R&D Tax Credit Rates for Software Development in LATAM & Central Europe
Research and Development (R&D) centers stand as pivotal drivers of the future within the technology sector. These centers are hubs of innovation, propelling companies to substantial advancements in their pursuits, and fostering the development of novel technologies, projects, and products. Furthermore, they serve as employment catalysts, contributing to a reduction in the unemployment rate within the population. Such an effect could not have failed to receive a corresponding treatment from the governments around the world.
In 2022, 33 of the 38 OECD countries granted favorable tax treatment to industry R&D spending at the central and/or subnational government level, up from 19 OECD countries in 2000. It seems like opening an R&D center is lucrative on both ends: while the center helps your business innovate and grow, the government supports you with improved taxing conditions. In this post, we will provide an overview of R&D tax incentives specific to the LATAM and Central Europe regions. We will focus on the specific incentives offered by the governments of Chile, Argentina, Poland, Romania, and other countries. Let’s kick off!
What is a research and development tax credit?
A research and development (R&D) tax credit is a government measure to encourage companies to engage in research and development initiatives. The purpose of these tax credits is to stimulate innovation, technological advancement, and economic growth by providing financial relief to companies engaged in qualifying R&D endeavors.
Types of projects that can qualify for research and development tax credit
Eligible endeavors for the Research and Development tax credit encompass a range of activities, such as the creation or enhancement of:
- Products (both tangible and intangible);
- Processes (including manufacturing and technical processes);
- Software (designed for external or internal use);
- Inventions (activities subject to patentability).
The R&D tax credit covers a diverse range of eligible activities, such as developing and enhancing products, improving manufacturing processes, creating software for sale or licensing, and experimenting with formulations. These activities aim to drive innovation, enhance efficiency, and contribute to the overall advancement of technology and processes. The credit recognizes the value of research and development across various industries, encouraging businesses to invest in inventive projects and technological improvements.
Global R&D incentives in LATAM and Central Europe
Measures like the knowledge-based economy, biotechnology, R&D, and training programs are the main integration points for Argentina’s tax policy pertaining to R&D incentives. They provide tax credits, exemptions, accelerated depreciation for income tax, and reimbursements for value-added taxes. Despite their existence for several years, utilization by taxpayers remains underexplored, partly due to caps imposed by the national government based on annual budgets.
Law No. 23,877 introduces a competition-based Research and Development tax credit system, capped annually, providing entities with a certificate worth 10% of R&D payments, up to US $83,000. The program covers projects like business plan development, human resources training, and R&D initiatives. In Buenos Aires, the Technology District encourages innovation by granting exemptions on local taxes, replicated in other provinces like Buenos Aires, Cordoba, and Santa Fe to foster technology and software activities.
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The Brazilian Government has been a staunch advocate of Research and Development (R&D) activities since 2006, offering robust tax incentives to drive technological and product innovation. These incentives include expedited depreciation on qualified R&D assets, financial support for new R&D investments, and super deductions ranging from 160% to 200% for acceptable R&D expenses. The R&D deduction applies to costs paid by Brazilian companies and emphasizes improved R&D operations along with technological and product innovation. Taxpayers are required to produce tax clearance certificates, and even though R&D deductions are non-refundable, they do promote innovation in the nation.
Manufacturers of digital products are eligible to receive a tax credit of up to 12.97% of incentive product billing. Although Brazil lacks dedicated technology or innovation zones offering incentives for research and development, the government’s all-encompassing strategy attempts to promote and strengthen R&D projects in many industries.
In Chile, the government actively supports Research and Development investments through a multifaceted approach. For pre-certified R&D cash expenditures, corporate taxpayers receive a 35% tax credit, with the remaining amount being deductible as an expense. To further promote technological innovation, the Ministry of Economy, through the Chilean Economic Development Agency (CORFO), implements programs attracting entrepreneurs, fostering R&D investments, and connecting Chile to global technology markets. The tax credit, which offers flexibility and annual caps, is applicable to R&D-certified contracts with registered research centers as well as internal R&D projects.
Various incentive programs, such as the Technological Contracts for Innovation and the Technological Prospecting Program, further encourage R&D initiatives by providing co-financing and support for technological development. The overarching plan of the government is to establish Chile as a center of innovation and entrepreneurship for the LATAM region.
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Colombia has witnessed a surge in interest and project approvals for Research and Development (R&D) investments, driven by tax benefits. The 2016 tax reform plan replaced the previous 175% tax deduction with a 25% tax discount, fostering increased participation. R&D activities in Colombia align with OECD definitions, emphasizing systematic efforts to augment knowledge. The government, through the Ministry of Science, Technology, and Innovation (MCTI), offers benefits such as a 25% tax discount and a 100% tax deduction for eligible projects.
Notably, the country aims to elevate science, technology, and innovation investments to 1.5% of GDP, reflecting a strategic shift. Various initiatives include discounts, VAT exemptions for imports, and tax deductions for income derived from research and development projects. Eligible projects include science and technology investment, software engineering, patents, and strategic programs. While there are no specific technology or innovation zones, Free Zones enjoy special benefits, including a 20% rental rate and exemptions.
The Mexican government fosters technological innovation via the R&D Tax Credits Program, overseen by the National Council of Technology & Science (CONACYT). Annually, the council releases public calls for financial assistance or fiscal incentives in the form of tax credits, available only during specific periods. As outlined in the 2020 Mexican Income Law, a 30% tax credit is provided for R&D expenses and investments, computed based on the three-year average. Eligible companies incorporated in Mexico can claim up to MXN 50 million, with expenses covering external investigator fees, fieldwork, experimental tests, training, equipment purchases, and more.
