Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee - Towards a more effective use of tax incentives in favour of R and D {SEC(2006)1515}
Date: 2006-11-22
Institutions: European Commission
Subjects: State aid, aid to undertakings, fiscal policy, investment policy, research and development, research policy, tax incentive

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 22.11.2006 
COM(2006) 728 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE 

Towards a more effective use of tax incentives in favour of R&D 

{SEC(2006)1515} 

EN 

   EN 

 
 
 
  
 
 
TABLE OF CONTENTS 

Introduction ................................................................................................................................ 3 

1. 

1.1. 

1.2. 

2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

3.6. 

3.7. 

4. 

EU law and R&D tax incentives .................................................................................. 4 

Compatibility with fundamental freedoms................................................................... 4 

Compatibility with State aid rules................................................................................ 6 

Good design features for R&D tax treatment and incentives ...................................... 8 

Orientations for measures of common interest and mutual benefit ............................. 9 

Supporting large-scale trans-national R&D projects ................................................... 9 

Young Innovative Enterprises.................................................................................... 10 

Promoting philanthropic funding of research ............................................................ 10 

Cross-border mobility of researchers ......................................................................... 10 

Facilitating cross-border outsourcing of R&D........................................................... 11 

R&D and VAT ........................................................................................................... 11 

R&D treatment in the common consolidated corporate tax base............................... 12 

Conclusion ................................................................................................................. 12 

EN 

2 

   EN 

 
INTRODUCTION 

In  the  Lisbon  strategy1,  Member  States  committed  to  making  structural  reforms  to  their 
economies. Within this context, the European Council called for R&D investment to approach 
3% of GDP by 2010, of which 2% should come from the private sector. The Communication 
"Investing in research: an action plan for Europe"2 highlighted that R&D plays a key role in 
achieving productivity gains and economic growth, but the social return of the investment is 
often higher than the private return to the investing firm. This market failure can be addressed 
through  a  combination  of  different  public  support  measures  to  increase  private  R&D 
investment,  such  as  grants,  tax  incentives  and  risk-sharing  mechanisms,  taking  into  account 
the specific contexts and objectives of different Member States.  

Recently, 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.  

In line with Europe's commitment to become a more attractive place for business R&D, the 
Commission announced  in  2005,  in  its Communications  on the contribution of  taxation and 
customs  policy  to  the  Lisbon  Strategy3  and  on  a  common  approach  for  research  and 
innovation4,  its  intention  to  promote  a  more  consistent  and  favourable  tax  environment  for 
R&D, while recognising Member State competence for national tax policy. This approach to 
R&D  tax  incentives  is  confirmed  as  a  priority  in  the  Communication  on  putting  knowledge 
into practice5. 

To  this  end,  this  Communication  provides  guidance  to  help  Member  States  improve  their 
R&D  tax  treatment  and  to  help  develop  mutually  consistent  solutions  to  common  problems 
by: 

–  clarifying the legal conditions for Member State R&D tax incentives arising from EU law, 
notably relevant European Court of Justice (ECJ) jurisprudence on the EU Treaty freedoms 
and State aid rules;  

–  highlighting general design features for R&D tax treatment and incentives based on expert 

analysis of good practices; 

–  presenting for discussion a number of possible future initiatives aimed at addressing issues 

of common interest in a consistent way. 

The  accompanying  Annex  presents  more  detailed  guidelines  on  the  design,  implementation 
and evaluation of R&D tax incentives. 

1 
2 
3 
4 
5 

COM(2005) 24.  
COM(2003) 226 
COM(2005) 532 
COM(2005) 488 
COM(2006) 502 

EN 

3 

   EN 

 
                                                 
1. 

EU LAW AND R&D TAX INCENTIVES 

Most existing R&D tax incentives offered by Member States are open to all firms irrespective 
of  size,  sector  of  activity  or  location,  and  are  therefore  considered  to  be  general  measures 
from  an  EU  law  perspective.  However,  some  R&D  tax  incentives  target  particular  types  of 
companies, sectors or activities. This section focuses on the legal parameters for all R&D tax 
incentives  and  provides  guidance  on  the  design  features  of  such  incentives  to  avoid 
incompatibility with EU law due to territorial restrictions. The factors leading to an incentive 
being  deemed  territorially  restricted  can  be  either  explicit  or  implicit.  In  the  latter  case,  the 
incentive  generally  includes  design  features  that,  de  facto,  result  in  favouring  domestically 
performed R&D over that performed elsewhere in the EU. 

