Tax credit scheme

The growth plan adopted by Folketinget (the Danish parliament) in 2013 included an extension of the socalled tax credit scheme. Under the extension, enterprises with losses resulting from research and development costs may now receive payment of the tax base of losses of up to DKK 25 million.

Purpose

The purpose of the scheme is to improve the conditions for entrepreneurs of research and development activities in Denmark. Under the scheme, existing and new growth enterprises may obtain liquidity during the stage of researching and developing new products when their income and, consequently, typically their liquidity are limited.

Application of the scheme

The tax credit scheme makes it possible for enterprises and individuals to receive payment of the tax base of the portion of their loss which is attributable to research and development activities. The payment is tax-free. On the other hand, the loss for the year is reduced by the amount that equals the tax credit. Thus, the tax credit finances future investments during the enterprise’s research and development stage.

The payment of the tax credit will take place simultaneously with the payment to enterprises of any overpaid tax, which is generally in the month of November after the end of the assessment year.

On what basis is tax credit obtained?

In order to obtain the tax credit, the costs incurred by the enterprise must relate to research and development activities.

This includes, among other things, development work in connection with new or significantly improved materials, products, processes, systems or services. Moreover, the research and development activities of the enterprise must involve original investigations with a view to obtaining new scientific or technical knowledge.

The scheme is often particularly attractive for enterprises operating within pharmaceuticals, IT, cleantech, etc, but the definition of research and development activities is broad, and the scheme may therefore be relevant to other industries. However, a specific assessment of this is required.

Typical expenses

The most common expenses which arise in connection with research and development activities are typically payroll expenses and expenses for materials and lease of premises, etc. It should moreover be noted that the legal department of the Danish tax authorities has confirmed that application for tax credit may be based on gross expenses without deduction of grants. It is therefore important to be aware that if those grants are taxable, they will affect the tax loss of the enterprise and, consequently, the basis of the payment of the tax credit. But the grant is not to be set off directly against the research and development costs.

How much tax is saved?

Companies etc and self-employed individuals under the business tax scheme may obtain payment of the tax base of losses originating from research and development costs of up to DKK 25 million.

Thus, enterprises could obtain liquidity of up to 22% of a maximum amount of DKK 25 million = DKK 5.5 million.

Conditions

A number of conditions must be met in order to receive the tax credit:

1. The enterprise must be loss-making meaning that it has a tax loss. If the enterprise is a company which is included in a joint taxation scheme, only the jointly taxed income is required to be negative.
2. The loss realised by the enterprise must originate from research and development costs in accordance with the related definition according to Danish tax legislation.
3. Application for tax credit must be made simultaneously with the filing of the tax return, at the latest. Application to the Danish tax authorities is made on-line. 

Limitation rule

In situations where a shareholder controls a number of companies etc, a limitation rule has been introduced with respect to the amount limit of DKK 25 million for which tax credit may be applied. In such situations, the amount limit of DKK 25 million applies to the total losses of the entities controlled by the same individual.

The reason for the rules is that it is not to have any effect on the amount of the tax credit whether the research and development activities are placed in one or more controlled entities.  

Options

The tax credit scheme is a really good way for enterprises to obtain liquidity during the research and development stage, and it is therefore an attractive scheme for many enterprises carrying out research and development activities; particularly in view of the new rules on the limitation of losses under which the utilisation of losses is restricted if the annual taxable profit exceeds DKK 8,025,000 (2017).

Tax credit assistance

We will be pleased to assist your enterprise in applying for tax credit, including:

1. Assessment of whether the research and development activities of the enterprise meet the conditions of Danish tax legislation with respect to applying for tax credit.
2. Review of the research and development costs incurred, including assessment of whether the costs are comprised by the tax credit scheme.
3. Preparation and submission of application for tax credit.
4. Assistance with allocation of tax credit in a jointly taxed group.   

Please contact your local auditor or the listed contact persons if you would like us to assist you with the tax credit scheme.

Published in October 2017