in the tax period 2014.