Tax Credit Scheme for Research & Development costs in Denmark in 2024

Tax Credit Scheme for Research & Development costs in Denmark in 2024

In this blog, we look at the Tax Credit Scheme for Research & Development costs in Denmark in 2024.

Maintaining a healthy cash flow is crucial for any company’s survival and growth.

This is especially true for new companies, which often face significant financial challenges during their early stages.

Lack of adequate cash flow can hinder a company’s ability to pay its employees, suppliers, and other operational expenses, ultimately leading to financial strain and potential failure.

In Denmark, the government recognises the importance of supporting new companies and fostering innovation.

To address the cash flow challenges faced by companies, particularly those engaged in research and development (R&D) activities, the Danish government has implemented a Tax Credit Scheme.

The Research and Development (R&D) Tax Credit Scheme

The Tax Credit Scheme in Denmark is a government initiative designed to improve the cash flow of companies that invest in R&D activities.

Under this scheme, companies can receive an advance payment of the tax value of their R&D costs, effectively providing them with additional liquidity to support their operations and growth.

The primary benefit of the Tax Credit Scheme is the injection of cash back into the company.

This influx of funds can be used to cover various expenses, such as salaries, rent, equipment purchases, or reinvestment into further R&D projects.

By addressing cash flow challenges, the scheme aims to foster innovation and support the growth of companies, particularly those in the early stages of development or those undertaking significant R&D initiatives.

Moreover, the Tax Credit Scheme acknowledges the importance of R&D activities in driving economic growth and technological advancement.

By incentivising companies to invest in R&D, the government encourages innovation and supports the development of new products, services, and processes that can contribute to Denmark’s competitiveness in the global market.

Increased tax deduction offered

The Tax Credit Scheme also provides companies with an increased tax deduction of 8% in 2024 on R&D costs.

The resulting increase in cash flow when applying the Tax Credit Scheme is calculated by taking the tax value of the increased tax deduction.

If we take an example with 1.000.000 DKK, adding 8% would be 80.000 DKK in additional tax deduction.

The corporation tax rate in Denmark is 22%, so that would give 80.000 DKK x 22% = 17.600 DKK increase in cash flow.

Increased tax deduction rates

These are the increased tax deduction rates applicable for the years 2023-2026:

INCREASED TAX DEDUCTION RATES OF R&D COSTS	YEAR 2023	YEAR 2024	YEAR 2025	YEAR 2026
Percentage of R&D costs	108%	108%	108%	110%

How should the accounting be handled?

From an accounting perspective, the company shall either activate the R&D costs in the balance and depreciate the costs each year or expense the costs in the profit and loss statement.

The handling in either the balance or the profit and loss statement depends on the type of R&D cost.

We will delve deeper into this later in the blog.

It is important that the company can identify the R&D costs in the accounting which can be done by applying dimensions to the accounting entries.

Dimensions is a function found in f.ex. SAP, Microsoft Dynamics and e-conomic – but not in the smaller accounting systems like Dinero and Billy.

Tax Credit Scheme

Companies are able to get the tax value of their R&D costs paid out in advance for R&D costs up to 25 million DKK.

This effectively gives an increased cash flow of 5,5 million DKK.

The Tax Credit can be applied for, when submitting the Corporate Income Tax Return.

If you forgot to apply for the Tax Credit Scheme, you can apply to change your Corporate Income Tax Return within the statute of limitations.

Requirements to use the Tax Credit Scheme

To be eligible for the Tax Credit Scheme in Denmark, companies must meet certain criteria.

The main requirements are:

Tax Deficit

A fundamental requirement for companies to qualify for the Tax Credit Scheme is to have a tax deficit for the fiscal year in which they are applying.

A tax deficit occurs when a company’s tax deductions exceed its taxable income for a specific fiscal period, resulting in a negative tax liability.

R&D costs

R&D costs are of particular significance within the Tax Credit Scheme as they represent the investments made by companies in innovation, technological advancement, and product development.

Companies engaged in R&D activities often incur substantial expenses related to personnel, materials, equipment, and facilities, which can lead to deficits during the development phase of new products or technologies.

