There is an increasing interest from Chinese businesses in establishing R&D and technology centres in Europe. The R&D centre strategy is complemented by the general trend of increasing acquisition of and investment in European technology companies by Chinese business, especially in the energy and manufacturing sectors, and by the desire in China to design and product innovative, leading edge products rather than just manufacture them for the others. The Chinese business can both improve technology and intellectual property (IP) if already owns as well as develops completely new technology and IP at a European R&D centre.

The European Union (EU) has cutting edge technology, skilled engineers, and creative entrepreneurs and it is the home of leading universities where innovation is fostered, especially in areas like high-tech manufactures. The EU is also a major market for renewable energy and other technology sectors. The European standardized legislation and Directives allow having a well-known legal system for employment, tax and IP matters among its Member States and is part of most of the international treaties and trade organizations in which China is a member. An R&D Centre in an EU Member State can take advantage of all these resources and improve the likelihood of successful development of innovation and commercialization.

A clear example of the interest to foster R&D investment in EU Member States is how during the last years, there has been a substantial increase in the budget for funding research, innovation and education under Horizon 2020 – the EU’s program for research and innovation.

 

Optimization of R&D Operations

A significant number of countries now offer the critical operational pre-requisites for successfully conducting effective research and development (R&D), i.e, access to growing markets/customer base, access to talent, intellectual property protection, stable economy/government and information technology infra-structure. Accordingly, many countries are promoting optimization of R&D operations including re-location as part of their innovation-led economic development strategies. R&D tax incentives are an important component of these strategies. Countries offering R&D tax incentives are often regarded as a favourable location for internationally-mobile R&D. When efficiently allocated, companies can effectively leverage their global R&D infrastructure resulting in the development of valuable intellectual properties. R&D incentives vary by country with the regard to the following “key” considerations: a) computational mechanics; b) The levels of benefits available; c) the certainty of realizing an economic benefit from tax incentives.

Although the basic definition of “research and development” is similar across many countries, distinctions exist within sovereign laws. Some countries offer particularly lucrative incentives, subject to few restrictions on the location of the qualified research activity, funding of R&D, ownership of IP and so forth, while others offer basic incentives with significant limitations, including eligible industries, qualified costs and applications procedures. Most research incentives are designed to encourage companies to maintain a certain level of R&D, with additional incentives for increased research spending. A few regimes offer tax benefits for capital investments in R&D, while most offer incentives for operational costs, i.e, wages, supplies and contractor fees.

 

Cooperation Between China and Spain

Relationships between China and Spain have been growing and strengthening during last years. One of the main priority fields of cooperation between China and Spain is precisely the area of new materials, energy research and high-tech manufactures. A key element, at the time of investing and assessing in which field or in which business should an investor focus, is to be aware of the specific policy plans and strategies existing in a given country. During last years, Spain has taken strong actions to promote its technological and business leadership, and knowing that and the specific details of those policies is the key to success in deciding whether to invest or not in Spain and in a specific sector or business.

At the beginning of February 2013 the Spanish Council of Ministers approved, in a combined document, “the Spanish Strategy for Science and Technology and for Innovation” for the 2013-2020 period, whose essential purpose is to promote the scientific, technological and business leadership of the country as a whole and to increase the innovation capacities of the Spanish company and the Spanish economy, defining in this connection the following general objectives: (i) recognizing and promoting R&D and TI talent and its employability; (ii) fostering excellence in scientific and technical research; (iii) boosting business leadership in R&D and TI; and (iv) fostering R&D and TI activities aimed at meeting the global challenges currently facing Spanish society.

The development of this National Strategy by the government includes undertaking reforms and establishing measures to create a favourable environment for R&d&I including, among others: (a) improved governance of public institutions in the Spanish Science, Technology and Innovation system, (b) fostered public-private cooperation, (c) increades private investment in R&D&I, (d) optimization of tax incentive systems for R&D&i, (e) acces to and development of different sources of private funding for R&D&I activities, (f) creation of a suitable intellectual property rights management model and (g) incorporation of technology surveillance and competitive intelligence as part of the R&D&I process.

The key element then is to be able to have a partner that will know what are those specific benefits for investing R&D+I in Spain and that knows how to fully optimize them for the specific Chinese business’ capabilities and interests.

 

Optimization of R&D Operations in Spain: Legal Framework of Incentives

There are several financial (non-refundable subsidies, soft loans or a combination of both) and tax incentives for activities pursued in certain industries deemed to be a priority due to their potential for growth and their impact on the Spanish economy as a whole. The Autonomous Communities grant similar incentives in most of these industries. These incentives include most notably those aimed at fostering innovation, technological improvement and research and development projects, which have been one of the main priorities of the Spanish authorities in recent years.

