Investment Funds in R&D – Everything you need to know

As the end of the year approaches, it is fundamental to reflect on the tax opportunities that can be seized until 31 December to optimise the tax burden on companies and avoid tax payments. 

In this context, R&D (Research & Development) Funds emerge, an alternative for companies that, due to the characteristics of their activity, do not make R&D investments.

By subscribing to these funds, companies are taking advantage of 2 opportunities with a single investment. In this article, we explain how, through the subscription of R&D Funds, companies can capitalise on the initial investment and still benefit from a 32.5% reduction in CIT.

// What are R&D Funds?

R&D funds are investment funds whose main purpose is to invest in companies with high R&D intensity and that develop activities in critical sectors for the country's competitiveness, such as technological, industrial, health, services, among others.

The subscription of participation units in these funds allows companies to benefit from a 32.5% reduction in CIT payment through SIFIDE and, also, to capitalise on the initial investment made, when the fund reaches its maturity.

// Why did R&D Funds emerge?

Research and Development (R&D) is a growth engine for any economy. However, in recent years, Portuguese investment in R&D has been below the European average, fixed at 2.24% of GDP. To bring Portugal closer to the European average, the government decided to set the country's target at 3% of GDP by 2030.

One of the solutions found to address this discrepancy involved the creation of a tax benefit that would stimulate innovation and continuous investment in R&D activities: SIFIDE – Tax Incentive System for Corporate Research and Development. However, over the years it became apparent that SIFIDE only covered a relatively restricted core of companies, in addition to the fact that barriers to the development of R&D activities by the rest of the business fabric were high.

Thus, financial availability to invest or promote investment in these activities was one of the critical points to be resolved, otherwise Portugal would not be able to keep up with European growth.

Thus, R&D Funds emerged. These funds opened doors for companies, whose R&D activities are minimal or non-existent, to be able to invest indirectly in companies with high R&D intensity. In this way, these funds ensure that, for a certain period, the target companies of these investments can continue the development of their projects and their dissemination, without financing being a threat.

// How do R&D Funds work?

An Investment Fund is a financial product that aggregates the specific interests of a certain investor. In this case, the interest is investment in companies with high R&D intensity. Companies investing in these funds can benefit from two capital gains with a single investment:

• Reduction of up to 32.5% of CIT;
• Capitalisation of the Initial Investment when the fund reaches its maturity;

Let's look at the numbers:

Based on this example, by investing 1 million euros, you can benefit from a CIT reduction of €325,000, which in practical terms represents a net investment of €675,000.

If the CIT is lower than the Tax Benefit awarded, you have up to 12 years to deduct the remainder, which in this example would be €125,000 of tax credit to use within a maximum period of 12 years.

// Capitalisation of Investment Funds

Consider the following example, where the fund maturity period is 10 years and the Internal Rate of Return is 5%. In this case, at the end of the period, the return is €1,953,895.

// Reasons to apply for SIFIDE II through investment funds.

There are several reasons to apply for SIFIDE II via Investment funds.

1. Tax Efficiency: Allows a reduction of 32.5% of CIT, enabling the transformation of part of the CIT payable into investment that can generate return in the medium-long term.
2. Investment and Benefit: R&D funds are characterised by presenting a reduced level of risk, allowing not only a significant reduction in CIT but also the possibility of obtaining a return on the initial investment.
3. Diversification of Investment: One of the advantages of opting for an R&D investment fund is diversification, because it allows investing in different sectors, such as health, technology, or industrial engineering, and in companies at various stages of maturity, reducing risk and ensuring attractive returns.

// How to choose an investment fund

The choice of an investment fund to benefit from SIFIDE II must be made carefully. Here are the 3 main factors you should take into account:

1. Know the Investment Strategy: Identify funds aligned with your objectives, considering the sectors and companies they invest in, ensuring compatibility with your brand's image and DNA.
2. Evaluate the management team's experience: Ensure that the professionals responsible possess solid knowledge of the market and the SIFIDE application process, offering specialised support.
3. Analyse the fees charged: Consider costs such as subscription (1%-3%), management (2%-2.5%), and performance (20%-30%). Be aware that there are funds that charge performance fees on negative results.

// Investment period and application for SIFIDE II

Companies wishing to subscribe to participation units of an R&D investment fund must do so by 31 December of each year. After submission, the simplified application to SIFIDE is carried out, which must be submitted by the end of the 5th month after the closing of accounts.

// Conclusion

R&D Funds present themselves as a strategic solution for companies wishing to optimise their tax burden and, simultaneously, boost investment in high R&D intensity sectors. Through their subscription, it is possible to transform part of the CIT they would have to pay into investment with potential return, in addition to contributing to the innovation and competitiveness of the Portuguese business fabric.
With the subscription deadline approaching, companies have until 31 December to benefit from this opportunity.

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Last update: 19 June 2024