Additional deduction for research and development in tax years 2021–2027

The translation into English contains instructions and advice but lacks legal force. In case of divergence of interpretation, the versions in the two official languages Finnish and Swedish will prevail. This guide describes the additional tax deduction for research and development expenses, allowed on a temporary basis during tax years 2021–2027.

As the previous legal act called “Additional deduction for research and development in tax years 2021–2025” (Laki tutkimus- ja kehittämistoiminnan lisävähennyksestä verovuosina 2021–2025 (1169/2021)) was recently amended, the guide was updated accordingly on 1 January 2022. The amendments caused changes to how much can be deducted as the taxpayer’s additional deduction. Instead of the earlier percentage of 50%, the deduction as of the beginning of 2022 is 150%. The legal act’s period of validity was extended to end of the 2027 tax year. The references to years in the Finnish and Swedish names of the legal act were changed so as to indicate the final year 2027. Otherwise, the amendments brought no changes to how the legal act’s provisions must be applied.

This version of the guide is applicable to the additional deduction for research and development in tax years 2022, 2023, 2024, 2025, 2026 and 2027. Concerning guidance applicable to the deduction for the 2021 tax year, the earlier version of the guide, “Additional deduction for research and development in tax years 2021–2025” — Tutkimus- ja kehittämistoiminnan lisävähennys verovuosina 2021–2025 (VH/20003/00.01.00/2020, 1.1.2021) remains in force.

For more information on the “combined” deduction, valid until further notice, and based on taxpayer-paid wages and external service expenses when conducting research and development, see The combined additional deduction for research and development activities.

1 Introduction 

The Act on an additional deduction for research and development in tax years 2021–2027 (Laki tutkimus- ja kehittämistoiminnan lisävähennyksestä verovuosina 2021-2027 (1078/2020) (the abbreviation used below in this guide: “the Act”)) contains provisions governing an additional deduction, available during tax years 2021–2027. The Act is in force since 1 January 2021. It was amended through the “Act amending the act governing an additional deduction for research and development in tax years 2021–2025” (Laki tutkimus- ja kehittämistoiminnan lisävähennyksestä verovuosina 2021–2025 annetun lain muuttamisesta (1169/2021)). The current Act applies to taxation for tax years 2021, 2022, 2023, 2024, 2025, 2026 and 2027. The additional deduction’s percentage is 50% for tax year 2021, and 150% for the other tax years. 

The Act applies to income taxes on business and agriculture. When requirements are fulfilled, the taxpayer can claim the deduction for expenses based on an invoice received from a research and knowledge-dissemination organisation qualifying as such an organisa­tion by virtue of fulfilling the conditions laid down by the Act. It is also required that the invoice contains expenses related to co-operation between the taxpayer and the organisation. Because tax deductions are generally granted for R&D expenses connected to business and agriculture, the economic result for a taxpayer claiming the additional deduction is that the expenses are deductible 1.5 times for 2021, and correspondingly, 2.5 times for tax years 2022, 2023, 2024, 2025, 2026 and 2027.

In addition to the deduction discussed in this guide, which is based on co-operating with a research and dissemination organisation (sometimes called ‘additional deduction for R&D co-operation’), another similar deduction is in effect in Finland, namely the ‘combined additional deduction for R&D activities’. The scopes of application of the two deductions overlap one another in part, but differ from each other concerning the deductible amounts and the deduction base.  Accordingly, the deduction for R&D co-operation discussed in this guide can only be claimed when services relating to R&D were bought from a research and dissemination organisation, but the “combined” deduction is claimed when the taxpayer has paid general wage expenses and external service expenses when conducting research and development. Another difference is that the deduction discussed in this guide based on co-operating with a research and dissemination organisation is greater (150% of qualifying expenses) than the “combined” deduction (50% of qualifying expenses). It may additionally be noted that the “combined” deduction contains a further element based on growth of the qualifying expenses, which the deduction discussed in this guide does not have. Taxpayer is not allowed to claim simultaneously both the “combined” deduction and the deduction for R&D co-operation if the claim is based on the same expenses. From the perspective of European law, neither one of the two deductions can be viewed as comparable with state subsidies. For more information on the combined deduction, see The combined additional deduction for research and development activities.

