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Editorial

Enhanced deduction for corporate expenses on research and development

October 2011 - Tax & Private Client. Legal Developments by Integrites Group.

More articles by this firm.

Sweden is - in relative terms - one of the leading countries in the world within research and development. Most part of research and development in Sweden is financed by the industry, with a total contribution of 83 billion SEK in 2007.

 

There is a special section in the Swedish income tax act regulating tax deductibility of research and development which was introduced in 1970 and reads: “Expenditure on research and development that have or is likely to have an impact on the business activity shall be deductible. [...]”

Originally, the idea was to promote R&D in general by improving the possibility for the industry to be granted tax deductions. However, the application in the courts has moved in the opposite direction. There is considerable restraint in the application to grant deductions unless the research is directly related to the core of the company’s business. To change this development, it was recently decided that an amendment of the Tax Act shall be made to clarify when tax deductions are available for business enterprises. as of January 1, 2012, these will be:

  1. Research and development that, as a result of its connection with the company’s core activity have or is likely to have significance to the company’s core activity.
  2. Research and development that have or is likely to have significance on business activities in general (sw: “verksamheten i övrigt”).

In assessing whether granting tax deduction according to section 2 above an overall assessment shall be made which takes into account all aspects of the company’s activities. Emphasis is placed on the company having a reasonable interest in the research, it will not be necessary that it is directly related to the core of the company’s business. With the amendment, it is explicitly stated that all business activity that the company in question actually is engaged in is covered in the article. In addition to the services or goods the company sells/provides, internal support functions such as general administration, financial management and personnel management etc., are also included in the amendment as tax deductible expenses. Companies will be entitled deduction if they can motivate why, in view of their business activity as a whole, they have a reasonable interest in the research that they pay for. However, research and development entirely unrelated to the business’ activity will still not be deductible, nor will sponsoring or gifts.

 

The new rules will start to apply on 1 January 2012.

 

Simplified expert tax
The purpose of the rules when they were introduced was to strengthen Sweden’s international competitiveness and to create incentives for companies to choose Sweden for start-ups and encourage companies to locate or retain leading management functions in Sweden.

According to the Swedish Income Tax Act ("Tax Act") relief is provided for experts, researchers and other key employees when they meet certain qualifications, such as not being a Swedish citizen and not having lived or resided permanently in Sweden at any time during the five calendar years before the calendar year of starting the employment.

 

There are three different groups of people referred to:

  1. Experts with specialist tasks with such a knowledge level that is considerably difficult to recruit within the country.
  2. Individuals with research and development tasks at the same level as above.
  3. Individuals with managerial or other tasks making them considered employees with a key position in the company. This group does not require difficulties recruiting within the country, the only subject for assessment are the significance of the tasks.

In practice it has been very difficult to meet these requirements as finally decided by the Taxation of Research Workers Board (Sw. Forskarskattenämnden) which has called for an update of the rules. The legislative change results in an amendment to the Tax Act which states that employees with a salary exceeding two price base amount (SW: prisbasbelopp) per month will qualify for a tax relief regardless of their qualifications or job assignments. This way, a qualification assessment will be superflouos; a tax relief shall always be granted for a person with the required salary (including other benefits) or higher. The applicable amount for 2012 is SEK 88 000 per month, making the minimum annual salary SEK 1 056K (appr. USD 180K). A “specialist/expert” not reaching that amount of monthly salary may still be able to qualify for a relief under the current rules. The new rules will start to apply as from 1 January 2012.

 

The procedure will still be the same for being granted the status, i.e. an application must be filed with the Board, however, those experts with higher salary than the above will automatically be granted the tax status.


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