The Tax Credit Scheme incentivises companies to invest in R&D by allowing them to claim tax credits for deficits resulting from these activities.

This, in turn, can provide financial support and improve the cash flow.

R&D costs refers to the costs incurred by a company in conducting research and development activities (R&D).

1. Companies must have incurred eligible R&D costs during the fiscal year to qualify for the Tax Credit Scheme.
2. Eligible R&D costs encompass various costs associated with research and development activities, including:

Personnel Costs: Salaries, wages, and benefits of employees directly involved in R&D activities, such as scientists, engineers, researchers, and technicians.
Materials and Supplies: Costs associated with purchasing materials, chemicals, prototypes, and other supplies used in R&D experiments and testing.
Equipment Purchases: Expenses for acquiring or leasing specialised equipment, machinery, software, and tools necessary for conducting R&D projects.
Facility Expenses: Costs related to renting, maintaining, or operating facilities or laboratories used for R&D purposes, including utilities, rent, and maintenance.
Subcontractor Fees: Payments made to external consultants, research institutions, or subcontractors for specialised services or expertise required for R&D projects.
Overhead Expenses: Indirect costs incurred by the company in supporting R&D activities, such as administrative overhead, depreciation, and insurance.

3. These costs must be properly documented and directly related to qualifying R&D projects undertaken by the company.

How the Tax Credit Scheme Works

The Danish Tax Credit Scheme offers companies a valuable opportunity to offset tax deficits by leveraging their investments in R&D.

Understanding how this scheme operates is important for companies aiming to support their innovation initiatives and improve their cash flow.

Process of Applying for the Scheme

Applying for the Tax Credit Scheme involves a structured process that requires companies to collect and submit relevant documentation and information to the Danish Tax Agency.

Navigating this process effectively is essential for ensuring eligibility and maximising the benefits of the scheme.

1. Companies eligible for the Tax Credit Scheme apply for the tax credit when submitting their Corporate Income Tax Return to the Danish Tax Agency.
2. The application process involves declaring the tax deficit and the R&D costs incurred during the fiscal year.
3. Companies may need to provide documentation if requested by the Danish Tax Agency.
4. It’s essential for companies to ensure accuracy and completeness in their applications to facilitate the processing and approval of the tax credit.

Calculation of the Tax Credit Amount

Determining the tax credit amount under the scheme involves a careful calculation of eligible R&D costs.

A thorough understanding of the calculation methodology is vital for companies seeking to accurately assess their potential tax benefits.

1. The tax credit amount under the scheme is calculated based on eligible R&D costs incurred during the fiscal year.
2. Typically, the tax credit is equal to 22% of the R&D costs, up to a maximum of 5,5 million DKK in total tax credit (22% of 25 million DKK).
3. Companies should carefully review tax regulations and seek professional advice to accurately calculate their tax credit amount and optimise their benefits under the scheme.

Timelines for Receiving the Tax Credit Payment

The timeline for receiving the tax credit payment is a critical aspect of the Tax Credit Scheme.

Companies rely on this payment to improve the cash flow and support ongoing R&D activities.

Understanding the expected timelines for payment is essential for effective financial planning and management.

1. Once the Danish Tax Agency process the company’s Corporate Income Tax Return and approve the tax credit application, the company becomes eligible to receive the tax credit payment.
2. The timeline for receiving the tax credit payment typically varies depending on the processing time of tax returns and the efficiency of administrative procedures.
3. In general, companies can expect to receive the tax credit payment within a few months after the submission of their tax return, although specific timelines may vary.
4. It’s important for companies to monitor the progress of their tax credit applications and follow up with the Danish Tax Agency if there are any delays or issues with payment processing.

Generally, the tax credit is paid each year in November to companies.

Tax Credit Scheme for Research & Development costs in Denmark from an accounting perspective

It is important to distinguish between “Research” and “Development” costs from an accounting perspective.

Definition of “Research” from an accounting perspective

Research, involves conducting original activities aimed at achieving new scientific or technical understanding.

