“Monetisation” of the R+D+I Deductions, or “Tax Cheque”

Did you know that you can receive part of the R+D+I deduction that you cannot apply in your corporate income tax return in money?

As we published in our post titled “What Does the Research and Development Deduction Consist of?”, the application of this deduction is probably the most profitable in terms of the amount we can reduce the corporate tax. So, now we are going to complete the information provided in our first article by explaining how to “monetise” the Deduction for Research, Development and Innovation activities (R+D+I deduction).

Firstly, we will explain what the so-called “Monetisation” of R+D+I, or “Tax Cheque” means. This deduction allows you to apply, without limits on the positive corporate income tax payable, 80% of the remaining deduction once the rest of deductions have been applied, including the R&D deduction, and in addition, to recover in money 80% of the deduction not applied by lack of tax payable.

An example helps to clarify the theory:

• Example:

R+D+I deductions pending application            1,500 €

Taxable income: Income minus Expenses	4.000,00
Net tax payable (25%)	1.000,00
Application of deduction (limit 25% of positive gross tax payable)	-250,00
Net tax payable	750,00
Monetisation of the remaining R+D+I deduction
Reduced deduction – 80% of the amount pending (1500-250)*80%	1.000,00
Application of the reduced deduction, without limits	-750,00
Net tax payable	0,00
Excess amount due to lack of tax payable	250,00

This tax advantage is very interesting because it allows for the direct application of 80% of the deduction, without limits, compensating up to 100% of the gross tax payable. Moreover, it is very attractive for companies that may have accumulated negative taxable incomes and have given up recognising tax deductions for R&D&I because they are likely to expire without being able to apply them. Opting for the “monetisation” may recover part of the deduction generated in money.

Requirements to be able to opt for the Monetisation:

Article 39.2 of the Corporate Income Tax Law requires a number of conditions to be met in order to ensure that the taxpayer will continue to invest in R&D&I expenditure, namely:

Article 39.2 of the Corporate Income Tax Law requires a number of conditions to be met in order to ensure that the taxpayer will continue to invest in R&D&I expenditure, namely:

Temporary:

That at least one year has passed since the Deduction was generated and could not be applied due to the lack of positive tax payable.

Staff Maintenance:

That the average workforce of the company, or alternatively the average workforce assigned to R&D&I activities, is not reduced in the 24 months following the end of the tax period in which it is applied^[1].

Reinvestment:

That the amount equivalent to the deduction applied or paid is used for (i) Research and Development expenses (R&D) or Technological Innovation (TI) or (ii) investments in tangible or intangible fixed assets that are exclusively devoted to such R&D&I activities, with the exception of real estate.

Reasoned Report:

There must be a reasoned report from the Ministry of Economy and Competitivity that qualifies the activity as R+D or TI or a Prior Agreement of Valuation with the State Tax Administration.

Special Attention to the Reasoned Report:                   

As well as the aforementioned requirements, the requirement for a reasoned report is particularly relevant, since this is binding for the Tax Administrations and provides the company legal security with regards to the application of this deduction.

In short, the company must have a technical and economic evaluation report for the project, in which it is determined whether the expense incurred corresponds to Research and Development or Technological Innovation, that we must remember have different deduction percentages. This report must state the project being carried out and the amounts and types of expenses that may form part of the basis for the deduction.

Said technical-economic report must then be certified by one of the certification entities accredited by the Spanish National Accreditation Entity (ENAC), and, once the corresponding certification has been obtained, a reasoned report must be obtained from the Ministry of the Economy in which the R&D&I content of a given project is reflected.

Limits on the amounts to apply or pay:

There are limits on the amount of the deduction that can be applied to the tax payable or that can be received by the company in their bank account. These limits are applied at company group level in accordance with the criteria of Article 42 of the Commercial Code and are as follows:

1. Limit of 1 million euros per year for Technological Innovation.
2. Limit of 3 million euros per year for deductions generated for all items of R&D and TI expenses, jointly.
3. Additionally, this last limit can be increased to 2 million euros if the amount of the expenses for Research and Development in the tax period exceeds 10% of the net amount of the company’s turnover.

Deadlines to apply the Deduction:

It is important to highlight that the Spanish General Tax Directorate has stated in various consultations that these deductions can be used in years subsequent to the one in which they were generated, up to a maximum period of 18 years, even if they have not been recorded in the declaration-settlement of the year in which they were generated, because, for example, they are waiting for the reasoned report from the Ministry, so there would be no problem in recording this deduction in subsequent tax returns, including expenses from previous years.

What happens if I don’t meet the requirements after a while?

As indicated in Article 39.2 of the Corporate Income Tax Law itself, failure to meet any of the requirements implies that the company must regularise the amounts unduly applied or paid in the tax period in which the non-compliance with the requirements occurs. Moreover, interest on arrears must be paid.

^[1] For the calculation of the average workforce dedicated to R&D&I activities, the Spanish General Tax Directorate (DGT) has concluded that workers who are only partially dedicated to these activities can also be considered.