All  R&D  tax  incentives  implemented  by  Member  States  must  conform  to  the  fundamental 
Treaty freedoms and the principle of non-discrimination. In particular, any R&D tax incentive 
imposing  restrictions  on  where  the  R&D  is  performed  (territorial  restrictions)  has  to  be 
scrutinised to verify compatibility with EC Treaty Articles 43 (freedom of establishment) and 
49 (freedom to provide services). The Commission is currently examining the compatibility of 
Member State legislation in this respect and has identified a number of problematic cases that 
have  been,  or  are  being,  discussed  with  Member  States.  The  territorial  restrictions  of  one 
Member State’s R&D tax incentives are currently before the ECJ6 (Commission vs Spain). In 
others (e.g. France, the Netherlands, Belgium), Commission initiatives have already prompted 
Member States to amend their tax legislation or practice. 

It  is  important  to  note  that  this  section  contains  the  Commission's  view  of  the  existing  ECJ 
case law regarding R&D tax incentives. Moreover, it should be underlined that assessment of 
the compatibility of a specific R&D tax incentive with EU law depends on the circumstances 
of the case. 

1.1. 

Compatibility with fundamental freedoms 

When analysing an R&D tax incentive, the Commission considers both explicit and implicit 
territorial restrictions to be incompatible with EU Treaty freedoms. An example of an explicit 
restriction is a legal provision which restricts the benefit of an R&D tax incentive to activities 
performed domestically. Territorial restrictions infringe upon the freedom of establishment by 
excluding companies from conducting or outsourcing their R&D elsewhere in the EU.  

Explicit  territorial  restriction  was  the  central  issue  in  the  Laboratoires  Fournier  ECJ  case 
(C39/04),  in  which  the  ECJ  ruled  against  the  legality  of  the  French  “Credit  d’Impôt 
Recherche”  in  force  at  the  time.  Under  the  French  “Code  Général  des  Impôts”,  industrial, 
commercial  or  agricultural  undertakings  received  a  tax  credit  only  for  expenditure  on  R&D 
activity in France. The ECJ ruled that legislation restricting the benefit of a tax credit to R&D 
carried  out  in  national  territory  infringes  the  principle  of  freedom  to  provide  services. 
According to the ruling, by introducing discrimination regarding the place of establishment of 
the  service  provider,  this  legislation  was  liable  to  restrict  cross-border  activities  and  was 
directly  contrary  to  the  objective  of  Community  R&D  policy,  which  is  to  fully  exploit  the 
potential  of  the  internal  market  through  the  removal  of  legal  and  fiscal  obstacles  to 

6 

C248/06 

EN 

4 

   EN 

 
                                                 
cooperation between undertakings. The French tax incentive was rapidly modified to comply 
with the ruling. 

The  following  are  examples  of  implicit  territorial  restrictions:  (1)  a  tax  incentive  covering 
R&D  costs  incurred  anywhere  in  the  EU,  but  subject  to  administrative  approval  favouring 
domestic  R&D  performers  over  non-residents  wishing  to  provide  R&D  services,  e.g.  when 
such  approval  is  needed  only  for  R&D  costs  incurred  abroad,  or  when  the  administrative 
burden  is  heavier  for  non-resident  companies;  (2)  a  tax  incentive  covering  the  costs  of 
subcontracted  R&D,  but  limiting  the  proportion  of  R&D  that  can  be  subcontracted  to  non-
resident  entities.  However,  a  tax  incentive  limiting  the  proportion  of  R&D  that  can  be 
subcontracted  without  making  any  distinction  between  resident  and  non-resident  sub-
contractors would be acceptable. 

