Double R&D deduction

Startups typically perform innovative activities and create entirely new products in conditions of great uncertainty. In such circumstances, they often carry out research and development (R&D) projects, which subsequently lead to generating significant costs and represent a burden for startups. This benefit regulated in the Law on Corporate Income Tax can help them with that.

What is the benefit related to R&D?
It is a tax benefit on corporate income tax and refers to the possibility of legal entities, i.e., startups, to deduct R&D expenses in double the amount in the tax balance sheet, which is of great importance for startups as it facilitates their business and the implementation of R&D projects. The recognition of expenses in the increased amount practically means a reduction of taxable income, which also reduces the costs of doing business for startups.

Who is eligible for this benefit?
Startups that have conducted R&D on the territory of Serbia are eligible for this benefit, and it is considered that they have conducted an R&D project if at least 90% of all employees involved in the R&D project perform their activities in Serbia. However, the startup will also be eligible for this benefit if parts of the R&D project are carried out outside of Serbia, provided that there are certain physical, geographic, or natural factors that cannot be provided in Serbia for the implementation of the project.

What is R&D?
R&D is an abbreviation that stands for research and development. Research refers to any original or planned investigation undertaken to acquire new scientific or technical knowledge and understanding, while development refers to the application of research findings or other achievements or design to create significantly improved materials, devices, products, processes, systems, or services prior to commercial production or use. The law excludes the application of this benefit if research costs are incurred for the purpose of discovering and developing oil, gas, or mineral reserves in the extractive industry.

What are R&D costs that are directly related to research and development?

The law specifies which costs can be considered as costs directly related to research and development:

• Wages of employees engaged in R&D, including those who are directly involved in solving relevant technical problems, as well as the salaries of employees who supervise the project, but also salaries of employees who provide support activities to those engaged in implementing and directly supervising the project.
• Material procurement costs that are directly related to R&D.
• Acquisition costs of intangible assets, as well as the rights to use intangible property (protected copyrights, patents, etc.) provided that they are directly related to research and development.
• Costs of real estate acquisition, facilities, equipment.
• Costs of renting real estate and facilities.
• Costs of purchasing expert opinions, advisory services, as well as transfer of special knowledge and skills (know-how), etc.

However, some costs that have arisen in the startup doing business cannot be considered R&D costs:

• Sales costs, such as advertising and promoting a new product or service, resulting from conducted R&D;
• Administrative and other general overhead costs that can not be directly related to R&D. These may include startup management salaries in situations where they do not directly participate in supervising the implementation of R&D projects;
• Employee training costs;
• Maintenance costs of fixed assets used for R&D (e.g., machine maintenance costs).

What if the R&D project fails?
The implementation of an R&D project can be successful or unsuccessful, but in either case, the startup will have the right to use the R&D cost relief.

Can a startup use both double R&D deduction and IP box at the same time?
If an R&D project is successfully completed and results in good intellectual property, the startup as the owner of that property is entitled to use both the double R&D deduction and the IP box.

What documentation is required?
To use this tax benefit, the startup is required to submit certain documentation in paper form for each individual R&D project when filing its tax return:

• Project description with defined objectives and planned phases;
• Records of the time each employee spent working on the specific project;
• A conclusion that expresses the data on the amount of all R&D costs.

At the time of submitting the tax return, the startup is required to have (but not necessarily submit) documentation such as project budget and performance projections, procurement plan, expert opinions, invoices showing the value of assets or services acquired for R&D purposes, contracts with third parties involved in the project.

Which regulations govern this tax benefit?

• Law on Corporate Income Tax, Article 22g
• Regulation on the conditions and methods for recognizing expenses directly related to research and development in the tax balance sheet in the amount twice the actual amount.

Example:
Startup “Aurora” conducts research and development to develop software for the sale of various products. “Aurora” has fifteen employees, ten of whom are engaged in R&D projects. Nine out of the ten are conducting research and development projects in Serbia, while one of them is conducting a part of the project abroad. In this case, “Aurora” is entitled to R&D incentives, as (at least) 90% of all employees engaged in R&D projects perform their activities in Serbia. Some of the employees in the R&D project are engaged in direct project implementation, such as creating new software solutions, others are engaged in direct supervision of project implementation, such as providing feedback to directors-founders, while others provide support to other employees involved in research and development, such as quality control for testing new software. The salaries of these individuals can be presented in the tax balance sheet as expenses in double amount. On the other hand, the salaries of the two founders, directors of “Aurora”, who are not directly involved in supervising the R&D project, cannot be shown as expenses in an increased amount. “Aurora”, in order to do business, incurred expenses for the procurement of materials and the leasing of business premises used in the implementation of the project, and such expenses can be stated in an increased amount. As a result of the conducted R&D project, “Aurora” developed new software for the sale of various products and decided to advertise and promote it, but it is not entitled to use this incentive for advertising expenses. At the end of the tax period, “Aurora” submits a tax balance sheet and is required to submit all the necessary documentation. By stating expenses in an increased amount, “Aurora” manages to reduce its taxable profit and make its business easier.
Considering that “Aurora” has successfully implemented an R&D project, resulting in software that users have subscribed to, and has thus generated certain revenues, “Aurora” will be entitled to use the “IP Box” incentive, as well.