The future of SIFIDE post-2025

The Tax Incentive System for Business Research and Development (SIFIDE II) has been the main instrument of tax support for companies that carry out Research and Development (R&D) initiatives in Portugal. As it is in force until the 2025 financial year, it will be important to ensure its “renewal” given its relevance as one of the main instruments with a tax impact for companies that invest in R&D, something recently recognised through the distinction received by Portugal at this level, for constituting the most favourable tax benefit regime for large companies and SMEs, according to the 2023 OECD report . It should also be noted that, according to the same report, the set of tax incentives for R&D granted through SIFIDE II reached, for the first time , in 2023, 0.39% of the Gross Domestic Product (GDP), something that is also worth highlighting.

In this context, while SIFIDE II represents a significant fiscal effort by the Portuguese State to support companies that invest in R&D, SIFIDE II is already one of the Portuguese economy's biggest "calling cards" for stimulating R&D in the country and attracting foreign investment in cutting-edge areas, both in terms of technology and services, especially those that foster the creation of highly qualified jobs, as this is the main eligible expenditure. In other words, it is the people dedicated to carrying out R&D activities who make the difference and, the greater this allocation and investment, the greater the potential tax benefit, according to the rules currently in force. At this level, it is important not to forget that, for every EUR 1 of tax expenditure that is lost by the allocation of a tax credit for R&D via a SIFIDE II application, “ between EUR 1.11 and EUR 1.86 ” is transformed into R&D expenses by companies benefiting from SIFIDE II, according to a study carried out in 2019 by the Working Group for the Study of Tax Benefits. This confirms the notable impact of this regime on stimulating R&D at a national level.

Thus, the long-awaited SIFIDE III may represent an opportunity for companies to strengthen their commitment to R&D through tax support, considering and hoping that its new legal framework will be defined quickly, bearing in mind that the current SIFIDE II regime will end in the 2025 tax period. In this sense, it is considered critical to ensure its validity for a longer period, also sending a clear message of stability to companies that want to invest in R&D in Portugal on a multi-annual basis.

It should be noted that tax incentives for R&D are available in 34 of the 38 OECD countries, so it would be unusual for Portugal to do without the public tax policy instrument that has had the greatest impact on the experimental development of new products, processes and services.

On the other hand, it is considered that its renewal should take into account new approaches or intervention axes in terms of ( adapted from the OECD assessment framework ): (i) scope and definition of what is R&D for tax purposes; (ii) typology of eligible expenditure, continuing the special focus on expenditure on qualified human resources (but not only, not disregarding the contribution of labor that, not having had the opportunity to qualify, has unique and unquestionable experience in its area of ​​specialization); (iii) provisions for companies with insufficient tax situations (traditionally, the “ carry-forward ” option has been chosen, although other approaches are already being explored in other geographies); (iv) preferential provisions for certain types of companies (SMEs), collaborative initiatives, priority areas, among others.

Nevertheless, it is important that the new SIFIDE III continues to meet the conditions to not be classified as State Aid, under the applicable rules on this matter, thus ensuring its competitiveness in relation to other regimes. Furthermore, if part or all of the tax credit to be granted takes the form of a “refund” (or the so-called Qualified Refundable Tax Credits), an option that has not yet been explored at national level, in accordance with certain applicable criteria, then the new SIFIDE III could, in fact, become a strong lever for attracting qualified people to Portugal, further encouraging companies with a high intensity of knowledge, technology and services to establish themselves in our country to carry out R&D.

By introducing this new approach, stability and durability to the new SIFIDE III, the conditions may also be created to potentially remove this instrument from Pillar Two (known for the application of a minimum effective tax rate of 15%), further enhancing Portugal's position to attract foreign direct investment in the R&D sphere, namely for the location of R&D centers with global reach, for industrial prototyping centers, medical research centers or for the development of new technologies for military, civil or aerospace use.

In an increasingly volatile world and when technology is radically dematerializing talent management, with increasingly remote and digitalized work environments, SIFIDE III presents itself as an excellent opportunity for Portugal to follow the path it has taken towards leveraging R&D investment in many cutting-edge areas.