Tax-optimisation institutes to support research and development, called. in-house R&D

A number of countries in the European Union are being forced by various circumstances to take various measures to ensure that public finances are consolidated and that money flows into the public purse. The Slovak experience after the introduction of the reduced flat tax in 2004 also shows that it is paradoxically possible to increase tax revenues of the state by reducing tax rates. Following the example of some other EU countries, Slovakia has also taken the decision to give tax advantages to entrepreneurs in the field of innovation not only to attract foreign ones, but mainly to support and retain Slovak ones on the market. That is why in recent years two attractive institutes have been introduced into the Income Tax Act, the so-called. Patent Box and Super Deduction, which bring tax benefits for science, research and innovation (including IT firms).

Super deduction

The research and development super deduction allows taxpayers undertaking research and innovation projects to deduct for a second time from their tax base the expenses they have incurred on such projects. This includes not only development companies, but also standard IT companies that are dedicated to research and development.

If the proposed amendment to the Income Tax Act is adopted, it will bring a tax benefit that consists in an additional deduction of up to 200% of research and development costs from the tax base for the tax period of 2019 (for the tax period of 2018, the value of the benefit was at the level of up to 150%). The deduction can be used for research and development projects that incur costs that are part of the economic result and are eligible for a deduction from the tax base.

Despite the fact that the tax relief in the form of the Super Deduction was supposed to make the business environment in Slovakia more attractive, in the first years since its introduction it caused uncertainty among entrepreneurs. Although the use of the Super Deduction among entrepreneurs is slowly increasing, the percentage of application or. the use of this tax institute is still low. The main reasons for the low use are mainly the high administrative burden, lack of information on the conditions for qualifying for the application of the institute, ignorance of legislation and procedures, as well as fear of possible sanctions from the financial administration.

However, the government wants to continue to motivate entrepreneurs to use the Super Deduction for research and development, and has therefore announced that it will continue to use the Super Deduction for research and development. promised businesses the possibility that the level of benefit for claiming the Super Deduction could increase even further in the next period (probably from 1 January 2020), with the benefit being up to 250%.

Patent Box

Another important institute is the so-called. Patent Box, which is a special tax regime consisting in tax exemption of income derived from royalties for the use of patents, utility models and software, which are the result of the taxpayer’s own development activities in Slovakia, up to 50% of such income. The taxpayer may claim the exemption during the taxable years in which it amortises the capitalised development costs of those intangible assets. This regime has been introduced in Slovakia since 1. January 2018.

If the entrepreneur takes advantage of the Patent Box tax benefit and at the same time takes advantage of the Super Deduction tax benefit, he or she can significantly reduce his or her tax liability. As a result, the Slovak Republic can become an attractive business environment in the field of research and development without the entrepreneur being forced to shift his income abroad, i.e. to countries with lower tax burden.

The issue and application of the Super Deduction and Patent Box is still a rather complicated and unexplored area for many entrepreneurs. Despite the fact that the government expected a high percentage of entrepreneurs to take advantage of these tax incentives, in reality these expectations were not even half fulfilled. Entrepreneurs have rather taken a very cautious attitude in this area and are waiting for more information and procedures to be published on how to apply these institutes correctly and efficiently to their business without being sanctioned by the state in the future.

Is expert advice required in relation to the application of the Super Deduction and Patent Box?

Due to the complexity and relative ambiguity of the correct application of the Super Deduction and Patent Box, our clients have repeatedly contacted us regarding the qualification for the application of the tax-optimization institutes in question. In this context, we assessed for our clients, among other things, whether their entrepreneurial activities are indeed research and development (R&D), which results in new, hitherto unknown to the public, knowledge that has real significance for the public. Often times, entrepreneurs are only a cosmeticadjustment or tweak to their business documentation or marketing communications away from a dramatic reduction in their tax and levy obligations.

In connection with the application of the aforementioned tax-optimisation institutes, the taxpayer concerned must, among other things, correctly account for the costs relevant for the application of the tax exemption, while the accounting records must be clearly recorded and demonstrable in the event of an inspection by the financial administration.

Our office Highgate Group provides comprehensive legal, accounting and tax advisory services under one roof, focusing, among other things, on the issues of the aforementioned tax-optimization institutes Super Deduction and Patent Box.

If you are interested in our services, please do not hesitate to contact us.