In  principle,  the  ECJ  has  recognised  that  restrictions  on  the  scope  of  tax  incentives  could, 
under certain specific circumstances, be justified, either by an exemption expressly provided 
for by the Treaty7 or on other grounds recognised by the ECJ as overriding requirements in 
the general interest. However, the ECJ accepts such a restriction only where it is certain that 
the  aims  sought  cannot  be  achieved  using  a  less  restrictive  measure  (principle  of 
proportionality).  In  the  past,  Member  States  have  sought  to  defend  territorial  restrictions 
before the ECJ on the basis of several arguments: 

a) Fiscal supervision 

Member  States  have  argued  that  the  need  for  effective  fiscal  supervision  is  an  overriding 
requirement in the general interest, justifying a territorial restriction. The ECJ has held that, in 
principle, a Member State has the  right  to  apply  measures  to ascertain clearly and precisely 
the amount of costs deductible as research expenditure (Baxter8, Fournier). It may also require 
a non-resident taxpayer to demonstrate clearly and precisely that the losses he claims to have 
incurred correspond, under domestic rules governing the calculation of income and losses, to 
the  losses  actually  incurred  (Futura  and  Singer9).  However,  the  ECJ  has  so  far  concluded 
(Baxter,  Futura  and  Singer  and  Fournier)  that  the  restrictions  in  these specific  cases  are  not 
proportionate to the aims sought. For example, in Baxter and Fournier, the ECJ concluded that 
national legislation that does not accept evidence submitted by a taxpayer as valid for R&D 
carried  out  in  other  Member  States  cannot  be  justified  by  the  need  for  effective  fiscal 
supervision.  In  these  cases,  reference  is  made  to  the  Mutual  Assistance  Directive10  and  the 
fact that Member States should be able to obtain the relevant and necessary information under 
that Directive or through bilateral tax treaties11. 

b) Loss of tax revenue 

7 
8 
9 
10 
11 

EC Treaty Art 46 & 55  
C254/97 
C250/95 
Council Directive 77/799/EEC as amended by 2004/56/EC 
Vestergaard C 55/98, Futura & Singer C 250/95, Danner C 136/00 

EN 

5 

   EN 

 
                                                 
Member  States  have  argued  in  several  cases  that  preventing  the  loss  of  tax  revenue  could 
justify  the  imposition  of  a  restriction.  However,  the  ECJ  has  so  far  been  very  clear  that 
budgetary arguments are not acceptable as such 12.  

c) Prevention of tax avoidance 

The  ECJ  has,  in  principle,  recognised  that  the  prevention  of  tax  avoidance  could  justify 
restriction  of  the  fundamental  freedoms.  However,  existing  case  law  suggests  that  the  ECJ 
would not accept a general territorial restriction, but would rather favour legislation aimed at 
preventing, on a case-by-case basis, wholly artificial arrangements13. Furthermore, to prevent 
tax evasion, the ECJ has also referred to the possibility for a Member State to use the Mutual 
Assistance Directive.  

d) Promoting national R&D and competitiveness 

In  the  Fournier  case,  the  ECJ  stated  that  promoting  R&D  may  be  considered  an  overriding 
requirement  relating  to  public  interest  which  may  justify  a  restriction  on  the  exercise  of 
fundamental freedoms. It noted, however, that the refusal by a Member State to grant R&D 
tax relief on the basis that the R&D was carried out in another Member State is contrary to the 
objectives of Community R&D policy, which, according to Article 163(1) of the EC Treaty, 
includes  strengthening  the  scientific  and  technological  bases  of  Community  industry  and 
encouraging it to become more competitive at international level. 

Summarising  existing  case  law,  there  is  ample  and  consistent  evidence  that  territorial 
restrictions on the application of R&D tax incentives are unlikely to be accepted by the ECJ. 
Thus, when designing R&D tax incentives, Member States should take into account that any 
explicit, and in some cases implicit, form of territorial restriction would not be considered to 
be in accordance with the EC Treaty. This does not however preclude territorial restrictions 
which simply reflect the territoriality of the tax competence of Member States. For example, a 
wage  tax  or  social  security  incentive  for  R&D  personnel  might  by  its  nature  be  limited  de 
facto to persons performing R&D activities in the Member State in which they are taxed or 
pay social security contributions. 

1.2. 

