Tax Incentives To Innovation

Article by Prof. Denis Borges Barbosa, JSD and Marcelo Siqueira

In the past years, Brazilian Government has established tax incentives to stimulate research and innovation in the market. We shall analyze here some benefits of the new law and rules that became known as "Lei do Bem" or "Good Law".

The Law as a whole

The Law summarizes the existing tax incentive law of the sector, revoking previous rules but maintaining some incentives, modifying them in part. In large, the law does not renew much but allows the benefit without previous approval from the government.

There are three main new issues:

Multiple Deduction (as already included in law 10.637/02) of expenses in Research and Development (R&D), in 160 percent of the effectively disbursed amount. Such proportion may be increased to 180 percent depending on the amount of researches employed or 200 percent if a patent or cultivar is granted.

Amounts paid to small companies to make research R&D as agents are deductible (as always) but are not deemed as income in the agent company. This, theoretically, would mean that there would be no income based tax incurring upon such values in the agent company.

The multiple deduction is limited to the tax due in that fiscal year, with no carry over. However, companies that only do R&D may carry on such expenses to other fiscal years as well as consider payments made to researching partners from the benefit tax basis.

The new law increases the base of multiple deduction, including other taxes as CSSL (9 percent rate on the income) and the deduction basis increases from 15 to 24 percent (or even 34 percent depending on further interpretation of the law).

Here the main issue is to favor R&D personnel and the law aims to favor employment and the creation of small companies of researchers.

Incentives in art. 17

Art. 17 includes, basically, the previous benefits without the need of previous approval by the Government except a small benefit that did not have any practical importance.

Benefits of article 18

Art. 18 initially allows the hiring of small companies and the values paid - solely for use in technology innovation R&D - to them are not considered income (and no tax - PIS or COFINS - incurs). Those who pay the values for R&D may deduce them from tax basis for the net profit (income tax IRPJ and CSLL), whether they are intra-company or hiring those small research only companies. Hiring a legal entity for research is more beneficial than an employee...