Introduction
Creating favorable conditions for research and development is of great importance for fostering growth in an international economy. Within the Swedish tax system, there are provisions for deductions from employer contributions and the general payroll tax on compensation for individuals engaged in research and development (“R&D”).
To encourage tax incentives for increased investments in research and development, the Swedish Government appointed a special investigator in June of 2023 to review the current regulations regarding R&D deductions. In November of 2024, the investigation was expanded with an additional mandate to map the existence of various types of tax incentives for R&D, within EU countries and the OECD, aimed at enhancing the competitiveness of the Swedish industry.
Should R&D Regulations Be Improved?
The application of the current R&D regulations is not entirely straightforward. The lack of clear definition of the concepts of “Research” and “Development” creates demarcation difficulties for companies. It is therefore not entirely clear what qualifies as research and development respectively. Today, companies must demonstrate that an activity constitutes qualified research or development in order for a deduction to be granted. Due to the challenging demarcation issues, higher evidentiary requirements are imposed on companies. This, in turn, counteracts the incentives for companies to apply for the deduction.
Regarding “development”, great evidentiary challenges arise, particularly for new businesses. For a deduction to be granted, companies must demonstrate that the results of research have been applied in the development process, and that this has led to a substantial improvement. Proving that a product has been substantially improved through development can be both economically and practically challenging for smaller companies with limited resources. The administrative burden and the potential risk of protracted processes cause companies to hesitate in making the deduction.
Requirements Under Current Law
To qualify for the deductions, companies must conduct research or development for commercial purposes. This requirement exists to encourage increased investment in research and development within the business sector. Additionally, there are requirements regarding the working hours and age limits of the company’s employees. Employees must work at least 50 % of their time during a given month, with a minimum of 15 hours specifically dedicated to R&D activities.
Deductions cannot be applied for employees who, at the beginning of the year, have reached the age of 66, as only old-age pension contributions apply for such employees. There is also a deduction ceiling: companies may not deduct more than 3 million SEK per calendar month, and the deduction should primarily be made from the company’s employer contributions.
The deduction is limited to actual and direct work within research and development. The assessment is made based on the circumstances of the individual case, considering both the tasks performed by the employee and the broader context in which the work is conducted. The terms “Research” and “Development” are intended to encompass all types of R&D activities that have real substance, such as technology, natural sciences, medicine, etc. They also include all production of goods and services with a genuine R&D content. Support functions of various kinds for research and development, or work related to ongoing operations, fall outside the scope of application as they are not considered sufficiently qualified. Such support functions can, for example, include marketing, organizational development, and customer and market research.
Further Expansion of Investigation Started 2023
According to the mandate established in 2023, the investigation should include an assessment of the significance of the R&D deduction as an incentive for research and development, as well as an assessment of whether the deduction has had the intended effect since its introduction. Furthermore, an analysis should be conducted to assess whether there is a need to expand the definitions of the terms research and development in the Swedish Social Security Contributions Act, so that these may more broadly encompass R&D activities that lead to positive external socio-economic effects – for example, whether software development should be included.
It should also be analyzed how the definitions of research and development should be formulated to clarify what falls outside the scope of application. Another aspect to be evaluated is whether the size of the deduction should be adjusted for the deduction to serve as an effective incentive for companies to increase investments in R&D and place their R&D activities in Sweden. Furthermore, it should be analyzed whether a special application procedure should be introduced with a decision-making body other than the Swedish Tax Agency (Sw. Skatteverket) for the assessment of the right to the deductions. Finally, the investigator was asked to provide necessary legislative proposals where necessary.
As mentioned above, the investigation has now been expanded. The Swedish Government justifies in its supplementary directive that other countries within the EU and OECD have recently increased their ambitions for research and development and adjusted their tax regulations to attract more R&D investments. In order to maintain competitiveness, the Swedish Government suggested that the Swedish tax regulations should also be reviewed in light of an international context. The expanded mandate includes, among other things, mapping the occurrence of different types of tax incentives for research and development. This includes, for example, refundable tax credits available in countries within the EU and OECD, as well as follow-ups and evaluations of the effects of these incentives. Furthermore, an analysis should be made, and proposals provided, on how a tax incentive primarily based on companies R&D expenses, which allows for reduced income tax, can be structured within Swedish tax legislation.
Our Comments on the Matter
In our work, we have identified that the current R&D regulations are structured in a way that discourages stakeholders from utilizing the right to deductions. Ambiguous definitions of the terms “Research” and “Development”, along with prolonged processing times, create uncertainty for businesses, increasing the risk of repayment claims. Additionally, applying for the R&D deduction retroactively reduces the chance of success.
Therefore, Svalner welcomes this investigation and views positively the clarification of the concepts of research and development, as well as the simplification of the application process. This would create better conditions for the R&D regulations to be effectively implemented and utilized to a greater extent.
Such a clarification would also reduce the administrative burden for businesses, making it easier for smaller companies with limited resources to be included in the system.
We believe that it is valuable for the investigation to be conducted not only at the national level, but also in a higher lever to provide a broader perspective on how Sweden’s R&D regulations can be improved. This will also be helpful in maintaining and strengthening Sweden’s existing competitiveness within the business sector.
Greater opportunities for R&D deductions will lead to increased tax incentives for companies to actually conduct research and development within their operations, which in turn is expected to result in higher investments in research and development. Svalner hopes that the investigator takes full advantage of the international outlook, so that the proposed improvements can be effectively adapted to the Swedish business environment.
For more information contact:
Erik Nilsson
E-mail: erik.nilsson@svalner.se
Phone: +46 73 525 15 51
