The Finnish Tax Administration’s Guidance on the New R&D Tax Incentive Out Now

Finland has introduced a new tax incentive in terms of R&D activities to be applied from the tax year 2023 onwards. The incentive is an additional tax deduction by nature, determined based on the taxpayer’s annual R&D expenses.

The incentive contributes to Finland’s goal of increasing the share of R&D activities to 4% of its GDP by 2030, and roots from the parliament’s R&D working group’s final report that seeks measures to reach this goal. The Finnish Tax Administration published its guidance (in Finnish) regarding the incentive yesterday.

The incentive is a general tax incentive, available to all tax taxpayers engaged in R&D related business activities regardless of their form of business. Technically the incentive is an additional deduction, i.e., a taxpayer may deduct a greater amount of R&D expenses in its taxation compared to actual expenses incurred and booked in its accounting.

Given its general nature, the incentive is not considered to create state aid from the EU law perspective. Similar incentives concerning R&D or other specified business activities are relatively common on a global scale, and certain temporary R&D incentives have also been introduced to the Finnish tax regime within the past years.

Currently, there is also a parallel R&D incentive in force in Finland, providing tax benefits to taxpayers engaged in R&D collaboration with specific non-commercial R&D organisations during 2021–2027. However, in practice this incentive has not been significantly utilised, which is why the legislator considered a general R&D incentive necessary.

The incentive is a combination deduction consisting of two components, a general additional deduction, which is based on the amount of R&D expenses incurred during the tax year, and an extra additional deduction, which is based on the increase of R&D expenses compared to the previous tax year. The former is applied as early as starting from the tax year 2023, and the latter from the tax year 2024 onwards.

The amount of general additional deduction is 50% of the applicable R&D expenses. The amount is capped to EUR 500,000 and must reach a minimum of EUR 5,000.

The amount of extra additional deduction is 45% of the increase in applicable R&D expenses compared to the previous tax year. The amount is also capped to EUR 500,000 with no minimum threshold in terms of amount. Although the calculation mechanism compares the expense bases of general additional deductions between two tax years, the amount of extra additional deduction is not dependent on whether any general additional deductions were in fact made for the tax years in question.

The calculation of the incentive deduction is performed on the basis of the tax year and legal entity in question, similar to e.g. Finnish interest deduction limitation calculation.

A key consideration regarding the incentive is determining what sort of expenses qualify for the expense base for which the amount of the incentive is calculated. The Finnish Tax Administration’s guidance goes into quite a bit of detail concerning the definition of applicable research and development activities.

To summarise, the R&D activities in the context of the incentive are defined as creative and systematic activities to increase knowledge or use information for new applications concerning something substantially new. The legislator acknowledges that R&D activities include a wide range of business activities, and an exhaustive legal definition is not possible to produce. Hence, a broad definition of the applicable activities is indicated.

The applicable expenses incurred from the R&D activities may consist of a taxpayer’s own personnel’s salary expenses, excluding social security contributions, or a taxpayer’s subcontracting expenses for R&D services purchased from service providers . In both instances sufficient documentation indicating the expenses’ direct connection to the R&D activities should be ensured.

Furthermore, it should be noted that the potential capitalisation of R&D expenses does not impact the expense base determination, i.e. the expense base is linked to the actual expense accrual of the tax year and it is not directly connected to the income tax treatment of the incurred R&D expenses.

There are two key limitations to the expense base determination. Firstly, if a taxpayer has received direct public subsidies for certain R&D expenses, these expenses cannot be included in the expense base. Secondly, if a taxpayer has claimed a deduction based on the existing parallel R&D incentive scheme regarding collaboration with non-commercial research organisations, these expenses cannot be included in both expense bases.

Furthermore, various business restructurings may impact the taxpayer’s ability to claim the incentive e.g. in terms of mergers or tax neutral business transfers. In such instances the criteria for the deduction should be analysed with particular care.

A key aspect for the utilisation of the R&D incentive relates to its applicability to group taxation. Despite some opposing views during its preparation, the incentive is calculated and utilised on a taxpayer level instead of a group level.

Therefore, several legal entities belonging to a group of companies may utilise the incentive, which effectively multiplies the maximum deduction amounts allowed. This aspect could create tax planning opportunities for groups with de-centralised R&D operations, e.g., in situations where a group’s business is divided into several business areas with separate R&D functions.

On the other hand, the utilisation of the incentive is limited to a taxpayer’s own R&D activities. Therefore, contract R&D entities, i.e., operators that sell R&D work as a service to related or third parties are not able to utilise the incentive.

If the party purchasing services is a Finnish tax resident, the purchaser can include the subcontracting costs to its own incentive expense base as elaborated above. However, in cases where multinational entities have placed their R&D function in Finland, it appears that in most cases the incentive would not be available to such taxpayers.

Another interesting detail is that, in addition to Finnish tax residents, the incentive is available to non-residents if they have placed their R&D function in a Finnish permanent establishment, typically a branch. Therefore, in terms of foreign multinationals, it appears that their ability to claim the incentive is dependent on the legal form in which they have organised their Finnish R&D functions, as the incentive is, in most cases, granted to branches and denied for subsidiaries.

From the tax accounting perspective, the incentive deduction is also taken into account when confirming a tax loss for a taxpayer, i.e., the ability to claim the deduction is not dependent on the profitability of the tax year in question. Therefore, there could be situations where the taxpayer has a positive result in its accounting and at the same time be loss-making from a tax perspective.

The incentive deductions cannot, however, be made against received group contributions. This results in a peculiar situation if an entity’s incentive deduction exceeds its taxable profit prior to incentive deduction and it receives group contribution. Despite the tax loss caused by the incentive deduction, the received group contribution is considered a taxable profit for the entity, as the group contribution cannot be offset against the incentive deduction. Therefore, the entity would realise both the taxable income and the tax loss for the tax year in question.

The incentive deduction is discretionary, i.e., a taxpayer must claim the deduction on its tax return. Technically, the claim is made by using a separate form attached to the tax return. The claim must be made prior to the end date specified in the taxpayer’s tax assessment, that is between May and October following the tax year, and it cannot be made afterwards with a claim of adjustment. However, the taxpayer can apply for an advance tax ruling concerning the R&D incentive according to a standard procedure.

If you have any questions about the incentive or what implications it may have for your business, please contact the Borenius Tax team or your regular Borenius contact.