2 Taxpayers eligible to the additional deduction for R&D co-operation 

According to § 3, subsection 1 of the Act, taxpayers have the right to claim the additional deduction that conduct an R&D activity relating to their operation of a business or agricultural farm. In addition, nonresident taxpayers that conduct an R&D activity from a permanent establishment situated in Finland have the same right.

Under § 3, subsection 1, if the conditions for the additional deduction are fulfilled, any taxpayer operating in business or agriculture, regardless of company size and regardless of its business sector, can claim the deduction. This means that all Finnish companies such as partnerships, limited partnerships, and corporate entities that conduct business or agricultural operations are entitled to the deduction. In accordance with the provisions of § 3 of the Act on income tax (TVL), limited-liability companies (Oy; Ab), cooperative societies (osuuskunta; andelslag), associations, and foundations are examples of “corporate entities”. Operators of a trade or business, and operators of agriculture, that are self-employed and Finnish tax residents are also entitled to the deduction. Moreover, a foreign corporate entity that operates in business or agriculture, which due to its place of effective management is tax resident in Finland i.e., having general liability to tax, is entitled to the additional deduction.

Under § 3, subsection 1 of the Act on additional deductions for R&D expenses, if a nonresident taxpayer has a permanent establishment in Finland, the taxpayer is entitled to the deduction. In that case, it is required that the relevant R&D activity is conducted from the permanent establishment. For more information on permanent establishments, see Income taxation of foreign corporate entities - Business income and other categories of income sourced to Finland.

The additional deduction is only available to taxpayers operating in business or agriculture. ‘Operating in business’, according to § 1, subsection 1 of the Act on taxation of business income (EVL), refers to a natural or legal person that operates a business enterprise or operates a trade. The Act on taxation of business income contains no further definition of activities deemed ‘business’. The established case-law concerning the matter equates ‘business’ with various activities aimed at generating profits, having some risks inherent, having a high degree of independence, extensiveness, continuity; and being directed towards an unrestricted number of people. All of these criteria need to be satisfied for an activity to be deemed ‘business’. ‘Operating in agriculture’, according to § 2, subsection 1 of the Act on taxation of agricultural income (MVL), refers to farming and special subcategories of farming or closely related activities of forestry that have a connection to agriculture but are not deemed as an operation separate from the main agricultural activity.

3 Requirements and base for the deduction 

To qualify for the additional deduction, the taxpayer must co-operate with a research and dissemination organisation with the aim to carry on an R&D activity connected to the taxpayer’s business or agricultural enterprise. The deduction is claimed on the basis of subcontractor invoices issued by the research and dissemination organisation.

3.1 Definition of ‘research and dissemination organisation’ 

According to § 3, subsection 2 of the Act, the additional deduction is granted when an organisation for research or for the dissemination of information has co-operated with the taxpayer company. According to § 2, subsection 2 of the Act, research and dissemination organisation means an EEA entity whose main objective is to carry out, in an independent manner, basic research, industrial research or experimental development, or to disseminate the results of such activities through training, publications or communication; in such an entity, undertakings which exercise decisive influence as a shareholder, member or any other similar means must not have  pre-emptive rights to the results.

The above is essentially based on the definition found in Article 3, paragraph 83 of the General Block Exemption Regulation (Commission Regulation (EU) No 651/2014 (the GBER) declaring certain forms of aid compatible with the internal market, under Articles 107 and 108 of the Treaty) as referred to in Government proposal HE 196/2020.

Firstly, under the provisions of § 2, subsection 2 of the Act, the organisation that the company co-operates with must conduct its activities in a country within the European Economic Area (EEA). This means that the additional deduction can be made only if the co-operation takes place with an organisation operating in Finland or in another EEA country. Secondly, the additional deduction is subject to the condition that the organisation’s main objective is to carry out independent research or to disseminate results of research independently. In addition, the organisation must not enjoy a pre-emptive right to the results obtained by undertakings which exercise decisive influence as a shareholder, a member or any other equivalent. It follows from the conditions above that the organisation’s main activity must be of a non-commercial nature. Accordingly, the taxpayer cannot claim an additional deduction on the basis of co-operation with commercial operators. Examples of commercial operators include consultancy firms and the like. Nevertheless, the organisation may also conduct, in addition to its non-commercial core activities, an economic activity where R&D co-operation projects may be carried out.