Compatibility with State aid rules  

R&D tax incentives in Member States are not only subject to the legal constraints imposed by 
the Treaty freedoms, but also need to be in line with Community State aid rules. According to 
Article 87(1) of the EC Treaty, “any aid granted by a Member State or through State resources 
in any form whatsoever which distorts or threatens to distort competition by favouring certain 
undertakings  or  the  production  of  certain  goods  shall,  insofar  as  it  affects  trade  between 
Member States, be incompatible with the common market”. In principle, State aid rules apply 
regardless of the form of the aid. Thus, R&D tax incentives could constitute State aid if the 
relevant criteria under Article 87(1) and the jurisprudence of the ECJ regarding the conditions 
under which R&D fiscal measures qualify as State aid are fulfilled, and the aid does not fall 
under  the  de  minimis  regulation14.  A  comprehensive  assessment  of  these  conditions  is 

12 

13 
14 

Danner  &  X  &  Y,  ICI  C  264/96,  De  Groot  C  385/00,  Bosal  C  169/01,  Saint-Gobain  C  307/97  and 
Skandia C 422/01 
X &Y C 436/00, Danner C 136/00 
Commission Regulation 69/2001 or any successor thereof. 

EN 

6 

   EN 

 
                                                 
provided in the 1998 Commission notice on the application of the State aid rules to measures 
relating to direct business taxation15, which also provides specific guidance. One of the main 
criteria  is  the  selectivity  of  the  R&D  tax  incentive.  An  R&D  tax  incentive  is  considered 
selective  if  its  potential  beneficiaries  are  restricted  notably  in  terms  of  size  (e.g.  to  SMEs), 
location or sector and as such is likely to constitute State Aid. 

Indeed, the Stockholm and Barcelona European Council conclusions called for continued 
efforts to reduce the general level of State aid and the need to redirect aid towards horizontal 
objectives of common interest, including economic and social cohesion, and target it towards 
identified market failures. 

Furthermore, direct tax measures that pursue general economic policy objectives by reducing 
the  tax  burden  related  to  certain  production  costs  (including  R&D  costs)  normally  do  not 
constitute State aid if they apply without distinction to all firms and to the production of all 
goods  and  services.  Moreover,  the  fact  that  some  undertakings  have  higher  levels  of  R&D 
spending  than  others  and  thus  benefit  from  R&D  fiscal  measures,  notably  those  active  in 
R&D-intensive sectors, does not necessarily mean that the measures are selective. 

In  certain  cases,  R&D  tax  incentives  that  constitute  State  aid  may  be  compatible  with  the 
Treaty  on  the  basis  of  Article  87(3).  The  Commission  has  also  adopted  a  new  revised 
Community  Framework  for  State  aid  for  research,  development  and  innovation  (the 
Framework)16,  under  which  the  Commission  will  assess  State  aid  measures  for  R&D&I 
notified to it, including measures in the form of R&D tax incentives.  

When  designing  R&D  tax  incentives,  Member  States  should  take  into  account  the  above-
mentioned  notice  and  Framework.  The  first  step  is  to  determine  whether  an  R&D  tax 
incentive  can  be  considered  a  general  measure.  In  most  cases,  R&D  tax  incentives  that  are 
open to all firms irrespective of size, sector or location are considered to be general measures 
that do not fall under the Framework.  

When assessing an R&D tax incentive that constitutes State aid in accordance with Article 87 
(1) of the EC Treaty, the Commission will look particularly at the following elements : 

–  The R&D tax incentive applies to one or more R&D categories defined in the Framework 

(i.e. fundamental research, industrial research and experimental development);  

–  The  R&D  tax  incentive  relates  solely  to  certain  eligible  R&D  costs  listed  in  the 

Framework; and 

–  The  aid  intensity  of  the  R&D  tax  incentive  can  be  established  and  does  not  exceed  the 

maximum threshold established in the Framework.  

The R&D&I-framework furthermore states that when doing so, the Commission will assume 
that on the basis of evaluation studies presented by Member States, R&D tax incentives have 
an incentive effect by stimulating higher R&D spending by enterprises.  

Account  must  also  be  taken  of  the  relevant  cumulation  rules  which  determine  whether  a 
company may receive aid under different measures. 

15 
16 

OJ C 384, 10.12.1998, p 3 
RDI Framework 

EN 

7 

   EN 

 
                                                 
It must also be assessed whether fiscal measures fall under block exemption regulations.  

2. 

GOOD DESIGN FEATURES FOR R&D TAX TREATMENT AND INCENTIVES  

In  recent  years,  a  growing  number  of  Member  States  have  adapted  or  introduced  R&D  tax 
incentives  to  foster  investment  in  R&D17.  Currently,  15  Member  States  use  them  as  part  of 
their mix of public support instruments. Under the Open Method of Coordination, CREST18 
expert  reports19  provide  an  overview  and  analysis  of  the  various  R&D  tax  incentives  in 
Member  States  and  other  relevant  countries.  The  reports  highlight  the  variety  of  types  and 
design  characteristics of tax incentives, reflecting the diversity of situations in the countries 
concerned (general tax policy, industrial structure, private sector R&D performance). There is 
no  single  answer  as  to  how  R&D  tax  incentives  should  be  designed,  implemented  or 
evaluated. 