This can include fundamental research activities that contribute to the advancement of knowledge in a particular field, such as exploring theoretical concepts, conducting experiments, or developing hypotheses.

Research costs should be presented in the profit and loss statement.

Definition of “Development” from an accounting perspective

Development, on the other hand, refers to the application of scientific or technical knowledge to produce new or significantly improved materials, mechanisms, products, processes, systems, or services.

Unlike research, which focuses on generating new knowledge, development activities entail applying existing knowledge to create tangible innovations or improvements that have commercial or practical value.

Smaller companies (class B and class medium C) can choose to present development costs in the profit and loss statement or in the balance.

Larger companies (class large C) has to present development costs in the balance.

When a company presents the development costs in the balance, a reserve (the development costs minus 22% tax deduction) should be reserved in the equity capital group on a special account dedicated for R&D reserves.

The following three requirements are needed in order for R&D to be considered R&D for tax purposes:

Something new

Your R&D needs to contain an element of news and should be compared with the work of other companies in your niche.

The result of your successful R&D should provide new knowledge to the industry.

Therefore, reverse engineering, copying or otherwise imitating other companies does not fulfil the requirements.

Something creative

If you are using methods that have previously been used it is not always considered creative.

However, applying new methods to known procedures can sometimes be considered creative.

Something uncertain

Costs

The uncertainty regarding costs refers to the unpredictability or variability associated with the financial aspects of conducting research and development activities.

When embarking on an R&D project, companies often face uncertainties regarding the total costs required to achieve their objectives.

This uncertainty can stem from various factors, such as unexpected technical challenges, changes in project scope, or fluctuations in the prices of materials and resources.

For tax purposes, the Danish Tax Agency recognise that R&D activities inherently involve financial risks and uncertainties.

Therefore, companies can include both direct costs (such as salaries of researchers, and expenses for materials and equipment) and indirect costs (such as overhead expenses) incurred during R&D projects when claiming tax benefits under the R&D tax scheme.

Timeline

The uncertainty surrounding the timeline refers to the challenges companies encounter in accurately predicting the duration or timeframe required to complete an R&D project.

Research and development activities often involve complex processes, experimentation, and iterative testing, which can lead to unforeseen delays or setbacks.

From a tax perspective, Danish companies engaging in R&D must be able to demonstrate that they have made genuine efforts to progress their projects within a reasonable timeframe.

While flexibility is acknowledged due to the inherent uncertainties in R&D, the Danish Tax Agency can expect companies to provide a clear timeline outlining key milestones, objectives, and expected completion dates.

Objectives

The uncertainty regarding objectives relates to the inherent risks associated with achieving the desired outcomes or goals of an R&D project.

Companies undertaking research and development often face challenges in accurately forecasting whether their objectives can be met within the allocated resources and timeframe.

For tax purposes, Danish companies must establish clear and measurable objectives for their R&D projects, outlining the specific outcomes or innovations they aim to achieve.

While some degree of uncertainty is accepted due to the experimental nature of R&D, the Danish Tax Agency expect companies to conduct thorough feasibility studies and risk assessments to assess the likelihood of meeting their objectives.

Each R&D project should be evaluated independently.

Sector-specific Benefits

We’d like to provide you with some different industries in Denmark that can leverage the R&D Tax Credit Scheme to drive innovation and growth.

Technology Industry

Denmark has a thriving technology sector, encompassing areas like information technology, biotechnology, and clean energy.

Companies in this sector can benefit from the R&D Tax Credit Scheme to fund research into new software, hardware, or innovative solutions to technological challenges.