Because the Act’s definition of ‘research and dissemination organisation’ is essentially based on the General Block Exemption Regulation (the GBER), all organisations operating in the EEA that meet the GBER’s definition are considered a research and dissemination organisation within the meaning of the Act.

Organisations that satisfy the conditions of research and dissemination organisations may be public or private. For example, Finnish universities and polytechnics, as well as similar EEA organisations, are deemed such organisations. Vocational schools for learning a trade are not research and dissemination organisations.

Furthermore, research institutes operating in Finland or another EEA Member State may also qualify as a research and dissemination organisation. The following is a non-exhaustive list of organisations in Finland that satisfy the conditions set out in § 2, subsection 2 of the Act (with their official names in Finnish): Ulkopoliittinen instituutti UPI, Valtion taloudellinen tutkimuskeskus VATT, Luonnonvarakeskus LUKE, Ruokavirasto, Maanmittauslaitos MML, Ilmatieteen laitos, Geologian tutkimuskeskus GTK, Teknologian tutkimuskeskus VTT Oy, Säteilyturvakeskus STUK, Terveyden ja hyvinvoinnin laitos THL, Työterveyslaitos TTL, Suomen ympäristökeskus SYKE. In contrast with the above, an organisation such as “Statistics Finland” — Tilastokeskus does not satisfy the requirements of § 2, subsection 2 of the Act and therefore cannot be regarded as a research and dissemination organisation.

In general, organisations satisfying the requirements of § 2, subsection 2 are themselves the most appropriate parties to describe their operation and give a sufficient account of whether they fulfil the requirements. Such a description can be included in the contract or sub-contracting order, so as to allow the taxpayer to provide proof that the conditions for the deduction are met in that regard. 

3.2 The R&D activities

One of the conditions for the additional deduction is that when the taxpayer company co-operates with a research and dissemination organisation, the co-operation is for an R&D activity within the meaning of the Act. Under § 2, subsection 1 of the Act, ‘research and development’ is fundamental research, industrial research, experimental development or feasibility studies within the meaning of Article 25(2) of the GBER, which systematically seek to add to knowledge or seek to use it for the purpose of finding new applications.

Accordingly, the company’s co-operation with the research and dissemination organisation must therefore correspond to one or more of the categories of research covered by Article 25(2) of the GBER: fundamental research, industrial research, experimental development and feasibility studies. Further definitions of research types in reference to Article 25(2) of the GBER are given in Articles 2(84) — 2(87). 

In accordance with Article 2(84) of the GBER, ‘fundamental research’ means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any direct commercial application or use in view.

Further, in Article 2(85) of the GBER, ‘industrial research’ means the planned research or critical investigation aimed at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services. It comprises the creation of components parts of complex systems, and may include the construction of prototypes in a laboratory environment or in an environment with simulated interfaces to existing systems as well as of pilot lines, when necessary for the industrial research and notably for generic technology validation.

Further, in Article 2(86) of the GBER, ‘experimental development’ means acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills with the aim of developing new or improved products, processes or services. This may also include, for example, activities aiming at the conceptual definition, planning and documentation of new products, processes or services. Experimental development may comprise prototyping, demonstrating, piloting, testing and validation of new or improved products, processes or services in environments representative of real life operating conditions where the primary objective is to make further technical improvements on products, processes or services that are not substantially set. This may include the development of a commercially usable prototype or pilot which is necessarily the final commercial product and which is too expensive to produce for it to be used only for demonstration and validation purposes. Experimental development does not include routine or periodic changes made to existing products, production lines, manufacturing processes, services and other operations in progress, even if those changes may represent improvements.

Further, in Article 2(87), ‘feasibility study’ means the evaluation and analysis of the potential of a project, which aims at supporting the process of decision-making by objectively and rationally uncovering its strengths and weaknesses, opportunities and threats, as well as identifying the resources required to carry it through and ultimately its prospects for success.

The nature and purpose of the activity will determine whether the activity is deemed R&D within the meaning of the Act. Depending on its purpose, an activity may be an R&D activity in a given situation while in another situation, it is not R&D. In general, R&D activities are of a systematic nature. This means that the activity must have a predefined objective. The main purpose is to create something fundamentally new, by increasing knowledge or using it to find new applications. However, to claim the additional deduction does not require an examination of the results of the R&D activities or the achievement of the predefined objective. In the same way, there is no need for the activities to produce a result in the form of new intangible property. The carrying out of the R&D project justifies the deduction. 

