EC Seeks To Promote Effective Use Of Research And Development Tax Breaks

by Ulrika Lomas, for LawAndTax-News.com, Brussels

23 November 2006

The European Commission has this week adopted a Communication on the more effective use of tax incentives in favour of R&D, in order to boost R&D investments and enhance job creation and economic growth in Europe.

The Communication clarifies the legal conditions arising from EU case law and sets out some basic principles and good practices for the design of tax incentives for R&D. It encourages Member States to improve the use and coordination of tax incentives on specific R&D issues.

"R&D is vital for our economy and competitiveness in a more and more globalised world. I am convinced that tax incentives promoting R&D would make Europe more competitive and help create more jobs and growth when coordinated among the Member States" explained Commissioner László Kovács, continuing:

"I invite Member States together with industry and researchers to embrace a more consistent and favourable tax environment for innovation and cooperation across borders.”

"We have identified tax incentives as way of encouraging more private investment in R&D,” added European Science and Research Commissioner Janez Potocnik.

"We want to break down the barriers that prevent companies and researchers working together across internal borders and so create a European Research Area. A common approach to tax incentives would be a good step in the right direction.“

Currently, tax incentives have grown to become one of the major instruments used by many Member States to increase business R&D. In parallel, industry is embracing the open innovation model and cooperation across borders is becoming commonplace, in particular in the high tech sector.

However, the diversity of schemes introduced has resulted in an increasingly complex landscape for R&D tax treatment in Europe hindering trans-European collaboration.

The Commission has therefore clarified that tax incentives which restrict their benefits to activities performed domestically are incompatible with the EC Treaty.

It stated that:

"It is also important to realise that R&D tax incentives which target a specific group or sector may constitute State aid and therefore must be made compatible with the Community State Aid rules. It is therefore particularly important for Member States to note that the new State aid framework for research and innovation, which has been adopted in parallel, may have a direct effect on their tax incentives for R&D."

The Commission also offered guidance on the main design options, features and relevant factors which Member States may wish to follow when designing or updating their R&D tax incentive schemes.

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