• Information Technology: Technology companies can utilise tax incentives to finance research into cutting-edge software solutions, such as advanced algorithms, artificial intelligence, and cybersecurity measures. This enables them to develop innovative products and services that meet evolving market demands while maintaining a competitive edge.
• Biotechnology: Biotech firms can leverage tax benefits to support research initiatives aimed at developing novel therapies, diagnostics, and treatments for diseases. By investing in R&D, these companies can accelerate medical advancements, improve patient outcomes, and contribute to the global biopharmaceutical landscape.
• Clean Energy: Denmark’s commitment to renewable energy presents opportunities for companies to innovate in clean energy technologies. With tax incentives, firms can fund R&D projects focused on enhancing the efficiency of solar panels, wind turbines, energy storage solutions, and smart grid technologies. By driving innovation in clean energy, companies can support Denmark’s transition to a sustainable and carbon-neutral future.

Leveraging the R&D Tax Credit Scheme can help technology companies accelerate innovation, stay competitive in rapidly evolving markets, and contribute to Denmark’s reputation as a hub for technological advancement.

Healthcare Industry

The Danish healthcare sector encompasses pharmaceuticals, medical devices, biotechnology, and healthcare services.

Companies in this industry can utilise the R&D Tax Credit Scheme to fund research into new drugs, medical devices, diagnostic tools, or healthcare delivery models.

• Pharmaceuticals: Pharmaceutical companies can leverage tax credits to finance clinical trials, drug development programs, and research into novel therapies. By investing in R&D, these firms can bring new medications to market, address unmet medical needs, and improve patient care and quality of life;
• Medical Devices: Manufacturers of medical devices can use tax incentives to support product development efforts, including the design, prototyping, and testing of innovative medical technologies. By investing in R&D, these companies can introduce cutting-edge devices that enhance diagnosis, treatment, and patient outcomes across various medical specialties;
• Biotechnology: Biotech companies can benefit from tax credits to advance research in areas such as genomics, molecular biology, and precision medicine. By exploring new frontiers in biotechnology, these firms can develop groundbreaking therapies, diagnostics, and personalised medicine approaches that revolutionise healthcare delivery and improve population health.

Leveraging the R&D Tax Credit Scheme can help healthcare companies drive medical innovation, improve public health, and contribute to Denmark’s reputation as a leader in life sciences research and innovation.

Manufacturing Industry

Denmark has a diverse manufacturing sector, encompassing industries such as machinery, electronics, food and beverage, and renewable energy.

Companies in this sector can leverage the R&D Tax Credit Scheme to drive innovation in product design, manufacturing processes, and sustainability initiatives.

• Machinery: Manufacturers of machinery and equipment can utilise tax incentives to drive innovation in product design, materials, and manufacturing processes. By investing in R&D, these companies can develop state-of-the-art machinery that enhances productivity, reliability, and efficiency across various industrial sectors;
• Electronics: Electronics firms can leverage tax credits to support research into next-generation electronic components, devices, and systems. By innovating in areas such as semiconductors, sensors, and communication technologies, these companies can create products that power digital transformation and drive advancements in consumer electronics, telecommunications, and IoT applications;
• Food and Beverage: Companies in the food and beverage industry can harness tax benefits to innovate in product development, sustainability, and supply chain optimisation. By investing in R&D, these firms can create healthier, more nutritious food products, implement eco-friendly packaging solutions, and adopt sustainable farming and production practices that align with consumer preferences and environmental goals;
• Renewable Energy: Denmark’s leadership in renewable energy presents opportunities for manufacturers to innovate in clean energy technologies. With tax incentives, companies can fund R&D projects focused on improving the performance, reliability, and cost-effectiveness of renewable energy systems, such as solar panels, wind turbines, and energy storage solutions. By driving innovation in renewable energy, these firms can support Denmark’s transition to a low-carbon economy and accelerate global efforts to combat climate change.

Leveraging the R&D Tax Credit Scheme can help manufacturing companies enhance competitiveness, reduce environmental impact, and contribute to Denmark’s transition to a more sustainable and technologically advanced economy.

Integrating the Tax Credit Scheme into financial planning

Integrating the Tax Credit Scheme into financial planning is a crucial aspect for companies in Denmark aiming to optimise their cash flow and maximise tax benefits.