R&D activities may be directed toward the development of new products, services, businesses or the like. In addition to development of new services, research and development in the services sector may include the development of new research methods and metrics, and electronic services or the identification of unknown business risks, etc. When related to the development of economic activities of companies, R&D may be conducted in order to develop a new product or service concept.

However, as a routine activity, making various improvements to products, services or business processes is not an R&D activity. In the same way, carrying out administrative work, general work on sales and marketing, or standard teaching and training is not an R&D activity. Furthermore, activities such as data collection, storage, classification, evaluation and other analysis, testing and standardisation, as well as administrative and support functions, are not R&D unless they are exclusively related to an ongoing research and development project.

The fact that an organisation the taxpayer co-operates with has taken into account a proportion of its overhead costs when calculating the price of its R&D activities, which meet the definition of the Act, does not affect the assessment of the nature of the activity. Accordingly, the organisation’s operation can nevertheless be regarded as an R&D activity.

From the perspective of the organisation the company co-operates with, R&D activities may take the form of on-demand research or co-operation. Based on Government Proposal HE 196/2020 and report VaVM 24/2020 of the Committee on Finance, taxpayers can claim an additional deduction regardless of the category to which research and development activities belong, from the perspective of the organisation it co-operates with. Thus, the name or heading of the contract is not relevant for the fulfilment of the conditions for the deduction. Instead, the key is that the activity meets the definition of ‘research and development’ of the Act. 

3.3 Connection between the R&D activity and the taxpayer’s business or agriculture 

According to § 3, subsection 1 of the Act, taxpayers have the right to claim the additional deduction that conduct an R&D activity relating to their operation of a business or agricultural farm. From this, it follows that the research and development must serve the taxpayer’s own business activity or agricultural activity. This means that the taxpayer must engage in business activities within the meaning of § 1, subsection of the EVL; or engage in agriculture within the meaning of § 2, subsection 1 of the MVL, and that the research and development must also be related to that activity. Research and development relates to business or agriculture where the purpose of the activity is to add data for the purposes of business or agriculture, or use data to find new applications in business or agriculture, etc. Research and development may relate either to the taxpayer’s existing business or agriculture or to a planned business or agriculture.

The taxpayer can also engage in activities other than business or agriculture. Under the provisions of § 1, subsection 2 of the EVL, when carried out by certain entities, such as limited liability companies, even activities remaining outside of business or agriculture will be deemed as being part of the business source of income, and the profits or losses of such activities are calculated in accordance with the EVL. No additional deduction may be made on the basis of R&D activities that support other than business or agriculture, even if the profits/losses are under the provisions of § 1, subsection 2 of the EVL calculated in accordance with the EVL. How provisions of the EVL are applied on corporate taxation is discussed in more detail in the Tax Administration’s in depth guide concerning “Elimination of the income-source division of certain entities” – Eräiden yhteisöjen tulolähdejaon poistaminen available in Finnish and Swedish.

For example, in the case of self-employed businesses’ and professionals’ income, the income of partnerships, limited partnerships and partially exempt entities, activities that do not qualify as business or agriculture are part of a personal source of income, the profits/losses of which are calculated in accordance with the Act on income tax (Tuloverolaki (TVL)). Because the research and development must be related to business or agriculture, no additional deduction can be claimed in the context of an economic activity belonging to the personal source of income.

Because the R&D must be related to the taxpayer ’s own business activity or to the taxpayers own agriculture, any R&D carried out for another company to use cannot give rise to the deduction. However, in the case of a group enterprise, if the entire group’s R&D is centralised in one or more subsidiaries, the activities may, in the view of the Tax Administration, be regarded as R&D related to the “own” business or agriculture of the group’s member undertakings, subsidiaries or companies; which justifies the deduction. In this context, the definition of “group” refers to undertakings meeting the conditions laid down in Chapter 1, § 6 of the Accounting Act.

In the framework of one or several R&D projects, the taxpayer company may co-operate not only with the research and dissemination organisation, but also with other taxpayers. This does not prevent the company from claiming the additional deduction. However, an additional deduction can only be claimed by reference to co-operation in R&D activities with the research and dissemination organisation insofar as it has a connection to the taxpayer’s own activities.

