Table of Contents:
1. What is the R&D Tax Relief?
2. Do Depreciation Deductions Qualify as Eligible Costs?
Depreciation deductions on fixed assets created as a result of research and development (R&D) activities but not used in such activities do not qualify as eligible costs for R&D tax relief. This position was confirmed by the Supreme Administrative Court in its ruling dated May 21, 2024. The court stated that a company has the right to include, within the applicable limits, depreciation deductions on fixed assets—such as pilot production lines—as eligible costs under Article 18d(3) of the Corporate Income Tax Act (CIT), provided that these assets are or will be genuinely used for R&D activities.
What is the R&D Tax Relief?
The R&D tax relief allows taxpayers to reduce their taxable income by deducting eligible costs associated with research and development activities, as specified in Article 18d(2-3) of the CIT Act. These costs include, among others, employee salaries, the purchase of materials, specialized equipment, consulting services, and expenses related to obtaining and maintaining patents. The relief also covers depreciation deductions on fixed assets used in R&D activities.
Do Depreciation Deductions Qualify as Eligible Costs?
A company engaged in R&D activities aimed at developing new products and processes. One such initiative was a project co-funded by the European Union under the “Smart Growth” operational program. The goal of the project was to develop technology for better utilization of corn grains and to extend the shelf life of final products. Experts confirmed the project’s R&D nature during the funding approval process.
As part of the project, the company incurred costs related to the design and construction of pilot production lines. These costs included both eligible expenses under Article 18d of the CIT Act and other costs necessary for project implementation. The company intended to classify these expenses as tax-deductible costs through depreciation deductions on fixed assets created under the project. The applicant emphasized that all project-related costs would be recorded in a separate accounting register. Additionally, the company declared that it would not apply for tax exemptions related to operations within a special economic zone.
As the Supreme Administrative Court ruled:
“Article 18d(2a) of the CIT Act refers to intangible assets in the form of development work costs mentioned in Article 16b(2)(3) and indicates that depreciation deductions on such intangible assets are considered eligible costs in proportion to the share of costs listed in Article 18d(2)(1-4a) or Article 18d(3a)(2) in their initial value.”
However, the court also noted:
“Pursuant to Article 18d(3) of the same Act, eligible costs include depreciation deductions on fixed assets and intangible assets used in R&D activities, provided they are recorded as tax-deductible expenses in a given tax year. This excludes passenger cars as well as buildings, structures, and premises owned separately. The applicant will therefore be entitled to deduct eligible costs listed in Article 18d(2)(1-4a) and depreciation deductions, but only under Article 18d(3) of the Act. These provisions apply to fixed assets, provided that the costs pertain to or will pertain to actual R&D activities.”
