Support of R&D activities through tax incentives and direct funding

Whereas previously 40–60% of corporate tax incentives were used for capital investments, today economic policy increasingly aims to encourage the creation and development of intellectual assets through direct subsidies and tax incentives. Since 2010, the nominal amount of R&D expenditure has tripled.

Direct subsidies and tax incentives to promote R&D activities

At the same time, most Hungarian companies are still unaware of these opportunities, and it is very likely that this area has greater potential than is currently realized, both for individual companies and for the economy as a whole. In our series of articles, we aim to reduce the lack of knowledge about research and development activities by introducing the basic concepts of R&D, incentives, the characteristics of activities eligible for R&D support, and the requirements for implementation and documentation, compliance with which can reduce the risk of penalties.

R&D support may take the form of direct incentives or tax benefits, which can be claimed either for the implementation of the activity itself or for the exploitation of the resulting intellectual property, and may affect taxes other than corporate income tax as well. From 2024, subsidies related to research and development activities will be aligned with the global minimum tax rules, meaning that claiming them will not result in any disadvantage. However, before exploring the various incentives in detail, it is worth becoming familiar with the basic concepts of R&D.

What do we consider to be an R&D activity?

We refer to as R&D activities any creative work aimed at expanding existing knowledge, developing new solutions, or resolving scientific and/or technical uncertainty.

What are the characteristics of R&D activity?

• novel,
• carried out in a scientifically sound, systematic and planned manner, with the process being properly documented.
• performed by professionals possessing the necessary expertise and competencies.
• The expected outcome is to reduce or eliminate technological or technical uncertainty and risk.

What is systematic scientific activity?

In the course of systematic scientific activity:

• hypotheses and/or assumptions that can be interpreted using scientific and/or technical-technological criteria are formulated.
• in order to support or refute these, information is sought, experiments are carried out, and/or models are developed in a planned and documented manner.

What does novelty mean in the context of R&D?

The assessment of novelty in the context of the classification of R&D activities differs from the novelty examination applied to inventions; the novelty of research and development activities is not evaluated under patent law. It is expected that, during the process, the existing state of the art in science and technology related to the solution of the problem is identified and presented. It should be determined whether a widely accessible solution to the given problem already existed at the time the project was initiated. Furthermore, the scientific plausibility of the solution, as well as its technical and technological feasibility and measurability, should be examined.

Preliminary R&D qualification procedure

The previous preliminary classification procedure had to be conducted at the Hungarian Intellectual Property Office. This task has since been taken over by the National Research, Development and Innovation Office (NKFIH), which, unlike the former practice, does not issue legally binding decisions. However, since the authorities also consult the NKFIH when auditing an R&D project, a preliminary classification is likely to substantiate eligibility for the application of incentives.

Within the preliminary R&D classification procedure, it is examined whether there are already accessible solutions to the problem that are obvious to professionals. If such solutions exist, it is further assessed whether the project can nevertheless be expected to produce any novelty. If a project changes compared to what was set out in the application submitted during the preliminary classification procedure, it will be considered a new project for the purposes of applying incentives, and the previous classification will no longer apply.

At the same time, the fact that a project ultimately does not produce results will not invalidate its R&D classification at a later stage. If it originally met the relevant criteria, the support was rightfully claimed for its implementation.

Therefore, if you apply manufacturing or service innovations to technical problems that arise during your operations, it is possible that you are carrying out R&D activities. Don’t miss out on available tax incentives, ask for our help in obtaining them! One of the favorite areas of LeitnerLeitner’s consultants is advising on tax benefits, which makes it easier for our clients to achieve their goals, and for us, it is an exciting challenge to work on obtaining and making optimal use of these benefits.