3.4 The subcontractor invoice 

According to § 3, subsection 2 of the Act, the base of the additional deduction is the subcontractor invoice for R&D, which the taxpayer company has paid to a research and dissemination organisation. Under § 2, paragraph 3 of the Act, ‘subcontractor invoice’ refers to invoices arriving from a research and dissemination organisation, and paid by the taxpayer company, to the extent that they contain expense items related to R&D.

The additional deduction is made on the basis of the subcontractor invoice from the research and dissemination organisation. Subcontractor invoices may be used as a base for the deduction only if the biller is a research and dissemination organisation within the meaning of the Act. Consequently, subcontractor invoices which are invoiced by another entity cannot be included even if the invoices relate to research and development that meets the requirements of the Act.

Only the items related to R&D activities that meet the requirements of the Act, included in the subcontractor invoice received from the research and dissemination organisation can be accounted for (see 3.2 and 3.3). If an invoice includes, in addition to those relating to R&D activities, items based on research and development activities other than those referred to by the Act, these items cannot become a base of the additional deduction.  The subcontractor invoice may therefore constitute the base for the additional deduction in whole or in part, depending on the nature of the items it contains.

In order for the company to demonstrate that the items included in the invoice, i.e. the deduction’s base, are in line with the requirements, it is appropriate for the research and dissemination organisation to specify the expense items of R&D activities within the meaning of § 2, subsection 1 of the Act.

Because the deduction is based on the subcontractor invoice coming from the research and dissemination organisation, nothing else can be included in the deduction’s base in respect of other research and development expenditure, although costs may have been incurred by the taxpayer, such as the remuneration of the taxpayer's own staff. In the same way, no additional deduction is available for donations made to organisations that meet the criteria of a research and dissemination organisation.

The base for the deduction within the business source of income consists of subcontractor invoices relating to business. Within the agricultural source of income, the base for the deduction consists of subcontractor invoices relating to agriculture. Subcontractor invoices can be included in the deduction’s base only to the extent that the items of those invoices fulfil the requirements laid down by the Act.

4 The deduction’s amount 

The deduction’s amount equals 150% of the subcontracting items relating to the tax year and complying with the conditions laid down by the Act. The minimum additional deduction is €5,000 in the tax year, and the maximum is €500,000. An impact on the amount may be caused by various M&A transactions that the company enters into, or by any public financial support the company receives for the R&D project.

4.1 The subcontractor invoices that can be included in one tax year 

The amount of the additional deduction for a tax year must be calculated taking into account the invoices, which under the provisions of the Act on the taxation of business income (EVL) and the Act on the taxation of income from agriculture (MVL) qualify for tax deductions, and for which the service/work performance, for which liability arises to settle the invoice, took place during that tax year. Under the provisions in § 22, subsection 1 of the Act on the taxation of business income (EVL), expenditure falls within the tax year when the liability to settle it arose, unless otherwise provided elsewhere in the EVL. This means that, in the business source, periodised expenditure is normally spread out across several periods on an accrual basis. Thus, for each tax year, the base for the additional deduction of expenses related to the business source of income contains the invoices which meet the Act’s requirements and are based on research co-operation carried out during the tax year.

Under § 25 of the Act on the taxation of business income (EVL), periodisation of R&D expenses is permissible in a manner different from the general rule in § 22, subsection 1 of the EVL. Under § 25, R&D expenses that aim for improvements of a business activity, with the exception of acquisition costs of a building, structure, or a part of a building/structure for permanent use, are deemed connected to the tax year when the liability to settle them arose. However, at the request of the taxpayer company, those expenses may alternatively be deducted in the form of depreciation during two or more tax years. Thus, under § 25 of the EVL, the taxpayer company has the option to deduct subcontractor expenses over a number of tax years by way of annual depreciation expensing, rather than deducting the whole amount during one tax year. Because the base for calculating the additional deduction for each tax year takes into account the invoices on an accrual basis, the above choice of deduction does not affect the base. The base for one tax year’s additional deduction therefore, in reference to accrual basis, also takes account of subcontractor invoices for the tax year, which are deducted in accordance with § 25 of the EVL only later.

In tax accounting, expenses within the agricultural source of income must be periodized in accordance with the cash basis. Under § 27a of the Act on the taxation of business income (EVL), similar cash-basis periodisation also applies to business income received by self-employed people who use cash basis. When the income of a taxpayer is tax-assessed on cash basis, the subcontractor invoice is an expense for the tax year when the taxpayer pays the invoice.

