New tax proposals on research and development

On 19 January 2026, the Swedish Government received a report on income tax incentives for research and development (R&D). The report outlines two alternative approaches for a new regulatory framework. During the press conference, the Minister of Finance did not want to commit to either proposal but emphasized the importance of introducing R&D incentives. The proposals will now be submitted for consultation.

Tax incentives for R&D are common across OECD countries. In Sweden, the current system offers an R&D deduction that reduces employer social security contributions for employees engaged in research and development activities. Given Sweden’s relatively high employer social charges, the existing scheme primarily counterbalances a structural disadvantage to encourage R&D within the country. Furthermore, there has been criticism regarding the Swedish Tax Agency’s interpretation of the deduction, particularly in respect of predictability and consistency in the application of the rules. 

To enhance Sweden’s competitiveness as an R&D hub and stimulate growth, the government commissioned an inquiry tasked with both improving the existing deduction and introducing a new income tax incentive. A proposal aimed at refining the current deduction was submitted last year, while this latest report presents options for a new income tax incentive on R&D. 

Common basis for the proposals 

Both proposals rely on an incentive calculation that is based on the salary costs of staff directly involved in R&D activities. This approach allows the new system to integrate smoothly with the existing R&D deduction and is supported by a common R&D definition. Although companies incur other R&D-related expenses, salaries of research personnel are the most significant cost, and focusing solely on wages also streamlines administration. 

Moreover, both alternatives apply to companies of all sizes, with no upper limit on the incentive amount. This is deemed critical to incentivize larger companies with major R&D investments and have the flexibility to allocate their research workforce internationally. 

Finally, in both proposals, it is the employer of the researchers that have the right to claim the incentive. Costs related to externally hired consultants engaged in R&D do not qualify for the incentive (even though consulting firms themselves may benefit from equivalent tax reliefs, which can influence pricing). 

Option 1 – The increased cost deduction 

Under this option, salaries for R&D personnel would give rise to an increased income tax deduction. For every SEK 1 spent on R&D salaries, an additional SEK 2 may be deducted, entailing that the total deduction is 300 percent of the R&D salary costs. In this context, salary costs refer solely to wages and similar payments and exclude pension contributions and employer social charges. This deduction can be claimed in the annual CIT return. 

According to information presented at the Government’s press conference, such a rule would mean that Sweden would move from a position in the bottom third for research tax incentives to becoming the country offering the highest subsidy rate for profit-making companies within the OECD. 

Approximately 4,000 companies conduct R&D in Sweden, of which around 60 percent are currently profitable. Loss-making companies could also use the deduction but only to increase loss carry forwards. Startups and similar companies would therefore benefit considerably less from this proposal than profit-making companies. A downside is that increased deductions for R&D would reduce the EBITDA, potentially limiting companies’ capacity to claim interest deductions. 

Option 2 – Refundable tax credit 

Under this option, companies would instead be granted a tax credit amounting to 20 percent of R&D wages (calculated and limited on the same basis as in Option 1 above). This results in a lower amount per company compared to Option 1, since the overall fiscal cost is set at the same level in both options and is consequently shared among a larger number of companies under this option. 

The tax credit can be offset against corporate income tax as well as other taxes such as property tax, with any remaining part of the credit refundable in cash. 

This approach provides a benefit to a wider range of companies than option 1, including startups and those with losses. However, it also raises concerns around potential misuse, requiring more robust controls. 

If implemented, Sweden would rank in the upper half of OECD countries regarding R&D subsidy levels for both profitable and loss-making firms. 

Key points from the partial proposal from January 2025 

The proposal from January 2025 has not been enacted into law yet. The inquiry identified significant challenges when applying the current R&D tax incentives and proposed several simplifications: 

• The definition of research is proposed to be broadened and simplified by removing the criteria that the work must be systematic and qualified. However, new knowledge must still be developed, but the requirements regarding how this shall be achieved will be simplified.

• Similarly, it is proposed to remove the requirements that development work must be systematic and qualified. 

• Existing conditions that development activities must stem from research and relate to creating new or substantially improved products, services, or production processes would be removed. 

• Instead, eligible development would be any work aimed at creating or enhancing a product, service, or process through innovative solutions to scientific or technical challenges. 

• While the current reporting system remains unchanged, the Swedish Tax Agency will also be able to consult other authorities if needed to assess whether activities qualify as research or development. 

Our perspective 

Strengthening Sweden’s position as a research-driven economy is essential, and enhanced tax incentives can be a valuable complement to other measures. It is therefore positive to see this issue being thoroughly examined and two concrete proposals being circulated for comment. 

Both proposals have advantages and disadvantages and will require thorough analysis, particularly given the complexity of the corporate tax framework. Ideally, the design should also take into account other corporate rules, such as potential adverse effects on interest deductibility and loss limitation provisions. It is also important that the proposals consider the recently adopted Pillar Two rules and the new substance-based incentive regulations included in the side-by-side package. 

We note that both options are linked to the current rules on R&D deductions. It is therefore important to ensure that the proposed improvements to the R&D definition are effectively incorporated, both in the legislation and in the administration by the Swedish Tax Agency and the courts. Without this, there is a risk that the newly proposed rules, regardless of the option chosen, will be applied too narrowly. 

A potential challenge is that consultancy costs are excluded from eligible expenses, which may limit the development of new collaboration models. There are scenarios where specialized expertise needs to be procured externally instead of through permanent employment. 

Finally, the report must include proposals on how to finance the suggested tax incentives. The current proposal is to tighten the interest deduction rules by reducing the threshold from 30 percent to 20 percent of EBITDA. At this stage, it is too early to determine whether the costs will be covered within the reform budget or require other tax increases. It would be highly unfortunate if the interest deduction limitation rules were made stricter, as proposed rules in the area are eagerly awaited by businesses. 

We will continue to follow developments on this issue.