In the third part of our tax environment review, we continue our overview of best practices from leading global startup ecosystems for creating a favorable tax environment that supports the growth of startups to scale-up and unicorn levels. This overview highlights the best practices of leading global startup ecosystems in establishing tax incentives for innovation-driven businesses and companies that invest in R&D.

In this review, we have compiled the best practices for implementing tax incentives aimed at supporting the innovative activity of enterprises by providing broader incentives than only R&D personnel salaries. We believe these programs help to increase the competitiveness of innovative companies and ensure future tax revenues for budgets.

US best practices

First and foremost, we would like to highlight the unique practice of creating tax incentives in the United States for innovation-active enterprises and companies investing in R&D. American companies of all sizes have access to the unique Credit for Increasing Research Activities program. The program focuses not only on R&D spending itself but rather encourages its continued growth. We believe this approach ensures, so to speak, a "natural selection" of program participants without unnecessary bureaucratic barriers. Only commercially successful companies that are able to derive commercial benefits and revenue growth from R&D spending can consistently increase these spending.

The Credit for Increasing Research Activities applies to federal corporate income tax. Companies can benefit from a 20% credit under the Regular Research Credit (RRC) - 20% of the qualified research expenses (QREs) in excess over the base amount or a 14% credit under the Alternative Simplified Credit (ASC) - 14% of QREs that exceed 50% of the average QREs for the three preceding tax years.

Thus, the tax credit rate is applied to the increase in R&D spending above a historical baseline, not to the company's total R&D spending for the year. Main limitation is that the Base Amount cannot exceed 50% of the company's current year QREs. The Base Amount is essentially a historical threshold of qualified research expenses (QREs) that a company must exceed in the current tax year before it can begin claiming the RRC .

The primary advantage of the R&D Credit is the immediate financial impact of the reduction in tax liability which increases a company's free cash flow. This free cash can be immediately reinvested into capital expenditure, hiring new personnel, or new R&D projects.

The R&D tax credit value isn't lost if it exceeds the tax liability in a given year: if the credit amount is larger than the company's tax liability, the unused part can be carried forward for up to 20 years to offset future taxes.

The credit can also be carried back for 1 year to receive a refund of taxes previously paid. Also, companies have the ability to "look back" and claim the credit retroactively by filing amended returns for the previous three years.

The credit applies to a wide range of expenses:

 employee wages;

 costs of tangible property (excluding investments in land and depreciable property) used in the research process;

 costs of supplies used or consumed in the conduct of qualified research;

 the amounts paid to third-party contractors to perform qualified research on the company's behalf (65% of amounts paid to a third party, or 75% for amounts paid to a qualified research consortium);

 in-house or third-party costs for the right to use computers in the conduct of qualified research (e.g., cloud computing costs).

The primary condition for receiving the tax incentive benefit is compliance with the Four-Part Test for Qualified Research:

 the activity must be intended to develop a new or improved business component (a product, process, computer software, technique, formula, or invention) - that results in a new or enhanced functionality, quality, reliability, or performance.

 the research must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. Therefore, activities rooted in the social sciences, arts, or humanities do not qualify.

 the activity must be undertaken with an aim to eliminate technological uncertainty - such as when the business doesn't know whether the component can be developed, while the appropriate design should be, or which method will be the best to achieve the desired result.

 the R&D processes must include some experiments like modeling, simulation etc.

For small and startups companies:

It is important to note that a unique opportunity is provided for small companies and startups, which makes the tax incentive effective even for companies that are not yet profitable in the early stages of growth.

Small companies and startups can apply the tax credit to offset their payroll tax liability, rather than their income tax liability as they often have substantial research expenses but little to no taxable income to offset with a traditional tax credit.

A qualified small business can elect to use up to $500,000 of its R&D credit to offset its payroll tax liability each year. The credit is applied against the employer portion of Social Security taxes (FICA), and any remaining credit can be applied against the employer portion of Medicare tax. This tax credit can be applied for a maximum of five years.

For startups, the applied tax incentives are determined using a minimum base amount (50% of current-year QREs) or the Alternative Simplified Credit (ASC) method. For a company with no prior QREs, the ASC federal method defaults to a 6% rate on current-year QREs. A business must meet two main criteria in the year the credit is claimed: have less than $5 million in gross receipts and no more than five years of gross receipts.

On a states level:

In addition to the federal program, it is necessary to highlight the best practices of states that are home to leading global startup ecosystems ranked among  the Top 40 by StartupGenome 2025.

Under these programs, companies can apply tax incentives to a portion of their Corporate Income Tax (CIT) collected at the state level.

EU+ best practices

It is also important to highlight the best practices of European countries with leading or rapidly growing startup ecosystems in implementing tax incentives that target innovative companies.

For most European countries with leading startup ecosystems, the typical practice is to combine incentives aimed at encouraging and supporting R&D expenditures with 'Patent Box' programs, which provide tax incentives to companies that successfully commercialize R&D results, such as patents.

In the UK, France, Ireland, the Netherlands, and Spain, a company can generally claim both the R&D incentive and the Patent Box incentive simultaneously. The tax incentive under the Patent Box model is primarily aimed at motivating companies to commercialize R&D results. This regime is popular among large, knowledge-intensive businesses for which the administrative costs of this benefit are easily offset by the resulting tax savings. In the analyzed countries, this benefit reduces the Corporate Income Tax (CIT) rate on the income from the use of innovations to 6.25%–10%, but each country has its own nuances in the regime for providing these benefits. The table below includes notes on the use of the IP Box but without a detailed description of this mode.

Another interesting feature of the tax incentives in the European countries studied is that the tax credit in most countries is refundable, allowing both large and small companies to receive the benefit in the form of cash. This option is especially important for startups and small businesses.

In all countries the incentives are consistently targeted toward five major expense categories, ensuring comprehensive support for innovation-driven enterprises: personnel costs (salaries, wages, external workers, etc.); materials and consumables (raw materials, utilities used in R&D); contracted/subcontracted R&D (payments to research partners); capital/fixed asset costs (depreciation of machinery and equipment); software and overheads (cloud, data, and necessary operational costs).

It is important to note that some countries provide tax incentives for unprofitable, innovative companies, such as the Danish R&D Tax Credit for Deficits (Skattekreditordninge) and the UK Research and Development Expenditure Credit (RDEC) Scheme.

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The detailed data on the incentives is presented in the full report.

DISCLAIMER: This report analyzes market trends and is not a source of definitive or complete data. Due to the dynamic nature of the market, it's impossible to provide 100% accurate, allencompassing data. Our research is based on the information we have gathered through different public sources, and it may be corrected as new data becomes available. Investing in startups is inherently challenging and carries significant risks. This report should not be construed as investment, tax, or legal advice. We are not making any recommendations. If you are considering starting a business or making venture investments, you should consult with qualified professionals, who can provide personalized and competent advice.