Enhanced deduction for corporate expenses on research and development
Sweden is – in relative terms – one of the leading countries in the world within research and development. Most part of research and development in Sweden is financed by the industry, with a total contribution of 83 billion SEK in 2007.
There is a special section in the Swedish income tax act regulating tax deductibility of research and development which was introduced in 1970 and reads: “Expenditure on research and development that have or is likely to have an impact on the business activity shall be deductible. […]”
Originally, the idea was to promote R&D in general by improving the possibility for the industry to be granted tax deductions. However, the application in the courts has moved in the opposite direction. There is considerable restraint in the application to grant deductions unless the research is directly related to the core of the company’s business. To change this development, it was recently decided that an amendment of the Tax Act shall be made to clarify when tax deductions are available for business enterprises. as of January 1, 2012, these will be:
- Research and development that, as a result of its connection with the company’s core activity have or is likely to have significance to the company’s core activity.
- Research and development that have or is likely to have significance on business activities in general (sw: “verksamheten i övrigt”).
In assessing whether granting tax deduction according to section 2 above an overall assessment shall be made which takes into account all aspects of the company’s activities. Emphasis is placed on the company having a reasonable interest in the research, it will not be necessary that it is directly related to the core of the company’s business. With the amendment, it is explicitly stated that all business activity that the company in question actually is engaged in is covered in the article. In addition to the services or goods the company sells/provides, internal support functions such as general administration, financial management and personnel management etc., are also included in the amendment as tax deductible expenses. Companies will be entitled deduction if they can motivate why, in view of their business activity as a whole, they have a reasonable interest in the research that they pay for. However, research and development entirely unrelated to the business’ activity will still not be deductible, nor will sponsoring or gifts.
The new rules will start to apply on 1 January 2012.