Fulfilling administrative prerequisites entails submitting technical, legal, and fiscal documentation. Oversight of the incentive is entrusted to a dedicated committee, which includes representatives from CONACYT, the Ministry of Economy, the Mexican tax authority, the Tax Ministry, and the Mexican presidency. It’s noteworthy that there are no designated technology or innovation zones offering R&D measures in Mexico. Overall, all the measures aim at enhancing productivity and competitiveness as well as attracting investments while contributing to the domestic market.
In recent years, Poland has undergone significant changes in its R&D grants and incentives landscape, seeking to attract new investors and spur further innovation among existing companies. Notable transformations include enhanced R&D tax relief, allowing for the deduction of up to 100% of eligible expenses associated with research and development activities. This mechanism encompasses a wide array of costs, including wages, materials, depreciation, and administrative expenses related to patents. The introduction of the Innovation Box regime in 2019 further sweetens the deal, offering a preferential 5% tax rate on profits derived from qualified intellectual property rights.
Additionally, Poland’s R&D incentives extend to cash grants from EU funds, reimbursing a substantial portion of R&D costs. Through initiatives such as the Multi-annual Support Program (MASP), providing monetary incentives for extensive and strategically vital endeavors, and the Polska Strefa Inwestycji (PIZ), granting Corporate Income Tax (CIT) exemptions spanning 15 years across Poland, the country actively encourages fresh capital injections. The all-encompassing strategy, which combines financial grants, tax breaks, and assistance initiatives, presents Poland as a more appealing and competitive location for business owners and organizations involved in R&D.
Romania has implemented robust R&D incentives, including a corporate income tax exemption for exclusive R&D engagement lasting ten years. Despite lacking comprehensive guidelines, this incentive aligns with a 50% super deduction for qualifying R&D expenses, complemented by accelerated tax depreciation for the first year of asset use. Since August 2016, salary income tax exemption targets have been applied to R&D and technological development activities. Romania’s four distinct R&D incentive programs enhance its appeal. However, clarity in legislative provisions and application norms is still to be found. Eligibility requirements ensure beneficiaries focus on specific R&D activities, fostering an environment conducive to innovation and technological advancement.
The Czech Republic’s R&D landscape has witnessed significant enhancements through legislative amendments effective in 2019. The Income Tax Act, amended in April 2019, aims to simplify R&D deduction rules and reduce administrative burdens. Notably, a pre-project notification requirement has been introduced. The Investment Incentives Act amendment, effective in September 2019, brings changes in approval processes, especially for small and medium-sized enterprises. The country offers a distinctive R&D deduction, allowing double deductions for eligible costs, with a potential increase to 110% for incremental expenses.
In addition, R&D centers can benefit from subsidies for employment creation, a ten-year corporate income tax vacation, and real estate tax deductions. National R&D programs and European Structural and Investment Funds (ESIF) provide additional funding options in the form of cash awards for different sectors. Eligibility requirements for R&D deduction encompass a notification before project commencement, while R&D center incentives include conditions related to investment and job creation.
The country has significantly revamped its investment incentive framework to foster an investment-friendly atmosphere. Amendments include a clarified definition, stricter deadlines, and a robust approval process. The Income Tax Act implemented a “patent box,” providing exclusions for the commercial use of chosen intangible assets. The super deduction for Research and Development (R&D) costs surged to 150% in 2019 and further increased to 200% from 2020, enabling a significant reimbursement. Despite previous undercapitalization, the Slovak Republic
has attracted foreign direct investment, stimulating innovation.
The 2009 Research and Development Incentives Act provides tax credits or cash grants to promote R&D. With an additional incremental deduction, the “super tax deduction” enables a 200% deduction for eligible R&D costs, returning 42 euro cents for every EUR1 invested. Along with guidance for future investments and particular qualifying requirements, the Slovak Republic also provides income tax relief and R&D subsidies. Through the corporate income tax return, the patent box regime offers partial tax advantages for income from intangible assets generated in the country.
Hungary’s government actively supports R&D investments through a comprehensive incentive regime. With the corporate income tax (CIT) rate reduced to 9% in 2017, the country provides a lucrative and tax-efficient environment for R&D initiatives. The incentive system includes a VIP Cash Grant, offering nonrefundable cash grants for investments; a Corporate Tax Credit, reducing CIT liability; and a Double Deduction of R&D Costs, allowing deductions twice for CIT purposes.
Additionally, Hungary offers tax credits for employing specific professionals. The Corporate Tax Exemption, allowing a 50% deduction on royalty revenue, and the Reduced Local Company Tax Base and Innovation Contribution Base permit the deduction of research and development expenses from the local business tax base. Eligibility requirements vary, with state aid qualifications for certain incentives and minimum investment values applying in specific cases.
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R&D is fundamental for global economic growth, so LATAM and Central Europe governments take various measures to encourage R&D taxes credits within their borders. These procedures are critical for fostering innovation, with specific programs ranging from lower tax rates for innovative revenue to support for intellectual property protection and collaborative relationships between firms and academic institutions.
Whether you’re new to the intricacies of R&D or an experienced professional familiar with regional tax credits, nCube guides you seamlessly into the dynamic realm of technology. We are a seasoned provider of R&D development centers in CEE and LATAM, so you can partner with our knowledgeable teams, dedicated to turning your aspirations into reality. With over 15 years of expertise in software development, nCube can be the reliable provider you’ve been looking for. Reach out to us, and let’s innovate together!