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The recent No. 109343/12/2017 Common Ministerial Decision for the determination of the criteria for the characterization of the expenses of scientific and technological research of enterprises under article 22A of the Income Taxation Code

Iason Skouzos - TaxLaw > Practice Areas  > Tax Law  > The recent No. 109343/12/2017 Common Ministerial Decision for the determination of the criteria for the characterization of the expenses of scientific and technological research of enterprises under article 22A of the Income Taxation Code

The recent No. 109343/12/2017 Common Ministerial Decision for the determination of the criteria for the characterization of the expenses of scientific and technological research of enterprises under article 22A of the Income Taxation Code

The recent No. 109343/12/2017 Common Ministerial Decision of the Ministers of Education, Research and Religious Affairs and of Finance, for the determination of the criteria for the characterization of the expenses of scientific and technological research of enterprises under article 22A of the Income Taxation Code (L.4172 / 2013).

I. Introduction

Recent No. 109343/12/2017 Common Ministerial Decision (“CMD”), issued by the Ministers of Education, Research and Religious Affairs and of Finance, has determined the criteria for the characterization of the expenses of scientific and technological research of enterprises under article 22A of the ITC (L.4172 / 2013), thus abolishing the previous number 12962 (“POL”) 2029 / 03.11.1987 Ministerial Decision (“MD”).

The provisions of the new CMD apply to the characterization of related expenses for the tax year 2017 onwards.

According to the new CMD, scientific and technological research activities are the creative work undertaken on a systematic basis, in order to increase the knowledge pool, to document and to use this knowledge pool, in order to devise new applications.

Scientific and technological research is distinguished in basic, applied and experimental development, as follows:

(A) Basic research is the original experimental or theoretical work of free choice, designed primarily to acquire new knowledge of underlying causes and of the fundamental characteristics of phenomena and observable events, without being directed to specific uses or applications. Basic research analyzes structures, qualities and relationships with the prospect of formulating and testing of hypotheses, theories or laws. Its results are usually not directly exploitable for commercial purposes, they are not available for sale but are published in scientific journals and are widely available to the interested parties, with no limitations.

B) Applied research is the original research work designed to acquire new knowledge, as long as it has a practical purpose. Applied research is designed to investigate either the potential uses of the promising findings of basic research, or to identify new methods and ways to achieve specific and predetermined goals. It uses existing and acquired knowledge to solve specific problems and gives functionality to ideas. The results of applied research are primarily applied to a limited number of products, functional processes, methods or systems.

(C) Experimental development is the systematic work based on the knowledge gained from research and practical experience and aiming at the production of new materials, products and devices, the installation of new processes, systems and services or at the substantial improvement of those who have been already produced or installed.

II. The qualification criteria

A key criterion for defining / distinguishing scientific and technological research activities in relation to related scientific, technological and industrial activities, is the presence in the scientific and technological research activities of a remarkable element of originality and the removal of scientific or technological uncertainty, i.e. when a solution to a problem is not easily apparent to a person familiar with the basic inventory of knowledge and of techniques used in the relevant field.

The following definitions and exceptions apply in particular (and not limited) to the delimitation / discrimination of scientific and technological research activities:

A) Design, manufacture of one or more prototypes and related tests are included. Any subsequent series of prototypes to meet other needs following the successful completion of the original prototype tests, is excluded.
(B) The construction and operation of pilot projects in an experimental phase in order to gain experience and to combine construction studies and other data for the creation of new product specifications, the design of special equipment and structures, and for the preparation of operating instructions and manuals of procedures and methods, are included.
(C) Industrial design works are only included if they are necessary for carrying out scientific and technological research activities. The design related to the production process is excluded.
(D) Industrial engineering works are included, only if further research is required for their successful implementation.
(E) The development of original and innovative software programs is included, only if these programs create substantial scientific or technological progress and if the purpose of each project is the systematic resolution of scientific or technological uncertainty. Their development leads to the increase of the knowledge pool.
Software development may involve a final product or be part of a specific scientific and technological research program.

