This is why research and development is one of the activities supported by the state both internationally and in the Czech Republic. One of the effective forms of this support, used in nearly all EU countries, is the R&D tax deduction, which allows for an additional reduction in the tax base for companies engaged in research or development activities. To qualify for the tax base deduction, several conditions must be met by the taxpayer. In recent years, however, in the Czech Republic, there has been increased activity by financial authorities towards taxpayers claiming the deduction. Tax audits in the area of deductions are often characterized by administrative complexity and a formalistic approach, leading to numerous disputes between taxpayers and the tax administration.

Recently, the tax administration published an article on its website considering the possibility of applying the R&D tax deduction for entities involved in the so-called chain of the research and development process, emphasizing the need to meet the legal conditions for the deduction at the level of the individual taxpayer. In this article, the tax administration not only presents its perspective on the issue of tax deductions but also goes further by attempting to discuss the application of the deduction in relation to the type, nature, or direct content of the research and development activity.

Using the specific example of so-called clinical trials, which are presented as routine activities carried out according to predetermined methodologies, the tax administration questions the possibility of applying the tax deduction. This is despite the fact that clinical evaluations represent highly sophisticated activities where comprehensive expert data is collected, examined, and evaluated by experts, and this activity is also explicitly listed as eligible in guidance MF-17. Although it is not possible to agree, without further details, with the example of clinical evaluations as ineligible routine activities, it also cannot be definitively concluded that activities of a so-called routine nature cannot be an integral part of the development process and cannot fall under the definition of research and development without providing rational reasons to support such a conclusion. Such an approach is overly simplistic.

The definition of so-called “routine” activities, as referenced by the tax administration, is not part of the definition of research and development activities either in the local legislation or in international recommendations concerning the R&D tax deduction. Relevant documents only mention certain activities that cannot be considered research and development activities. In this case, the tax administration has inappropriately borrowed terminology from other tax areas, specifically transfer pricing, where the term “routine” is commonly used in relation to functional profiles or remuneration for routine activities. However, it must be contested that the terminology used in transfer pricing cannot be equated with terminology for the purposes of R&D tax deduction rules.

Even (seemingly) routine activities can be a legitimate part of a research or development project if they meet all the necessary conditions for the deduction, i.e., if the role of the specific routine activity within the research project is clear, if it is explained and documented how the activity contributes to addressing research or technical uncertainties, or why such an activity is necessary to achieve the research and development goals. This interpretation is entirely consistent with the international Frascati Manual, on which the definition of research and development in Czech legislation is based.

Therefore, it is possible for a taxpayer to simultaneously perform so-called routine activities from the perspective of transfer pricing (such as contract research and development or contract manufacturing) and for such activities to also meet the conditions for the R&D tax deduction. The very arrangement, where research and development activities are provided between two entities on a contractual basis (so-called contract research and/or contract development), already implies that these are research and development activities (and not other activities), and it cannot be a priori assumed that such activities, just because they are of a routine nature or provided on a contractual basis, cannot automatically qualify for the R&D tax deduction. Research and development activities should be understood in all their complexity and diversity, and the specific situation should be analyzed independently without making definitive and unilateral conclusions without further details and deeper analyses.

We will continue to monitor the viewpoints and interpretations of the tax administration in this area and will keep you informed about any developments.