European R&D tax incentive study proposes harmonizing EU approach

A July 1 study from The European Law Institute reviews diverging trends in Europe in the definition of “research and development” (R&D) and “R&D expenditures” for tax purposes and suggests principles for a common approach among EU member states.

The study, titled “For a European Approach to R&D Tax Incentives,” suggests that a more uniform approach could strengthen EU R&D activities. It reviews, but does not take a position on, the benefits of tax incentives as opposed to direct funding, or on the relative merits of different types of tax incentives. Instead, it focuses on discrepancies in the interpretation of R&D and R&D expenditures.

For instance, the study notes, the requirement for “novelty” in the definition of R&D is broadly accepted by EU member states. However, there are different approaches to how the term is understood. As one of its proposed principles, the study states that novelty should be considered from both the perspective of the public and the private company. In addition, it suggests that the EU should consider creating an expert body to establish a more uniform interpretation of novelty.

The authors of the study further recommend that there be no “commercial objective” requirement for R&D, so that incentives would be available for fundamental research, irrespective of its purpose. Moreover, they recommend a broader conception of the types of R&D that would be eligible for tax incentives, and they would include social sciences, digital design, humanities, and (if research is involved) the arts.

Regarding R&D expenditures, the study makes recommendations regarding the harmonized treatment of various types of expenses, including depreciation, costs for different types of staff, standardization expenses, patent defense and insurance costs, and other operating expenses. It further suggests guidelines with respect to outsourcing R&D.

The European Law Institute is an independent non-profit organization that conducts research and makes recommendations related to legal issues within Europe.