Software development activities include:
(aa) the development of information technologies at the level of operating systems, algorithms, programming languages, data management, communications software, software development tools.
(bb) the development of Internet technologies.
(cc) the research on methods of design, development, exploitation or maintenance of software.
(dd) the development of software tools or computer technologies in specialized areas of information technology such as image processing, geographic data presentation, character recognition, artificial intelligence, etc.
Software development activities exclude:
(ee) activities using known methods and software tools for developing applications for business and IT systems.
(ff) updates, additions or changes to existing programs or systems.
(gg) supporting of existing systems.
(hh) conversion or adaptation of programming languages or other development tools / libraries.
(ii) the existing program customizations and the addition to features for application users.
(jj) detecting and removing errors in existing applications.

F) Clinical trials (studies) of the phases 1, 2 and 3 of new vaccines and therapies are included. Phase 4 clinical trials, which continue to test for drugs, vaccines or therapies after approval and production or use, are considered as scientific and technological research activities only if they relate to further scientific or technological progress. The above tests of phases 1, 2, 3 and 4 are accepted, provided that they are carried out in accordance with the procedure laid down by National legislation.

III. Certified expenses

Expenses related to the execution of scientific and technological research activities as mentioned above, are the following, which are restrictively mentioned:

(a) depreciation of expenses relating to the purchase or repair, maintenance, renovation of buildings, broken down by division, after cost allocation, relating exclusively to scientific and technological research activities.
(b) depreciation of expenses on the purchase of equipment and laboratory equipment for the period of time used for research purposes, such as apparatus, instruments, scientific instruments, devices and components of the laboratory or semi-industrial scale, and semi-mechanical (demonstrative) testing facilities. Expenses in this category may include any additional costs of transporting and installing the equipment, as well as staff training in its use.
(c) current operating expenses, such as rent or lease, electricity, water, fixed and mobile bills, postal charges, etc., broken down by division, after cost allocation, solely related to scientific and technological research activities.
(d) payroll for each grade of staff employed in the execution of the scientific and technological research project during its implementation and in proportion to its time of employment, such as specialized scientists, postgraduate students, technical and administrative staff.
e) expenses on internal and external travel for co-operation with laboratories, etc., for the announcement of results related to the research work being executed, executed or planned to be carried out, participation in seminars, conferences, scientific meetings directly related to the executed scientific and technological research project.
(f) expenses on a wide range of consumables, such as chemical and microbiological reagents, microparticles and instruments of single use or limited number of uses.
g) purchase or license fees for the use of specialized scientific “packages” of computer programs, which are necessary for the realization of the research. This does not include common software of general use,that is not focused on the particular computing needs of the particular project.
h) expenses for patenting in Greece and abroad.
i) expenses associated with databases connection, national and international knowledge networks, electronic libraries or other electronic sources of specialized knowledge and information. A prerequisite for the certification of these expenses is their exclusive relevance to the physical object of the scientific and technological research project.
j) outsourcing to third associates or parties (private workshops and enterprises, public research centers and laboratories, “AEI” and “ATEI”), of a specific and clearly defined part of a scientific and technological research project. Subcontracted eligible costs for the execution of part of the research project may not exceed the 70% of the research project budget.
The following expenses are NOT scientific and technological research expenses as mentioned above:
(a) any remuneration of shareholders, managing directors, B.O.D. presidents, B.O.D. members, partners, managers, general directors, owners of the beneficiary enterprise and the remuneration of persons with previous properties in affiliated undertakings, as well as persons who had one of the above properties in the two previous tax years than that of the actual costs incurred.
(b) expenses on dismissal allowances, extraordinary wages and benefits in kind.

