By Chris Jones - 22nd November 2006
EU governments will be encouraged to offer tax incentives to companies wanting to invest in innovation under new European commission proposals.
Every member state currently uses tax incentives in some form to encourage companies to invest in research and development, but since all the schemes constitute state aid, they all need approval from European competition authorities.
The new proposals from the commission will make it easier and quicker for national governments to gain approval from Brussels for R&D related state aid schemes, a move that commission officials hope will encourage more companies to invest in innovation.
“Under the Lisbon strategy, the EU has set itself the target of investing 3 per cent of GDP in R&D by the end of the decade,” a commission official said.
“But we are currently running well under that level, and we want to encourage more companies to invest.”
“Less than 15 per cent of state aid payments in the EU are focused on boosting innovation, and we hope the new proposals will lead to an increase.”
The commission’s proposals offer a ‘template’ for national tax incentive schemes, and draw on a variety of best practices already in operation throughout the 25 member states.
“We are offering clear economic guidelines of how state aid can be compatible with EU rules,” the official said.
“And we have also streamlined the approval procedure, so that cases where there are no problems can be approved quickly and cases where aid levels are high can be looked at in more depth.”
There will also be a new focus on developing cross-border state aid schemes, where companies working together on research projects are based in different countries.
Tax incentives that are restricted only to reserach activities carried out in the member state offering the aid have also been deemed illegal.
And the commission also wants member state governments to reflect on ways of simplifying the complex rules relating to aid for research foundations – including the taxation of donations to them and grants from them.
Brussels is also asking member states to consider whether general rules on R&D tax incentives should be included in the proposal for an EU-wide corporate consolidated tax base currently being drawn up by the commission.
The old state aid for innovation rules, drawn up in 1996, were relatively limited, especially with regard to the ‘eligible costs’ – the share of research costs that can be funded through state aid.
The new rules have been overhauled to broaden the range of eligible costs, meaning that a far wider range of research is eligible for aid.
There is a much clearer focus on small and medium sized companies in the new rules, with proposals allowing aid to cover the cost of patents, support services and the employment of qualified personnel all included.
SMEs broadly welcomed the commission’s proposals, saying they would ensure far greater recognition of the role played by small companies in the innovation process.
But they warned that state aid could still be abused by member states to prop up ailing “dinosaurs” and that careful monitoring of the new rules was vital.
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