What to watch out for when combining public support (subsidies or investment incentives) and R&D tax-deductible items?
Experience shows that a large number of companies only use one form of public support, whether these are subsidies or investment incentives, or an R&D tax-deductible item. In fact, these companies are often entitled to using several forms of support at the same time, combining them in an efficient manner and thus maximizing the benefits. Combining various forms of support, however, involves certain rules that need to be observed.
The Income Tax Act stipulates that R&D tax-deductible expenses must not include expenses for which, even in part, support from public resources was used. The most common public resource is a subsidy (a grant), or a tax relief relating to an investment incentive.
Apart from this, the Income Tax Act obliges taxpayers benefiting from investment incentives to meet certain specific conditions: among other things, to maximize the tax-deductible items including the R&D tax deductibles.
Last but not least, subsidy programmes have their own rules for granting subsidies, which often put a limit on combining various forms of support, such as a subsidy and an R&D tax deductible or an investment incentive.
Despite the complexity of the issue, the relevant legislation only deals with it on a general level. The court rulings on this matter do not shed much light on the topic, either. The tax authorities, however, monitor this field very carefully and it is often subject to inspections. Taxpayers therefore need to keep track of the individual rules and the links between them, not omitting any other relevant resources dealing with this topic, such as court rulings, contributions to the Coordination Committees of the Chamber of Tax Advisors, instructions issued by the Ministry of Finance, etc.
The view of the Regional Court in Prague
The most recent ruling of the Regional Court in Prague dealt with combining a subsidy (designated, in this case, for creating new jobs) with an R&D tax deductible. According to the tax administrator, the subsidy and the presented R&D projects concerned the development of the same system as the description of the production corresponded, in part, with the R&D projects’ aims, and the period of drawing the subsidy matched the periods for which the tax deductions were utilised.
In its ruling, the court did not agree that the subsidies supported all the costs proportionally and therefore that all the labour costs were related to the R&D project which was supported through the subsidy. Although the taxpayer provided records of the labour costs, the tax administrator did not assess them as such (led by the erroneous conclusion that all the labour costs were supported proportionally through the subsidy). According to the court, the principal conclusions of the ruling were not based on the evidence that had been provided (and which was to be completed by the court’s order) and the court retuned the whole matter to the tax administrator for further proceedings. It is to be expected that this dispute and other similar ones will in fact set up the framework for the tax administrator’s control activities and particularise certain legislative regulations that are not specific enough.
What are our recommendations in this field?
- Always look at all the company’s planned investments in the mid to long term;
- Choose between the forms of support that are currently available and those that are being planned with regard to the expected benefit, the administrative burden and the risks involved;
- Use suitable combinations of investment incentives, subsidies and R&D deductibles whenever possible and effective;
- Analyse the possible accumulation of various forms of support and primarily focus on whether one expense is not supported, even in part, through a combination of one or more forms of support, and whether there is any correspondence, for example in the project topics, or any other rules that would make the combination of several forms of support impossible; and
- Keep separate records for each form of support. The separate records must show that one expense was not supported twice. Do not leave the preparation and revision of the related documentation until an inspection of the tax authorities or another inspection body takes place. Not respecting the rules in this case may cause not only an additional assessment of tax on the R&D deduction/the tax relief resulting from an investment incentive, but it may also lead to an obligation to return the granted subsidy.