Research And Development (R&D) Tax Incentives In Brazil

According to analysts Brazil shall spend US$ 33 billion (1,3% of GDP) in R&D in 20141. Brazilian companies' investment growth in R&D activities is an important step to foster innovation in the country and tax incentives are considered an essential tool in this regard.

Current tax incentives for R&D in Brazil are in force since 2006 (arts. 17 to 24 of Law 11.196/052) and 787 companies had a total of R$ 5,34 billion tax incentive in 20123. Such tax incentives consist on:

1. Full deduction of R&D expenses (100%)4 plus 60 to 100% (according to employees hired, success of the R&D and its protection as a patent or cultivar) exclusion on profits (if any) for income tax (IRPJ) and Social Contribution on Net Profit (CSLL) purposes; b) Full depreciation of R&D assets in the year of acquisition (IRPJ and CSLL); c) Accelerated amortization of R&D intangibles (only for IRPJ); d) 50% reduction of company's industrialized products tax (IPI) on the purchase of machinery for R&D; e) Zero withholding income tax-WHT (IRRF) on remittances to register and keep intellectual property (IP) rights abroad.

Most of such tax incentives (except regarding IPI) are available only for Brazilian companies taxed by the real profit system (lucro real), since the major benefit is the tax allowance and exclusion (if the company is profitable) on the calendar year, but with no carryover, except for exclusive R&D companies. The main expenses are personnel and assets solely for R&D activities. No reimbursement is available. No prior approval from the Government is needed to use the tax incentives, but some tax requirements shall be fulfilled, like having negative debt certificates, keeping accounting and R&D projects controls and filing an annual form at the Ministry of Science, Technology and Innovation (MCTI) (FORMP&D). As many tax incentives around the globe, the aim is to subsidize the technological risk of R&D activities since the success is uncertain in this field. Companies shall create its own technology instead of acquiring them from third parties. Brazil limits its tax incentives to intramural R&D expenses (in basic and applied research and experimental development) by not allowing the incentives to extramural activities where the purpose is to surpass the technological risk, except where expressly authorized by Law 11.196/05 (performed by small and medium companies, individuals, universities or research institutes in Brazil). Thus R&D activities between affiliated...