4.2 Minimum and maximum amounts 

Under § 3, subsection 3 of the Act, the additional deduction is 150% of qualifying subcontractor invoices. The maximum deduction is €500,000 for one tax year. No additional deduction is allowed if the deductible amount during the tax year stays below €5,000.

The minimum and maximum amounts only concern one tax year and one company (taxpayer entity). How the maximum limit or the minimum limit is reached is separately evaluated for every tax year and company. For this reason, there is no requirement that the year’s subcontractor invoices be connected to exactly the same R&D project: invoices related to several different projects can still be included in the tax year’s deduction base.

The consequence of the rules that require separate evaluation for every tax year and taxpayer may be that no additional deduction can be claimed even if the qualifying invoices relating to one R&D project amount to €3,333.33 or more.

Due to the requirement that the deduction is evaluated separately for every tax year, if the taxpayer conducts both a business and an agricultural operation, the minimum and maximum limits apply to the total that relates to the business source of income and to the agricultural source of income. This way, if such a total of qualifying expenses is €3,333.33 or higher, the taxpayer is entitled to claim the deduction. The additional deduction’s amount for each one of the sources of income is calculated on the basis of the respective expenses being connected to each source.

No full deduction of €500,000 is allowed simultaneously within the taxpayer’s business source of income and within the taxpayer’s agricultural source of income. Instead, the maximum €500,000 for one tax year concerns the taxpayer’s entire conduct of operations. If a taxpayer has operations both in a business and in an agricultural source and the qualifying expenses would exceed the tax year's maximum limit, the taxpayer can independently determine the proportions of how much of the qualifying expenses should be claimed within each one of the two sources of income.

4.3 Effect of M&A transactions 

M&A transactions such as mergers (§52a of the EVL), demergers (§52c of the EVL), transfer of assets (§52d of the EVL), or transfers of a business unit from one company to another may affect the amount of the additional deduction which the taxpayer company participating in the transaction can claim.

Companies that merge into another, and companies dividing themselves in a demerger, can claim the deduction for purposes of the company’s tax assessment, for the final tax year (the year of merging or demerging), on the basis of the subcontractor invoices, which under the rules of the EVL or MVL can be deducted in the company’s tax assessment. Correspondingly, a company transferring assets or a business unit to another company can claim an additional deduction in reference to the subcontractor invoices that relate to the period before the company’s M&A transaction, i.e. before the transfer. In situations where the taxpayer’s liability to settle a subcontractor invoice arises after a completed M&A transaction, the receiving company is the one that can claim the additional deduction connected to the R&D activity that was transferred. The Act’s provisions concerning the minimum limit of the deduction, among other provisions and rules, must be adhered to also when a M&A transaction is made, or has been made.

The provisions of § 4 of the Act contain important restrictions of the deductible amount for the receiving company in connection with M&A transactions: mergers, demergers, transfer of assets, transfers of a business unit from one company to another. Under § 4, subsection 1, when a merger takes place, within the meaning of § 52a of the Act on the taxation of business income (EVL), an amount equalling the maximum deduction defined in § 3 of the Act can be deductible in the tax assessment of the receiving company, but the deduction made on the basis of the transferred R&D activity in the merged company’s assessment during the same tax year must first be subtracted. Under § 4, subsection 2, the provisions in the previous subsection 1 concerning mergers also apply to demergers as referred to in § 52c of the EVL, and to transfers of assets as referred to in § 52d of the EVL, and to the tax assessment of the receiving company when the company has acquired a business unit.

Based on the rules laid down in § 4 of the Act, the corporate entities participating in mergers, demergers, transfer of assets, transfers of a business, and carrying out R&D activities that relate to the business or agriculture transferred in M&A transactions, cannot claim a total additional deduction that would exceed €500,000 in total. In other words, the receiving company must take into account the deduction which the opposite party in the M&A transaction has already claimed on the basis of the transferred R&D activity on the same tax year.

If the final accounting period’s end date in the merging company, the final accounting period’s end date in the company being demerged, or the end date of the accounting period of a company from which a business unit is transferred away and the R&D operations are forwarded to the receiving company, falls within a different calendar year, the provisions of § 4 of the Act pose no restriction to the receiving company to claim the additional deduction. The reason is that the Act’s restriction of deductibility is tax year-specific.

