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Technological innovation and tax incentives under Law no. 11,196/05

Carlos Eduardo Eliziário de Lima

According to the current administration's industrial policy, incentive for technological innovation began with the Technological Innovation Law (Law No. 10973/2004). Essentially, the rule is designed to stimulate technological innovation and research in the productive sector by establishing specific bodies and by regulating the relationships between private companies and Scientific and Technological Institutions (for more information, please see our newsletter of March 2005).

The Innovation Law, however, did not specifically address tax incentives but, in its Article 28, sole paragraph, it just stated that the Executive Branch would submit a bill to address this matter. Although the bill was not submitted within the period established in the Innovation Law, on June 15, 2005 the Provisional Measure 252/2005 was issued. Among other items, it ratified existing benefits and created new tax incentives to promote technological innovation.

Due to political divergence, the validity of the Provisional Measure expired before it was approved by the Congress. In light of this setback, the government transferred the main points of the Provisional Measure to the text of another Provisional Measure, No. 255.

Provisional Measure Nº 255 was passed by the National Congress and converted into Law nº 11,196, sanctioned on November 21, 2005.

In summary, the key incentives for innovation set forth in Law No. 11,196 are the following:

(i) deduction as operating expenses of any disbursements for research and development (R&D) during the assessment period;

(ii) in addition to the deduction provided for in item (i), companies may deduct an additional 60% of these R&D disbursements as expenses (for a total of 160%), and this percentage may reach 80% depending on the number of researchers contracted (for a total of 180%). If the process results in the granting of a patent or registration of a cultivar, the company may deduct an additional 20% (which could mean a total deduction of 200% for R&D spending);

(iii) deduction of transfers destined for execution of innovation activities made by micro and small companies (MPEs) and independent inventors;

(iv) deduction of expenditures on technological research and development of technological innovation contracted with universities or research institutes established in the country;

(v) IRRF (Income Tax Withheld at Source) credit on royalties sent abroad arising from transfer of technology agreements recorded by the Brazilian Patent and Trademark Office (BPTO), in the following percentages: 20% for assessment periods ending between 01/01/2006 and 12/31/2008; and 10% for assessment periods ending between 01/01/2009 and 12/31/2013;

(vi) a 50% reduction of the Industrialization Tax (IPI) on R&D equipment, instruments, and accessories;

(vii) accelerated depreciation (multiplied by 2) of new machines, equipment, and accessories used for research and development, for the purpose of determining the Corporate Income Tax (IRPJ);

(viii) accelerated amortization of expenditures on acquisition of intangible assets related to R&D activities.

Note that specific conditions must be met before some of the incentives may be applied. For example, companies benefiting from the IRRF credit - Item (v) - must commit to investing 1.5 or 2 times the value of the benefit in research in Brazil, depending on the region in which it is established.

Law No. 11,196 also provides for a reduction to zero of the IRRF rate -currently 15%- on remittances aboard destined to the registration and maintenance of marks, patents, and cultivars.

Some of the benefits under Law No. 11,196 (like those listed in the previous three items) were already foreseen in Law No 8,661/93, which regulated the Program for the Development of Industrial Technology (PDTI) and the Program for the Development of Agriculture Technology (PDTA). However, application of these benefits was subject to prior approval of projects by the Ministry of Science and Technology following technical analysis by the Brazilian Innovation Agency (FINEP). This condition was eliminated by the new Law.

Finally, although the new system does not condition application of benefits upon official homologation, it should be noted that companies benefiting from them must submit accounting reports on their research and development projects - which is yet to be regulated -, control payments and spending in specific accounts, and assume full responsibility for undue application of the incentives.

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