IV. Special conditions for the certification of expenses

For the application of the tax deductions in accordance with the applicable provisions, interested parties should note that:
(1) The scientific and technological research activities should be linked to self-financed projects – excluding projects co-financed by any other body – carried out by the enterprise itself. A scientific and technological research project is made up of different sets of work, activities or services, includes clear objectives and specific deliverables for the determination of the relevant results and the comparison of the results with the goals set.
(2) The enterprise must keep a separate account in its accounting records in which the costs of scientific and technological research will be recorded and shall also preserve the relevant decisions of the competent bodies (decisions of the Board of Directors, General Manager, Director of Research e.t.c ., certificates of the General Secretariat for Research and Technology for the submission) for the performance of scientific and technological research activities for the time stipulated by the provisions of Laws 4174/2013 (Α’167) and 4308/2014 (Α’251) (for the preservation of accounting records).
The competent bodies with the decisions taken in the above mentioned terms shall determine cumulatively:
a) the subject and the objectives of the scientific and technological research project being carried out, (b) the detailed technical description of the project (work-modules-methodology), (c) the deliverables, (d) the implementation timetable, (e) the composition of the research team and the duration of employment of its members in the research project, (f) the equipment and instruments to be purchased for the implementation of the research project, (g) the other costs required in order to carry out the research project and (h) the budget for every cost category and the total budget of the project.

V. The procedure

The form and the content of the applications and the supporting documents required for the certification of the scientific and technological research expenses, shall be determined annually by announcements posted on the GSRT website.

Applications can be submitted by all businesses, regardless of the legal form of their operation.
The quality control on the subject of the research project, its implementation and results in relation to the deliverables and the objectives of the project and the certification of expenses, shall be carried out by committees or independent experts appointed by the General Secretariat for Research and Technology, with the issue of the relevant administrative acts.
In order to certify the expenses of scientific and technological research, GSRT issues the relevant certificates and notifies them to the competent Tax Authority of the beneficiary, as well as to the beneficiary enterprises.

VI. As a conclusion – Innovations of the new C.M.D.

The long awaited new C.M.D. has marked with much greater clarity, -compared to the previous, outdated, Ministerial Decision of 1987-, the limits for the designation of the expenses of scientific and technological research for which article 22A of the current I.T.C. provides for relatively strong tax incentives, and for the first time included expenses directly linked to the implementation of the innovative work of the enterprises and which remained exempt under the previous regime, formed by the previous M.D. of 1987, but also by the relevant clarifications-instructions issued by the competent General Secretariat for Research and Technology on an annual basis.

In this way, the particularly important operating costs related to building rentals or leasing, as well as other costs (i.e. electricity, fixed and mobile telephone accounts e.t.c.), are now accepted and taken into account, after allocation, when they are related exclusively to scientific and technological research activities. Also, depreciation costs of purchase, construction or repair costs, maintenance, renovation, and post-construction costs are also accepted after allocation, when related exclusively to scientific and technological research activities.

Also, while for the expenses related to the payroll of the staff employed for the scientific and technological research, the regulation of the previous M.D. is repeated, i.e. besides the specialized scientists, other categories are included, such as postgraduate students, technical and administrative staff, -provided that they are employed in the execution of the scientific and technological research project and for the period of its implementation-, it is expressly stated that the expenses related to redundancy payments, extraordinary wages and benefits in kind for the above staff members are not accepted. Similarly, no expense related to any remuneration cost for shareholders, members of the Board of Directors e.t.c., is accepted.

Furthermore, for the first time, costs related to the connection to databases, national and international knowledge networks, electronic libraries as well as other electronic sources of specialized knowledge and information technology are accepted as eligible, provided that there is an exclusive relevance to the physical object of the scientific and technological research project.
Finally, while the eligible costs for subcontracting and outsourcing of a specific part of the scientific and technological research project are accepted,- it is noted that these costs may concern both public and private entities, while the previous M.D. included only the first- there is an explicit limitation on the amount of the relevant eligible costs, as they cannot exceed the 70% of the project budget.

In conclusion, it appears that with the new C.M.D. the criteria for the characterization of scientific and technological research expenses are widened, while clear and more favorable provisions are introduced for innovative enterprises, since the costs incurred for both buildings and operating expenses will now be accepted.

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