Portugal makes changes to business R&D tax incentive system

The Portuguese Government is amending SIFIDE II, the tax incentive system for business research and development (R&D). The proposed changes reduce the tax benefits available to Investment Funds in favour of promoting direct investment in R&D. Created in 2011, SIFIDE II is the main Portuguese R&D policy instrument. Since 2018, Investment Funds dedicated to financing R&D companies have been eligible for SIFIDE II tax benefits.

New SIFIDE II rules

Before the changes to SIFIDE II, indirect R&D investments could benefit from the same tax incentives as direct R&D investments. As a result, investing companies could benefit from a tax credit of up to 82.5% on subscriptions into Investment Funds, increasing returns to fund holders. Between 2017 and 2021, the number of applications by Investment Funds almost tripled, representing a 137% growth in R&D investment, which in 2021 had already reached €1.613m.

From 2020, these Investment Funds, which in 2018 did not have specific investment policy obligations, had to start meeting implementation ratios – to make 80% of the investment in companies dedicated to R&D within five years.

Now, the Portuguese government is proposing three significant changes. On the one hand, indirect investment is intended to benefit only from the base rate of 32.5%. Results indicators are also to be reinforced by requiring 90% of funds raised for R&D to be invested in companies dedicated to R&D within three years. Finally, to retain the tax benefit, the purchased units may not be sold for ten years, compared to five years under the current rules.

In addition, the changes will prohibit SIFIDE II tax benefits for investment in related entities. There are some further proposed changes to the operation of the rules, such as extending the deduction period from eight to 12 years and the valorisation of eco-design project expenses increases by 10% to 120%.

Making a significant contribution to growth of R&D expenditure

The corporate tax incentives provided by SIFIDE II have contributed significantly to the success of increasing the level of R&D in Portugal. According to 2021 data, 1.69% of Portuguese gross domestic product (GDP) is invested in R&D, demonstrating a growth of 60% compared to 2015 data. Other metrics confirm good national performance, such as the growth of high and medium-tech exports and a significant increase in the number of research staff in companies, as analysed by the National Agency for Innovation (ANI), a public entity that aims to support all R&D activity.

However, the expenditure on indirect investments, such as participation in capital or the management of R&D institutions and the underwriting of Investment Funds that finance R&D, has prompted several changes to SIFIDE II in an effort to limit duplication of benefits and improve the effective promotion of R&D in Portugal in favour of direct R&D activities. These direct R&D investments include the allocation of human resources, acquisition of instruments and machinery, contracting services, acquisition of raw materials for testing and prototyping, and intellectual property costs.

Impact of changes

Portugal’s strategic aim is to achieve a level of expenditure on R&D of 3% of GDP by 2030. This aim has driven specific national public policies, such as channelling European funding to create R&D support infrastructures, allocating tax and financial benefits to companies undertaking R&D, and creating procurement and retention mechanisms for highly qualified staff.

The impact of the changes to SIFIDE II is uncertain but should help direct tax benefits to the businesses actually undertaking R&D. Venture capital has an important role in the growth and globalisation of industrial and technological activity. The SIFIDE II framework helps focus that venture capital on R&D activity in Portugal and should continue to be valuable, even with a lower level of incentive applied.