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New measures to support the establishment and expansion of R&D centers

The Hungarian government introduced a new R&D cash incentive under its VIP cash grant system for large enterprises in 2017 in order to promote the establishment of R&D centers and the expansion of already existing facilities. The growing number of public announcements by the Ministry of Foreign Affairs and Trade indicates the success of the new scheme.

Marcell Tatai-Szabó, Financial Advisor State Aid Specialist, Noerr & Partners Law Office

The subsidized R&D projects originate from various sectors such as automotive, electronics and information technology services and aim at the development of new generation electric motors, deep machine learning for advanced driver assistance systems, cloud optimized data analysis, software development for smart metering, etc.

Besides the cash incentive, companies running R&D projects can also enjoy various tax incentives: double deduction of R&D costs, exemption from social security contributions due to negative corporate tax base or exemption from social security contributions for researchers. The key to obtaining either cash or tax incentives is the project’s R&D classification. In line with the needs of industrial R&D centers running tens or even hundreds of research projects, the government introduced a new and simplified R&D classification procedure in 2018. The so-called group classification allows companies to request the classification of a series of projects in a single procedure instead of separate classifications for each project.  

Many executives ask: ‘How do I know, whether my company really carries out R&D activities?’ In this respect, the European Union’s State aid law also applies the globally used Frascati Manual, which defines three main categories of R&D: fundamental research; industrial research; and experimental development. Generally, the industrial R&D carried out by enterprises falls into the last two categories. In order to ensure the eligibility for incentives, the Hungarian Intellectual Property Office (HIPO) issues a resolution or an expert opinion certifying that the project is classified as R&D.

Moreover, and contrary to socalled regional aid (typically provided for investments in regions that are underdeveloped compared to the average level of the European Union), R&D aid is provided to foster research activity, regardless of its geographical location. Consequently, the cash incentive is also available in Budapest where many R&D centers of large multinational firms are located.

Based on the favorable legislative framework and the success of many other companies, executives may consider starting new R&D projects or establishing R&D centers in Hungary, since up to 25% of the project costs can be subsidized in the form of a VIP cash grant. One of the main advantages of the incentive measure is that companies can include all of the R&D projects that they are conducting in a maximum three-year period. Moreover, all operational costs incurred in relation to R&D activities are eligible for the grant, such as personnel costs of researchers, rental fees, depreciation of equipment or material costs. Therefore, an existing R&D center may include the personnel costs of its current researchers to the extent they are employed on the subsidized R&D project(s); the rental costs of the office to the extent used for the project is also eligible.

The abovementioned project costs should reach minimum EUR 3 million and the company should create a minimum of 25 new R&D jobs (which may also include employees working indirectly on the R&D project, e.g. admin staff) during the project period, which should be of a maximum of three years in duration. Another favorable condition of the cash grant is that the applicant has to commit the retention of the already existing and new R&D jobs only for two years after the project period. Due to the relatively low job creation threshold and short maintenance period of the VIP cash grant, executives of new R&D center may plan in advance the future cash grant applications in line with the center’s expansion. 

Recent experience shows that companies must thoroughly plan their R&D strategy in order to maximize the benefits available through cash and tax incentives and must be wellprepared for the incentive applications and classification procedures.