Here’s a detailed discussion on this topic:

Alignment with Company Objectives

1. When integrating the Tax Credit Scheme into financial planning, companies should align their R&D investment decisions with overarching company objectives and strategic priorities.
2. Assess how R&D activities supported by tax incentives contribute to the company’s long-term growth, innovation goals, and competitive positioning within the market.
3. Ensure that financial planning initiatives related to the scheme complement broader company strategies, such as expanding into new markets, launching innovative products, or enhancing operational efficiency.

Forecasting R&D costs and Tax Liabilities

1. Financial planning processes should incorporate accurate forecasts of R&D costs and corresponding tax liabilities, considering potential tax credits under the scheme.
2. Work closely with finance and tax departments to project R&D spending over relevant fiscal periods and estimate the resulting tax benefits from the Tax Credit Scheme.
3. Use historical data, industry benchmarks, and future projections to inform R&D costs forecasts, taking into account factors such as project timelines, resource allocations, and expected outcomes.

Cash Flow Management

1. Incorporate tax credit projections and potential cash inflows from the Tax Credit Scheme into cash flow forecasts and liquidity management strategies.
2. Evaluate the timing and magnitude of tax credit payments under the scheme to anticipate their impact on cash flow requirements and working capital needs.
3. Use financial planning tools and techniques to optimise cash flow management while leveraging tax incentives to support R&D initiatives and strategic investments.

Read about cash flow budgets here

Tips for Maximising Benefits

Here are some tips on how you can maximise the benefits of the R&D tax incentives available:

Understand the Tax Credit Scheme for Research & Development costs in Denmark

It’s crucial for companies to have a clear understanding of the R&D Tax Credit Scheme in Denmark, including eligibility criteria, qualifying expenses, and documentation requirements.

This involves staying updated on any changes or updates to the scheme and seeking professional advice if needed.

Document R&D activities

Proper documentation of R&D activities is essential to substantiate claims for tax incentives.

Companies should maintain detailed records of R&D projects, including project plans, research protocols, experimental data, and expenditure records.

This documentation will help support claims during tax audits and ensure compliance with tax regulations.

Identify eligible R&D costs

Companies should identify and track all eligible R&D costs that qualify for tax incentives, such as salaries of researchers, costs of materials and equipment, subcontractor expenses, and overhead costs directly attributable to R&D activities.

Careful categorisation and documentation of costs will help maximise tax benefits.

Leverage collaboration and partnerships

Collaborating with research institutions, universities, or other companies can enhance R&D capabilities and eligibility for tax incentives.

By pooling resources and expertise, companies can undertake more ambitious R&D projects and access additional funding opportunities or grants available for collaborative research initiatives.

Prioritise innovation and creativity

To fully capitalise on the R&D tax incentives, companies should prioritise innovation and creativity in their R&D efforts.

This involves fostering a culture of experimentation, encouraging employees to generate new ideas, and investing in disruptive technologies or breakthrough innovations that have the potential to transform industries.

Optimise project management

Effective project management is essential to ensure R&D projects are completed on time, within budget, and according to predefined objectives.

Companies should implement robust project management practices, including setting clear goals, allocating resources efficiently, monitoring progress regularly, and adjusting plans as needed to mitigate risks and maximise outcomes.

What if you forgot to apply the increased tax deduction?

You can submit a request to change the Corporate Income Tax Return for a previous year within the Statute of Limitations.

A request should be submitted to the Danish Tax Agency latest on the 1st of May in the 4th year after the end of the tax year.

What if you forgot to use the Tax Credit Scheme?

You can submit a request to change the Corporate Income Tax Return for a previous year within the Statute of Limitations.

A request should be submitted to the Danish Tax Agency latest on the 1st of May in the 4th year after the end of the tax year.

Can Sole Proprietors use the Tax Credit Scheme?

Yes, Sole Proprietors using the Business Tax Scheme can also apply the Tax Credit Scheme for R&D costs.

Seek professional advice

Given the complexity of tax regulations and the evolving nature of R&D activities, companies may benefit from seeking professional advice.

Dania Accounting is here to provide tailored guidance, help optimise tax planning strategies, and ensure compliance with regulatory requirements.

(This blog was updated: 14.7.2024)

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