Further expansion of the R&D deduction

For the past few years, a special tax incentive has been in place in the form of a deduction of the social security contributions paid by employers for employees who work with research and development. In order to be eligible, that employees must devote at least 75 percent of their time to R&D activities, assessed on a monthly basis. The deduction was expanded as of 1 April 2020, and now, further expansion is under way. The Swedish government recently published its legislative proposal to increase the maximum proposed benefit once more and decrease the aforementioned threshold on working time to 50 percent.

As of 1 April 2020, the benefit from the R&D deduction of social security contributions amounts to approximately 20 percent of the salary of an employee, per month. The maximum deduction per group of companies is capped at approximately SEK 900 000 per month. A condition has been that said employees work with R&D to at least 75 percent of their working time (and at least 15 hours per month), assessed on a monthly basis.

To further improve the conditions for businesses to carry out research and development in Sweden, the government has published a legislative proposal to expand the rules and the maximum benefit on offer. The proposal is for the maximum benefit to be increased once again, this time to SEK 1 200 000 per month, which will mostly benefit large companies. In addition to this, the condition of working time will be decreased so that it will suffice that said employees work with R&D to at least 50 percent of their working time. This will primarily gain smaller companies, and it is estimated that the number of R&D employees that will be affected will increase by about 2 500 people nationwide (or about 10 percent).

We are currently awaiting the parliamentary vote to confirm these changes, that are planned to come into force on 1 July 2021.

What qualifies as research and development?

Businesses often have a view of what constitutes research and development that is more limited than what the framework actually provides. This is because the definition of R&D is broad and may include several activities that do not fit the traditional confines of what may be considered R&D:

  • Research refers to systematic and qualified work on obtaining new knowledge for commercial purposes;
  • Development refers to systematic and qualified work using the results of research for commercial purposes to develop new goods, services or production processes or to significantly improve existing goods, services or production processes.

Examples of projects that may be eligible:

  • Manufacturing: Improvement of existing processes with the goal to increase efficiencies in production, such as decreasing energy usage or waste of resources;
  • Gaming: Development of a characters AI in a video game;
  • Textile: Development of sustainable packaging materials.

Comments

We are happy to see an expansion of the R&D deduction in Sweden, because it is a testament to the strong commitment from the Swedish government on stimulating growth in innovative sectors. However, Swedish businesses are relatively unaware of the R&D deduction. The incentive was created for commercial organisations that are working in a technical field in a broad sense, and to help with financing of their innovation projects, yet many companies do not apply for the deduction even though they are entitled to.

If your company has employees working with research and development for commercial purposes, there may be a possibility to claim the deduction (keeping in mind that the deduction may also be claimed retroactively from 2015 onwards). Do not hesitate to contact us if you have questions or want to know more. We have a multidisciplinary team of engineers, scientists, tax lawyers and finance professionals that would be more than happy to discuss this with you further.

Marcel Sikkema, David Fouhy and Tomas Malluzzo

 

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Marcel Sikkema
+46 73 340 77 82

 

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David Fouhy
+46 73 254 19 97

 

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Tomas Malluzzo
+46 70 961 76 21