How are economic recovery trends changing – R&D activities are coming to the forefront

It is well known that the larger and more complex a machine or organization is, the slower it can turn around and change direction. This is also true of a country's economic policy. But no matter how slow a change may be, after a while it becomes noticeable. At first, perhaps only the officers and helmsmen notice it, then the crew, and finally the passengers may also notice that the Hungarian economy, even if it has not turned around completely, has begun to move in a different direction than before.

Direct subsidies and tax breaks to encourage the creation and development of intellectual property

What does all this mean? While previously 40–60% of the incentives linked to corporate tax were directed toward capital investments, today funding is flowing less into solid, tangible concrete and steel. Instead, economic policymakers aim to encourage the creation and development of intellectual property, which is far less tangible but promises greater long-term growth, through either direct grants or tax incentives. Decision-makers and the companies involved are increasingly focusing on research and development that enhances efficiency rather than on establishing factories and production lines. This is also reflected in the fact that R&D expenditures have nominally tripled since 2010.

But does everyone know about these opportunities? Does this area not hold even greater potential for individual companies as well as for the economy as a whole? We, the tax advisors at LeitnerLeitner, believe that the majority of Hungarian enterprises are still not aware that many of their activities may qualify for obtaining R&D incentives, nor of the range of opportunities available to them. With this series of articles, we aim to reduce this knowledge gap; therefore, we will review the basic concepts of R&D, present the available incentives, and explain how a company can identify R&D-eligible activities within its operations, as well as how to ensure compliance and avoid the risk of penalties.

Although we will discuss the incentives in detail in a subsequent article, we would already like to highlight the basic directions here, as this also demonstrates that support will increasingly focus on this area in the future. Support for R&D activities may take the form of tax incentives related to the activity itself, and at a later stage incentives may also be available for the use of the intellectual property generated thereby; these may affect not only corporate income tax but other types of taxes as well. Moreover, as of 2024, significant favourable changes have come into effect in relation to research and development activities, aligned with the global minimum tax rules. Companies may now choose whether to continue applying the previously available tax base reduction or development tax allowance, or to switch to the new system. For each newly initiated R&D investment, one of the two options must be selected, and a thorough understanding of the overall system and the available options helps in identifying the most optimal solution – in this regard, it is worth thinking in the long term and even across borders.

One of the favourite areas of the consultants at LeitnerLeitner is advising on tax incentives. Our clients can achieve their business goals more easily and quickly, without having to deal with complex requirements and administrative processes. For us, the work related to obtaining and optimally using these incentives is a creative and challenging puzzle. We are proud when our advice contributes to our clients’ more prosperous and efficient operations!

However, before we dive into the complex system of incentives, let’s get to know the basic concepts of R&D!

What counts as R&D activity?

R&D activity refers to creative work aimed at expanding existing knowledge and developing new applications in order to resolve scientific or technical uncertainties.

What characterizes genuine R&D activity?

• If a problem is approached   in a novel way,
• with scientific rigor, and     systematically,
• according to a plan and with the process fully documented
• by professionals with expertise and competence, and,
• with the expectation that the outcome will reduce or eliminate technological or technical uncertainty or risk, then it can truly be considered R&D activity

What do we consider systematically conducted scientific activity?

If, in the course of solving a problem,

• hypotheses are formulated that can be interpreted according to scientific and/or technical-technological standards,
• information is collected in a planned and documented manner to verify these hypotheses,
• experiments are carried out, and/or
• models are developed with the aim of resolving a scientific or technological uncertainty or risk, this is considered systematically conducted scientific activity.

What does the novelty of R&D activities mean?

When evaluating R&D activities, the assessment of novelty is not the same as examining the novelty of inventions; the novelty of the activity is not judged according to patent law, but a specific approach is applied.

It is necessary to understand the results already achieved in science and technology regarding the solution of the problem:

• Whether a solution already exists,
•  and how widely available it is for the given problem,
•  at the time the project starts.

It is also necessary to examine:

•  whether something is scientifically possible, or,
• technically or technologically feasible,
• and how it can be implemented and measured in practice.

Preliminary R&D assessment procedure

Previously, it was advisable to carry out the preliminary assessment procedure at the National Intellectual Property Office; however, this option no longer exists. Although the National Research, Development and Innovation Office (NKFIH), which now handles the task, does not issue legally binding decisions, authorities still consult the NKFIH regarding classifications, so its assessments should be considered as guidance. In the preliminary R&D assessment procedure, they will examine whether existing solutions are actually accessible and obvious to the professional. If they are, it will be checked whether there is still any novelty.

If a project is implemented differently from what was set out in the application submitted during the preliminary qualification procedure, it will be considered a new project for the purposes of applying tax and social security contribution allowances. The scope of the previously obtained classification will not extend to it, as the decision adopted within the qualification procedure is binding on the authority only if the project is implemented without changes. 

At the same time, it is very important to note that the mere fact that a project did not produce results or that the activity was unsuccessful does not invalidate the project’s R&D classification.

In summary, if your company encounters a problem during its manufacturing or service activities for which no readily available solution exists and you set out to find an answer, or if you solve a technical problem by developing your own idea, you may be carrying out R&D activities. If our article has sparked your interest and you would like to identify hidden R&D activities and take advantage of the available subsidies, we look forward to welcoming you to our office!