Currently Science, Technology and Innovation Law 14/2011, of 1 June 2011, establishes the legal framework for the fostering of scientific and technical research, experimental development and innovation in Spain, founded on a scheme based on the approval of the related Spanish Strategies for Science, Technology and for Innovation, mentioned before, through which to instrument in detail the initiatives required to perform such objectives. Spain offers immediate deduction of qualified R&D expenditures, as well as offering research tax credits for technological innovation.

 

Tax Credit for R&D&i

For those benefits, the legal framework is Law 27/2014, on Corporate Income Tax. Chapter IV, article 35 includes the measures that regulate the tax deductions for R&D&I, as well as the rules on their application in article 39. For the purposes of tax incentives, the aforementioned Law 27/2014 includes what was collected in this sense in Law 14/2013 about support for entrepreneurs and internationalization (which included fiscal measures to support, inter alia, investment in new companies and in R&D and substantially modified the Patent Box regime).

The Spanish system of tax deductions for R&D&I is among the most favourable in the world, being able to reach up to 42% of direct expenses. In contrast to other R&D&I incentives, tax deductions and more advantages, they have economic effects comparable to those of grants, but they are not taxed. It has free implementation (all types of areas of knowledge and expense volumes), and general (for all companies, regardless of their CNAE or size). These deductions are not subject to competitive concurrency with a predefined budget; are generated by each company, when carrying out R&D and/or IT activities, in accordance with the definitions established in the Corporate Tax Law.

The generation of the tax deduction is proportional to the developed R&D&I activities, and is applied in the annual liquidation of corporate tax, up to a certain quota limit. However, the deduction generated but not applied can be applied can be applied in subsequent years, and there is even a case of monetary advancement of the deduction to be applied.

 

Bonuses and Patronage for R&D&i

The regulation in R. Decree 475/2014, of june 13, on bonuses in the social security contribution of the research staff foresees the establishment of bonuses in the corporate share of the Social Security contribution by research personnel assigned exclusively to R&D&i activities. It is a non-tax incentive, linked to the hiring and maintenance o full-time employment for R&D&I activities.

One of the most outstanding aspaects of RD 475/2014 is that it establishes a bonus up to 40% for business contributions to the Social Security regarding the research staff and that it foresees a full compatibility of this incentive with tax deductions for R&D&I in the case of “innovative SMEs”; and in the rest of organizations, this compatibility can exist as long as both incentives are not applied on the same researcher.

 

Patent Box

The “patent box” consists of a reduction in the tax base for income coming from the cession (or transfer in some cases) of certain intangible assets. It is, therefore, an incentive to encourage the valuation and transfer of knowledge and technology of certain intangible assets, such as the right to use or exploit patents, designs, plans, formulas or secret procedures, the right to the information related to industrial, commercial or scientific experiences by including know-hows.

The Spanish legislation privileges the transfer of intangible assets so that the technology does not remain in the company that has developed it. It allows that only 40% of revenues are declared, in order to encourage the cession (transfer in some cases) of the technology to another company. The regulatory framework, for fiscal years beginning after 2015, is Article 23 of Law 27/2014, of 27 November. On Corporate Income Tax.

In order to qualify for any credit, all qualified R&D must take place in Spain or a member state of the European Union or in the European Economic Area. IP Ownership does not affect whether the taxpayer can claim the credit or not. Aside from knowing the legal framework of benefits and deductions it is also very important to master the investment strategy. One of those key strategies is the intellectual Property Strategy.

The purpose of an IP Strategy is to protect and support the Chinese company’s business. The strategy should help maximize the value derived from research and development at the R&D Centre. Most of the Centre’s results may be protected under one or more types of IP law such as patent, trade secret, copyright or trademark law. Both National and European laws will typically apply to each type of IP protection. IP developed at the Centre will be subject to Spanish and European laws initially, sinice the Centre resides in Spain. The IP strategy includes an evaluation of R&D results, case-by-case, to determine what type of IP protection is more appropriate, given the company’s goals. Maximizing IP value requires an understanding of these various laws as well as the international treaties affecting IP rights.

 

To put it in a nutshell, there is high demand in the explained technological sector. We only need to see the amount of EU projects dedicated to the subject: htpp://www.smartcities-infosystem.eu/sites-projects/projects, and a growing industry is also being developed in the sector. Furthermore, China has large technologically advanced companies that can incorporate European technology and produce at fully affordable prices. This creates a niche in the market that is very interesting for Chinese and European companies.

In summary, the incorporation of European technology into Chinese technological and productive processes is creating great business opportunity at global scale. This is why alliances like the Smarts Cities Law Firms (www.smartcitieslawfirms.com) leader in the sector, are promoting investment operations, joint ventures, mergers and acquisitions of companies linked to the technology sector, mainly between Europe and Asia, believing firmly that China must play an essential role in this outlook.