Why Sweden's proposed R&D tax changes mark a positive step forward

On 15 January 2025, Sweden published interim results of its R&D tax incentive review, launched in June 2023 to drive R&D and investment.

In brief

• The Swedish government proposes redefining research and development to broaden incentive scope and improve access to R&D tax relief.
• Recommendations include removing the 15-hour rule and introducing expert consultations to enhance evaluation quality.
• The investigation will also consider new incentives, such as corporate income tax reductions, with the final report due in January 2026.

The current R&D incentive (Swedish: forskningsavdrag) offers companies a reduction in social security contributions (Swedish: arbetsgivaravgifter) for employees engaged in R&D activities. However, employers have faced significant challenges in applying these rules, largely due to the complex and interdependent definitions of “research” and “development.” These complexities have made it difficult to determine whether the conditions for relief are met.

The Swedish Tax Agency has also encountered difficulties in interpreting and applying these definitions, resulting in prolonged processing times, demands for extensive documentation and unpredictable outcomes. These hurdles have discouraged many companies, especially smaller ones, from pursuing the available relief.

To address these issues, the government’s initial report outlines several findings regarding the current R&D tax incentive’s impact, and proposes legislative changes to improve its effectiveness and accessibility. The proposed amendments focus on simplifying the definitions of R&D activities and streamlining the requirements for claiming deductions.

The report notably recommends changes to the definitions of research and development. It suggests that research be defined as work aimed at generating new knowledge for commercial purposes. Development should refer to work focused on creating or improving goods, services, or production processes for commercial purposes through new solutions to scientific or technical problems. Additionally, the direct link between research and development is removed, as are the requirements that R&D be “systematic” and “qualified.” These definitions are broader than current legislation and place greater emphasis on the objectives of R&D work rather than the outcomes — a welcome change.

The investigation also proposes:

• Removing the 15-hour rule: Currently employees must spend at least 50% of their working time —and a minimum of 15 hours — on R&D activities to qualify for the relief. The investigation concludes that the 15-hour requirement imposes an unnecessary administrative burden and that the 50% requirement alone is sufficient.
• Granting the Swedish Tax Agency to seek expert opinions: The agency would be permitted to consult another public authority to determine whether a company’s work qualifies as R&D. This change would provide access to the expertise needed to evaluate technical activities which the agency currently lacks. The investigation specifies that any such consultations must remain confidential.
• Maintaining the current monthly maximum deduction limit: The deduction is currently limited to a maximum of SEK3,000,000 per group, per month. The investigation notes that prior increases to the ceiling did not lead to more companies claiming the deduction. Instead, these increases disproportionately benefited a small number of large companies at a substantial cost to the state.
• No changes to the application or filing procedures: The report concludes that introducing new administrative processes, such as pre-assessments or advance approvals, would not justify the added complexity and expense.

The government’s investigation will now continue with an expanded remit, with a final report due by 19 January 2026. The expanded scope directs the investigation to evaluate the potential for a new incentive, separate from the reduction of social security contributions, allowing companies to reduce corporate income tax based on their R&D expenses. The investigation will review international models, such as refundable tax credits and patent boxes, and propose new legislation for Sweden that aligns with EU norms and global tax standards.

The EY organization views this report and its recommendations, which are proposed to take effect on 1 January 2026, as a significant step forward. We believe these changes will simplify the process for companies to claim R&D tax incentive and encourage greater investment in innovation. The global EY organization has actively contributed to the ongoing discussions and looks forward to continuing to shape the future of R&D incentives in Sweden.