It may be that companies concerned by various M&A transactions conduct some other projects of research and development other than the R&D activities being transferred due to a merger, etc., for which the companies receive subcontractor invoices qualifying for the additional deduction. The provisions of § 4 of the Act pose no restriction to the receiving company to claim the additional deduction, other than concerning the R&D activity that was transferred. However, the additional deduction’s combined total amount, which is includes the transferred R&D activity and the receiving company’s other R&D activity, is subject to the maximum limit of €500,000. The company being merged into another company, the company being demerged, or the company that transfers a business unit away, can each claim an additional deduction, maximally €500,000 in connection with their tax assessments.

4.4 Public financial support for the taxpayer’s R&D project

Various forms of public financial support can affect the amount of additional deduction. Under § 3, subsection 3 of the Act, no additional deduction is granted if direct state subsidy other public financial support was given to the taxpayer for covering the subcontractor expenses related to R&D co-operation. For this reason, the taxpayer can only claim the additional deduction for its expenses that remain outside of the public financial support’s coverage. ‘Public financial support’ means direct state subsidies or any other category of public support. However, if the taxpayer entity borrows money in order to pursue its R&D project, it is not deemed ‘public financial support’ under the definition set out in § 3, subsection 3 of the Act.

For calculating the additional deduction, the first step it to subtract the public-support money from the deduction’s base. After that, the remaining amount of expenses will serve as the base for calculating the additional deduction.

If a public body granted the taxpayer a general-purpose support, defined according to the public body’s official decision as not directed to the R&D project’s subcontractor invoices, to receive the support poses no obstacles for the taxpayer to claim the additional deduction, unless it is nevertheless deemed that the support is directed to the project's subcontractor invoices. If the amount of the general-purpose support is lower than the costs of the project that are unrelated to subcontractor invoices, it is deemed that the support is entirely for “other” expenses, which means that it has no impact on how much the taxpayer can claim as its additional deduction for the tax year. If the amount of the general-purpose support is higher than the project's "other" expenses, it is deemed that the support first covers all the "other" expenses up to their full amount, and then, the support money left over would cover the taxpayer’s subcontractor invoices. In this case, the base for the additional deduction is deemed as consisting of the remaining part of the subcontractor invoice, i.e. of what is left when the financial support has been deducted. If the general-purpose support covers the R&D project fully, the taxpayer cannot claim the additional deduction at all.

If based on the request for the financial support, or based on the official decision concerning the giving of financial support, the public body expressly intends to cover subcontractor invoices connected to the taxpayer’s R&D project, the taxpayer can only claim the deduction with regard to the invoices that the support does not cover.

It may be that after the public financial support is taken into account, the base shrinks down to a level below the minimum limit. In this case, the taxpayer can no longer claim the deduction at all.

In accordance with Government proposal HE 196/2020, the legislation governing state financial aid must be taken into account, and it is therefore important to ensure that the research and dissemination organisation’s pricing of its invoice must reflect actual market values and actual market conditions. For this reason, the pricing of the subcontractor invoice, in reference to the VaVM 24/2020 report of the Finance Committee, must stay within limits that ensure that no overpricing or underpricing can cause a prohibited direct or indirect public support to arise. The report of the Finance Committee notes that the pricing of the subcontractor invoice is typically agreed by parties independent from each other and therefore the pricing in principle represents fair market values, which are formed in the competitive market. This means that it is not necessary for the subcontractor invoice to include profit margin or mark-up.

4.5 The relationship between the deduction based on R&D co-operation and the combined deduction for R&D activities 

There is some overlap as regards the scope of application of the additional deduction based on R&D co-operation, in effect for tax years 2021—2027 and the scope of application of the “combined” deduction for R&D activities, in effect as of 2023, until further notice. The overlapping arises from the fact that the subcontractor invoices from research and dissemination organisation qualifying as the base for the additional deduction based on R&D co-operation also fulfill the definition of the combined additional deduction’s purchased-service cost.

However, as provided in § 6, subsection 2 of the Act on additional deductions based on expenses of R&D activities (Laki tutkimus- ja kehittämistoiminnan menoihin perustuvista lisävähennyksistä verotuksessa (1298/2022)), no simultaneous claims for both the combined deduction for R&D activities and the additional deduction based on R&D co-operation are allowed on the basis of same subcontractor invoices. In other words, the combined additional deduction and the additional deduction based on R&D co-operation cannot be claimed simultaneously in reference to one single expense.