Nevertheless,  based  on  expert  analysis  of  the  various  schemes  and  existing  evaluations,  a 
number of guiding principles can be defined for the main design options, features and relevant 
contingency factors and may be found in the Annex20. For example, these guiding principles 
include the need for tax incentives to:  

–  reach  more  firms,  maximising  the  potential  increase  in  BERD  and  minimising  market 

distortions, general measures are best used; 

–  include all current expenses and consider certain types of R&D-related capital expenditure; 

–  focus  on  ascertaining  the  direct  additionality  of  tax  incentives  and  their  behavioural 

additionality; 

–  consider evaluation criteria and data from the design stage; 

–  test  whether 

tax 

incentives  have  met 

their  specific  objectives,  whether 

their 

delivery/administration mechanism was efficient and their wider societal effects. 

The Annex provides detailed guidance on generic design and implementation principles such 
as  those  described  above,  but  also  on  the  different  types  of  regimes  and  relief,  and  eligible 
R&D  costs.  It  presents  options  for  improving  the  tax  treatment  of  R&D  in  different  policy 
contexts, addressing in particular the influence of the wider policy mix, the relative merits of a 
generally R&D-friendly tax environment versus the use of general corporate tax incentives or 
selective  support  for  young  innovative  SMEs.  Member  States  are  invited  to  take  these 
guidelines into account when introducing new or adapting existing R&D tax incentives. 

Systematic and consistent evaluation of their impact, both at individual firm level and on the 
economy  at  large,  is  crucial  for  a  more  effective  use  of  R&D  tax  incentives.  However,  the 
relatively  few  evaluation  studies  that  currently  exist  often  use  different  methodologies, 
making their results difficult to compare. Member States are invited to adopt a systematic and 
consistent approach for their evaluation along the lines defined in the Annex.  

17 
18 
19 
20 

IBFD 2004 report on the tax treatment of R&D expenses 
The scientific advisory committee to the European Council and the Commission 
CREST Reports 
SEC (2006) XXX 

EN 

8 

   EN 

 
                                                 
The  approach  proposed  includes  an  ex-ante  analysis  of  the  expected  impact  of  R&D  tax 
incentives and the preparation of ex-post evaluation at the design stage. The Commission will 
promote  the  sharing  of  experience  and  good  practices  by  setting  up  a  network  of  national 
experts. 

3. 

ORIENTATIONS FOR MEASURES OF COMMON INTEREST AND MUTUAL BENEFIT 

To enhance the effective use of R&D tax incentives and improve R&D tax treatment in the 
EU, there are a number of other specific tax issues that need to be addressed in a consistent 
way, on top of the basic design principles outlined above (i.e. compliance with EU law and 
learning from Member State good practices). Some of these issues are research-related aspects 
of the general taxation system while others concern R&D issues of common interest. 

The  common  aim  of  the  initiatives  proposed  in  this  section  is  to  ensure  that  tax  policy 
contributes more to achieving the knowledge economy by establishing a consistent framework 
conducive to more investment in R&D and improving the functioning of the Internal Market.  

Member States are invited to discuss the initiatives proposed in this section at EU level and 
consider them when reviewing their tax policy. 

3.1. 

Supporting large-scale trans-national R&D projects  

Increasing  globalisation  of  knowledge  and  internationalisation  of  research  and  innovation  is 
an  important  current  trend.  This  development  is  supported  by  advances  in  ICT  as  well  as 
realisation of the significant value added to the knowledge production and dissemination that 
globalisation and international partnerships have to offer. The experience of Eureka and other 
multinational research initiatives has shown that large-scale transnational projects face major 
difficulties  in  ensuring  timely  and  synchronised  multi-annual  public  funding  from  several 
Member  States,  often  linked  to  the  distinct  approval  procedures  used.  Consequently,  whilst 
transnational  projects  should  ideally  be  encouraged  due  their  high  productivity,  beneficial 
learning and knowledge transfer impacts, they may in fact be discouraged. To resolve these 
issues, it may be appropriate to also use specific R&D tax incentives for their timeliness and 
predictability  over  the  duration  of  a  research  project  instead  of  solely  funding  such  projects 
through grants.  

