The new R&D tax credit has been in place for over half a year, and soon businesses involved in innovation will need to decide whether they will pay taxes under the new or old tax credit scheme at the end of the year. However, due to the complexity of the regulations and the interplay between various incentives, making the right choice is often far from simple.
What’s New About the New Credit?
The most significant feature of the new tax credit (which allows eligible taxpayers to retain 10% of their qualifying expenses as a deduction from corporate tax) is that it can reduce the taxpayer’s total calculated corporate tax liability to zero. This is a major advancement compared to other corporate tax credits, which cap the amount of tax liability that can be reduced (e.g., the development tax credit can only lower the liability by up to 80% of corporate tax). Another notable advantage of the new R&D tax credit is its flexibility. If a taxpayer cannot utilize the credit in a given year (for example, due to a lack of profitability), the unused portion can be carried forward for up to three years. After that, the taxpayer can even request the tax authority to pay out the remaining unused credit. This makes it an exceptionally attractive option for businesses in innovation.
The new R&D credit is also advantageous in terms of the scope of eligible costs. While the scope of eligible costs that can be considered under the "old" credit scheme, which is based on reducing the corporate tax base, is more limited, the new R&D credit broadens this scope. For example, within the new credit, costs for R&D services from external providers (up to 20% of eligible costs), patent procedure costs, or even the full range of personnel costs directly related to R&D projects can be included.
Why Stick with the Old Credit?
There are several factors that might lead innovative companies to stay within the old tax credit system, despite the advantages mentioned above. One key consideration is that switching to the new credit means not only losing access to the current corporate tax base reduction, but also to the local business tax, innovation contribution, and social contribution tax credits.
Those who benefit from other corporate tax credits (e.g., development tax credit) are also at a disadvantage. Due to the prohibition of double-counting, the eligible costs used to calculate the R&D tax credit under the new scheme cannot simultaneously be used for other corporate tax credits. This limitation may reduce the overall benefit for companies leveraging multiple tax relief programs.
Which One Should You Choose?
There is no clear recipe for which tax credit package is more beneficial for a particular company, so this must be examined individually, taking into account the company’s specific circumstances.
For example, if a company is planning a HUF 100 million research and development investment (e.g., setting up a new research lab or expanding an existing one), it might be better off using the development tax credit and staying within the old R&D tax base credit system. In this case, the amount of the tax credit is not limited to 10% of the eligible costs but can reach 30-70% of eligible costs, depending on the location of the investment and the size of the company.
However, in a case where a project company in the development phase is not yet generating profit or is even loss-making, the new tax credit would likely be more advantageous. In this case, the R&D tax base credit offers little benefit, as the negative tax base only results in deferred losses. By contrast, with the new R&D credit, the company can request the credit to be paid in cash in the corporate tax return for the third year after the project begins, regardless of whether they have a tax liability.
The picture becomes even more complicated when considering additional credits under other tax categories alongside the old credit. For example, if the company has significant revenue, this could push the balance in favor of the old tax credit due to savings from local business tax and innovation contribution.
The Stakes Are High
For these reasons, companies must conduct thorough calculations before deciding which combination of credits to use at the end of the year. They must also plan their financial indicators for the next five years, as companies cannot deviate from their choice of the new tax credit for five years once it’s made.