If the taxpayer becomes aware that the conditions are met for both deductions, the taxpayer is free to choose which part of expenses would connect with a claim for the additional deduction for R&D co-operation and correspondingly, which part with a claim for the “combined” deduction.

For more information on the differences between the two deductions, see the Tax Administration’s guide “The combined deduction for R&D activities” — Tutkimus- ja kehittämistoiminnan yhdistelmävähennys (section 6.2).

5 Claiming the additional deduction based on R&D co-operation

Taxpayers that conduct business must claim the additional deduction against their business profits; and correspondingly, taxpayer entities that pursue agricultural activities claim the deduction against the taxpayer’s profits from agriculture. The additional deduction for R&D can be claimed regardless of whether the tax year’s economic result turns out to be profits or loss. From this, it follows that a granted additional deduction can make the tax year’s loss heavier. In the same way, a granted additional deduction can change the tax year’s economic result from profits into loss.

In accordance with § 3, subsection 4 of the Act, the deduction is included in the taxpayer’s allowable loss for the year, relevant to the taxpayer’s business income source, or relevant to the taxpayer’s agricultural income source. In accordance with § 119, subsection 1 of the Act on income tax, loss for an income source is deductible against the profits belonging to the same source of income concerned by the loss, and carry-forward is available across the next 10 tax years, as income is generated.

The taxpayer must claim the deduction on their income tax return. Under § 5, subsection 1 of the Act, the taxpayer must give sufficient details to the tax authority on how the requirements for the additional deduction are fulfilled, and on the subcontractor invoices that constitute the deduction’s base. For more information on how to claim the additional deduction on the income tax return form, see the appropriate enclosure form’s instructions for completion.

According to § 5, subsection 1 of the Act, the claim for the additional deduction must be submitted before tax-assessment's end date. According to § 49, subsections 1 and 4 of the Act on assessment procedure, ‘end date’ is different for every taxpayer, and is the date indicated on the tax decision issued by the Tax Administration. In other words, the taxpayer needs to claim the deduction before the date when the Tax Administration finishes the year’s tax assessment of the taxpayer concerned.

According to § 5, subsection 2 of the Act, concerning circumstances other than the above, the provisions of the Act on assessment procedure generally apply to the additional deduction. From this, it follows that when the taxpayer submits an appeal concerning the additional deduction, the usual tax rules governing appeals are applicable. For more information about the appeal procedure (in Finnish and Swedish), see the Tax Administration’s in-depth guide “Appeal procedure applied to the Tax Administration’s decisions” — Muutoksenhaku Verohallinnon päätökseen. In situations where questions arise on how provisions of the Act are applied, taxpayers can also apply for an advance ruling. For guidance on how to apply for an advance ruling, see the Tax Administration’s guidance “Applying for an advance ruling and the decision issued” — Ennakkoratkaisu­hakemuksen tekeminen ja siihen annettava päätös (available in Finnish and Swedish).

6 The Act’s entry into force; information on how its provisions are applied

As set out in § 6, subsection 1 of the Act governing additional deductions for R&D expenses, the Act came into force 1 January 2021 and will cease to be in force 31 December 2027. According to § 6, subsection 2 of the Act, the period when its provisions are applicable extends to tax years 2021, 2022, 2023, 2024, 2025, 2026, and 2027. This way, the taxpayer entity can maximally be granted the additional deduction for 7 tax years. If the taxpayer has a non-calendar accounting year, it may have an impact on the taxpayer’s eligibility for the deduction a certain year.

In accordance with § 6, subsection 3 of the Act, its provisions are not applicable if the R&D project within the meaning of § 3 of the Act was started before the Act came into force. The point in time when the project is deemed to start is the date of signing the contract concerning it. Under Government proposal HE 196/2020, ‘contract’ concerning an R&D project means the agreement that concerns billing, to be carried out by the research and dissemination organisation. Accordingly, taxpayers can claim the deduction if the contract was signed January 1, 2021 or later.

The provisions of the Act are not applied on tax year 2028. This means that no additional deduction is permissible in the tax assessment for the 2028 tax year, although the taxpayer may have started its R&D project before or during the 2027 calendar year.