Therefore, Member States are invited – together with the European Commission – to address 
the obstacles for transnational research projects by, for instance, improving the use of and co-
ordination  of  tax  incentives  for  industrial  participants  in  large-scale  transnational  R&D 
projects or by applying common R&D definitions.  

As such public support is selective by design, it constitutes State aid and must comply with 
the provisions of the revised Framework and be compatible with the EC Treaty under Art. 87 
(3) regarding important projects of common European interest. 

EN 

9 

   EN 

 
3.2. 

Young Innovative Enterprises 

Tax  incentives  targeting  Young  Innovative  Enterprises21  as  introduced  by  some  Member 
States can have a positive effect on R&D activities and said companies' growth. They can take 
the  form  of  a  corporate  tax  exemption  or  a  time-limited  exemption  on  social  security 
payments associated with the employment of highly qualified personnel (e.g. researchers and 
experts),  thereby  lowering  the  costs  for  young  R&D–based  businesses.  Member  States  are 
invited to consider offering specific tax incentives for this strategically important category of 
enterprises. 

3.3. 

Promoting philanthropic funding of research  

A further way of promoting European R&D investment could be to improve the tax treatment 
of  philanthropic  entities  funding  research,  e.g.  foundations  and  charities  (research 
foundations).  Research  foundations  are  private  entities  with  the  aim  of  enhancing  scientific 
knowledge  by  funding  R&D  activities  in  public-benefit  organisations,  typically  universities 
and public research centres. However, although some large research foundations22 exist, this 
source of funding is under-exploited in Europe when compared to the US, and certain formal 
and informal obstacles appear to inhibit both donations by individuals and corporations on the 
one hand and the flow of funds to research on the other.  

There  is  therefore  a  need  to  improve  the  tax  conditions  for  cross-border  donations  and 
foundation  activities  to  create  a  level  playing  field  in  the  EU.  Agreeing  upon  a  common 
definition  of  public-benefit  purposes,  or  a  move  towards  the  mutual  recognition  of  public-
benefit  organisations  entitled  to  tax  relief,  would  be  an  important  step  to  facilitate  cross-
border funding. Such an approach can be found in the European Foundation Centre’s proposal 
for a European Foundation Statute, which also advocates a non-discriminatory approach to the 
tax treatment of such foundations and their donors and beneficiaries. 

Member States are invited to support a common approach regarding i) the tax treatment of the 
foundations  themselves,  irrespective  of  where  they  are  established  in  the  EU,  and  ii)  the 
definition of public-benefit organisations. 

The Commission will support the establishment of a "European Forum on Philanthropy and 
Research Funding", a permanent mechanism for sharing experience, reviewing best practices 
and promoting cooperation.  

3.4. 

Cross-border mobility of researchers 

To facilitate the mobility of researchers within the EU, for both long stays in another Member 
State and for shorter professional missions, Member States are invited to make administrative 
tax  compliance  easier  for  researchers  and  hiring  institutions  and  to  provide  tax-free 
allowances to cover the actual cost of mobility (e.g. travel expenses).  

Furthermore,  both  the  Member  States  and  the  hiring  institutions  should  make  an  additional 
effort  to  improve  transparency  regarding  specific  tax  incentives  that  might  be  available  to 
researchers  as  well  (e.g.  expatriate  tax  benefits).  Member  States  are  also  invited  to  identify 
under which circumstances researchers could be allowed to maintain their fiscal residence in 

21 
22 

See RDI state aid framework definition 
The Wellcome Trust, Volkswagen Stiftung, Fondazione Cariplo, Champalimaud Foundation 

EN 

10 

   EN 

 
                                                 
their country of origin for a limited period of time. In any event, Member States should avoid 
situations  of  double  taxation,  e.g.  by  improving  transparency  on  provisions  in  bilateral  tax 
treaties and domestic legislation which are relevant for cross-border researchers.  

3.5. 

