The Tax Compliance team is concluding a series of reviews in which it discusses the application of increasing coefficients to certain types of expenses. The last such type is research and development (R&D) expenses.

The essence of the benefit

When applying an increasing coefficient, the taxpayer is entitled to artificially increase the amount of R&D expenses for profit tax purposes. Tax legislation establishes a special accounting procedure for such expenses.

Thus, R&D expenses may be recognized as the taxpayer's expenses related to the development and improvement of manufactured products, as well as technologies and methods of production organization and management. According to the Federal Tax Service of Russia, based on the definition of R&D set forth in the Tax Code of the Russian Federation, the distinctive feature of such work is novelty.

An organization may carry out R&D activities independently or by engaging a contractor. The choice of one or the other method affects the composition and procedure for recognizing R&D expenses.

Where R&D is carried out independently, the following costs directly related to research and development may be recognized in the profits tax base: 

1. Amortization of fixed assets (PPE) and intangible assets (IA); 

2. labor remuneration of specialized employees and insurance premiums accrued thereon. 3;

3. Material expenses;

4. Payments for the acquisition of exclusive and non-exclusive rights to intellectual property (IP);

5. Other expenses (subject to a limit of 75% of the amount of expenses specified in paragraph 2).

These expenses are recognized in the tax base upon completion of the entire R&D complex or upon completion of its individual stages. 

Where a contractor is engaged to carry out R&D, the cost of work under a contract with the contractor should be recognized as expenses after the relevant acceptance certificate has been signed.

Regardless of the chosen method of performing R&D, if, as a result of the work, the company obtains exclusive rights to the IP result, they are recognized as NMA and are accounted for in expenses in one of the following ways: 

- By amortizing the asset;

- By writing off the formed value on a straight-line basis over two years. 

It is noteworthy that the amounts of previously recognized R&D expenses are not subject to reversal and inclusion in the initial value of the acquired IA.

Benefit before the tax reform

Until recently, the value of the increasing coefficient was 1.5, and it could be applied by a taxpayer if the following conditions were met: 

1) The R&D performed is included in the list established by the RF Government Resolution No. 988 dated 24.12.2008;

2) The taxpayer submitted one of the following documents to the tax authority together with the tax return for the relevant period: 

- R&D Report, executed in accordance with the interstate standard GOST 7.32-2017 “SIBID. R&D Report. Structure and rules of execution”;

- Confirmation that the R&D report has been placed in the Unified State Information System for recording research, experimental design and technological work for civil purposes.

Benefit after tax reform

The amendments to the Tax Code of the Russian Federation coming into force in 2025 contain two important innovations regarding the increasing coefficient for R&D expenses: 

1) Increasing the value of the coefficient to 2;

2) Reduction of the requirements for application of the coefficient for small technology companies: such organizations will be able to use the increasing coefficient when forming the initial value of IA in the form of the exclusive right to an invention, utility model or industrial design, regardless of whether R&D corresponds to the list of the Russian Government Resolution No. 988.

The other conditions for the use of the increasing coefficient, including the procedure for confirming the right to apply it, remain unchanged.

Implications for taxpayers

In light of the increase in the basic rate of corporate income tax, the new parameters of the increasing coefficient can potentially increase the attractiveness of R&D from the point of view of reducing the tax burden. The greatest effect can be achieved in the situation when the work resulted in the creation of a protected IP object, since in this case the taxpayer can actually take into account the same expenses twice: the first time - when completing the individual stages of R&D, and the second time - when writing off the cost of the obtained IA. This, in particular, was emphasized by the Russian Ministry of Finance in its clarifications. 

At the same time, when applying the increasing coefficient, taxpayers should pay special attention to the correct documentation of R&D activities, especially from the point of view of confirming the presence of an element of novelty in them. This is due to the fact that the tax authority has the power to conduct an expert examination of the R&D report submitted by the taxpayer. As case No. A40-158523/2020 of JSC “Kaspersky Loboratorium” shows, the presence of a negative expert opinion is grounds for denying the right to apply an increasing coefficient when accounting for research and development expenses.

[1] Letter of the Federal Tax Service of Russia dated 01.10.2019 No. СД-4-3/19955 “On the Procedure for Confirmation of Expenditures on R&D performed according to the List approved by Decree of the Government of the Russian Federation dated 24.12.2008 N 988”.

[2] See, for example, Letters of the Ministry of Finance of Russia dated 24.11.2017 No. 03-03-06/1/77722, dated 17.10.2012 No. 03-03-06/1/557.