Arne Mollin Ottosen Stine Andersen April 11 2014 Tax refunds for research and development costs Kromann Reumert | Corporate Tax - Denmark Arne Mollin Ottosen, Stine Andersen Corporate Tax ImplicationsReceipt of paymentJointly taxed group companiesTax returns and payment requestsIn January 2012 a new regulation was implemented giving Danish businesses the opportunity to obtain a tax refund for losses stemming from research and development (R&D) costs. From the 2014 income year onwards, the maximum loss for which R&D refunds can be claimed is Dkr25 million, amounting to a maximum tax refund of Dkr6.125 million.ImplicationsBusinesses investing in R&D often have significant losses in early years. Consequently, they have no opportunity to utilise their deductions immediately, since deductions cannot be utilised if the company is run with a loss. Instead, expenses and depreciations must be carried forward as tax losses to be utilised when the company later obtains a profit. If the company does not obtain a profit, the losses will not be utilised.In order for a company to survive, the start-up phase liquidity is crucial. The new regulation is an attempt to help businesses investing in R&D by increasing their liquidity through an immediate tax refund. Payments of a tax refund are therefore conditioned on the company actually having losses that relate to R&D.From the 2014 income year, a company can obtain a tax refund of up to 24.5% of Dkr25 million of its losses derived from R&D. Due to a decrease in the Danish corporate tax rate over the next three years, ending at 22% in 2016, the tax refund calculation follows the gradual reduction of the corporate tax. Thus, the tax refund is 23.5% of a maximum loss of Dkr25 million in the 2015 income year and 22% of a maximum loss of Dkr25 million in the 2016 income year. The tax refund is reduced proportionately if the income year is less than 12 months, but there is no proportionate increase if the income year exceeds 12 months.Receipt of paymentThe rules apply to businesses and self-employed persons running their business under a special Danish business scheme (virksomhedsordningen). The tax refund relates solely to costs invested in R&D. Furthermore, the investment must be made in connection with the normal operation of the company, including primarily costs in relation to the use and exploitation of scientific or technical knowledge to produce new or significantly increased materials, machines, products, processes, systems or services. Costs in relation to know-how or patent rights are not included.A company is not obliged to obtain a tax refund, but can choose to carry the losses forward as tax losses that can be utilised against a later profit.The rules apply solely to R&D costs that are fully deducted in the year in which they are incurred (ie, the company cannot obtain a tax refund for costs that are depreciated over several years). These expenses must follow the ordinary deduction rules (ie, they will be carried forward as tax losses to be utilised when the company later obtains a profit).Jointly taxed group companiesFor jointly taxed group companies, the tax value of a loss relating to R&D costs must be calculated on the basis of the entire income and the expenses in relation to R&D of the jointly taxed group. Consequently, a tax refund cannot be obtained if the jointly taxed group has made a profit. On the contrary, a tax refund can be obtained if the joint tax income is negative. However, the maximum amount that companies can obtain amounts only to 24.5% of Dkr25 million in the 2014 income year, regardless of whether the jointly taxed group companies all have significant R&D costs. The administration company must request a tax refund. Similarly, a possible tax refund will be paid out to the administration company.Tax returns and payment requestsA request for a refund of a company's R&D costs as set out must be submitted at the same time as the company's tax return for the relevant income year. The loss stated in the tax return cannot include the loss for which the company has requested a tax refund. The company is not liable to tax on the amount obtained.For further information on this topic please contact Arne Møllin Ottosen or Stine Andersen at Kromann Reumert by telephone (+45 7012 1211), fax (+45 7012 1311) or email ([email protected] or [email protected]). The Kromann Reumert website can be accessed at www.kromannreumert.com.