Facilitating cross-border outsourcing of R&D  

Some Member States (e.g. France, Spain) allow firms to request a certificate recognising their 
capacity to perform R&D. Such certificates  facilitate the application of  R&D  tax incentives 
and are valid for several years. They are used by tax authorities to streamline the processing 
of tax relief claims. To avoid territorial discrimination in cases of cross-border outsourcing of 
R&D,  Member  States  implementing  such  processes  are  invited  to  extend  them  to  R&D-
performing firms established in other Member States.  

Interested Member States are invited to agree on the content of such certificates to facilitate 
their  mutual  recognition  and  decrease  administrative  burdens  for  firms  across  the  EU.  The 
Commission will present a possible structure for such certificates to stimulate discussion. 

In  some  Member  States,  public  entities  performing  R&D  are  automatically  granted  such 
certificates.  To  avoid  territorial  discrimination  in  cases  of  cross-border  R&D  outsourcing, 
equivalent  public  entities  established  in  other  Member  States  should  be  treated  in  the  same 
way as national ones. The Commission has drawn up a list of R&D performing public entities 
established in the EU, based on their participation in the research framework programme. This 
list will be available online and can help interested Member States implement their R&D tax 
incentives in a non-discriminatory way. The Commission intends to update this list regularly 
and  invites  all  Member  States  to  review  it  and,  where  appropriate,  provide  information  on 
other entities to be included. 

3.6. 

R&D and VAT  

VAT on R&D costs incurred by taxable persons is deductible where the goods and services in 
question are used for VAT-taxable transactions. The current rules of the 6th VAT Directive 
concerning  exemptions,  public  authorities  and  subsidies  may  affect  this  deductibility  and 
hence  place  an  unnecessary  burden  on  certain  research  activities.  The  Commission  has 
committed  itself  to  reviewing  these  three  issues23,  which  need  to  be  modernised.  When 
reviewing  the  legislation,  the  Commission  will  critically  examine  the  restrictions  on  the 
recovery of VAT on R&D expenditure. It will also consider to what extent the current rules 
on  public  authorities  and  subsidies  hamper  the  creation  of  public-private  partnerships  and 
cost-sharing  arrangements,  including  in  the  research  field  where  such  structures  are 
increasingly  being  used  to  conduct  R&D  efforts  requiring  the  pooling  of  resources  from 
public  and  private  entities  or  the  outsourcing  of  research  by  private  entities  to  public  ones 
(contract  research).  The  application  of  current  VAT  rules  to  public  entities  is  complex  and 
leads  to  inconsistent  results  across  the  Community.  Furthermore,  the  difference  in  VAT 
treatment  between  public  and  private  entities  causes  distortions  of  competition,  produces 
economic  inefficiencies  and  encourages  tax  avoidance  schemes.  The  Commission  will 
examine  ways  of  simplifying  these  rules  and  facilitating  their  more  uniform  application 
throughout the Community in order to secure a level playing field in those sectors of activity 
where both public and private entities intervene, e.g. the provision of contract research. 

23 

COM(2000)348 

EN 

11 

   EN 

 
                                                 
The closely related problems of exemptions, public authorities and subsidies will be treated as 
a  package  and  the  social  and  economic  impacts  of  any  possible  legislative  proposal  will  be 
assessed before a proposal is presented in 2008.  

3.7. 

R&D treatment in the common consolidated corporate tax base 

In the longer term, it is desirable to seek an EU-wide tax definition of R&D and innovation 
and to give such expenditure favourable tax treatment in the common consolidated corporate 
tax  base  (CCCTB).  The  Commission  will  include  this  in  the  relevant  working  group 
discussions  with  Member  States,  with  a  view  to  defining  a  coherent  and  well-balanced 
solution in line with other possible incentives within the CCCTB. 

4. 

CONCLUSION  

The  Commission  acknowledges  the  recent  trend  in  many  Member  States  to  provide  more 
favourable  tax  treatment  for  R&D  and  welcomes  these  efforts  to  raise  R&D  business 
expenditure.  The  growing  diversity  of  R&D  tax  incentives  risks  further  fragmenting  the 
European corporate fiscal landscape and could lead to their less than optimal cross-border use. 
Therefore, a certain degree of coordination is needed to foster the effective use of R&D tax 
incentives across the EU and improve trans-national research cooperation given the increasing 
globalisation  of  R&D  activities.  This  Communication  and  the  accompanying  Annex  set  out 
the  legal  conditions  and  design  options  to  help  Member  States  improve  their  R&D  tax 
treatment.  

EN 

12 

   EN