The cost incurred of Research & Development activities allow tax payers to apply a Research & Development tax credit in Spain. In this article we explain the concept, the basis for the deduction, the percentage and the limits. We also explain how to cash out the unused tax credit.
Research and development activities will give the right to deduct from the Corporation Tax payable a fraction of the R&D cost and investments made during the tax year. This tax credit is compatible with other tax incentives, like the free amortization of assets devoted to Research & Development and, of course, to the deduction of the cost incurred, regardless they are capitalized or expensed.
Concept of Research & Development tax credit in Spain
To qualify for this allowance Research will be considered to the planned original investigation that seeks to discover new knowledge and a better understanding in the scientific and technological field, and development to the application of the results of the research or any other type of scientific knowledge for the manufacture of new materials or products or for the design of new processes or production systems, as well as for the substantial technological improvement of pre-existing materials, products, processes or systems.
Research and development will also be considered the materialization of the new products or processes in a plan, scheme or design, as well as the creation of a first non-marketable prototype and the initial demonstration projects or pilot projects, as long as these cannot become or used for industrial applications or for commercial exploitation.
Likewise, the design and development of the sample book for the launching of new products will be considered a research and development activity. For these purposes, it will be understood as launching a new product its introduction in the market and as a new product, one whose novelty is essential and not merely formal or accidental.
The creation, combination and configuration of advanced software will also be considered as research and development activity, through new theorems and algorithms or operating systems, languages, interfaces and applications destined to the elaboration of new or substantially improved products, processes or services. Regular or routine activities related to software maintenance or minor updates are not included.
Basis of the deduction.
The base of the deduction will be constituted by the amount of the research and development expenses and, where appropriate, by the investments in elements of tangible and intangible assets excluding buildings and land.
Research and development expenses will be considered those carried out by the taxpayer, including the amortization of the assets affected by the aforementioned activities, as they are directly related to said activities and are effectively applied to the realization of these, consisting specifically of projects. The basis of the deduction will be reduced by the amount of the subsidies received for the promotion of said activities and attributable as income in the tax period.
The research and development expenses that form the basis of the deduction must correspond to activities carried out in Spain or in any member state of the European Union or the European Economic Area.
Likewise, the amounts paid for carrying out said activities in Spain or in any Member State of the European Union or of the European Economic Area shall be considered as research and development expenses, at the expense of the taxpayer, individually or in collaboration with other entities.
Percentages of the allowance
The allowance, that is, the amount to be offset against the tax payable is 25 percent of the expenses incurred in the tax period for this concept. In the event that the expenses incurred in research and development activities in the tax period exceed the average of the previous 2 years, a 42 percent on the excess can be applied.
Moreover, In addition to the above deduction an additional deduction of 17 percent of the amount of personnel expenses of the entity corresponding to qualified researchers assigned exclusively to research and development activities can be applied.
Finally, the Law grants an allowance of 8 percent of investments in tangible and intangible assets, excluding buildings and land, provided that they are exclusively devoted to research and development activities. These assets must remain in the possession of the tax payer until they fulfill their specific purpose in the research and development activities, except that their useful life is shorter.
However, note that the aggregate amount of the Research and Development allowance that can be offset against each year tax liability cannot exceed 25 % of the tax payable. However, if the R&D allowance is higher than the 10 % of the tax payable, then the limit is increased to 50 % . Unused tax credits for R&D can be carried forward for 18 years to offset future tax liabilities within the same limits. Note that in certain cases, the tax payer can monetarize the tax credit claiming the refund to the Tax Office.
Read more: the Research and Development cash tax credit