The European Commission’s proposed EU Tax Omnibus package would introduce a minimum EU-wide standard for immediate tax deductions on certain R&D-related capital investments. While it moves the EU closer to the tax treatment available in the US and UK, the proposal is narrower, applying only to qualifying tangible assets used for research and development rather than broad categories of business investment.
The proposal is intended to encourage investment and improve competitiveness by reducing the tax penalty associated with delayed depreciation. However, because it excludes many assets central to modern research, particularly intangible assets such as acquired intellectual property and software development, it would not fully match the broader expensing regimes available in major competing economies.
Why full expensing matters
Businesses typically recover capital investment costs through depreciation over several years. Because deductions are delayed, inflation and the time value of money reduce their real value, increasing the effective cost of investment.
Full expensing allows businesses to deduct the entire cost of qualifying capital investments in the year they are incurred, preserving the full value of the deduction and reducing the tax cost of investing.
Accelerated depreciation achieves similar objectives by shortening depreciation schedules, but still leaves some of the tax penalty associated with delayed deductions.
Unlike tax credits or super-deductions, full expensing simply changes the timing of deductions rather than increasing the total amount that can ultimately be deducted.
The EU Tax Omnibus proposal
The proposal would require EU Member States to introduce a minimum R&D expenditure-based incentive allowing full expensing for qualifying tangible assets directly used in, or supporting, research and development activities.
The proposal covers certain tangible assets used for R&D, including land and buildings in limited circumstances.
However, it does not generally cover:
- Acquired intellectual property
- Patent rights
- IP licenses
- Software development
- Certain internally developed intangible assets
- Some land and buildings
This narrow scope is identified as the proposal’s principal limitation.
Many employee wages connected to research are already deductible immediately under existing accounting and tax rules, reducing the need for additional treatment. However, capitalized development costs and purchased intangible assets remain subject to amortization in many Member States.
Why the proposal is considered limited
The proposal focuses only on assets used specifically for research and development rather than broader business investment.
According to the analysis, this creates several issues:
- only a relatively small share of total investment qualifies
- businesses must distinguish between qualifying and non-qualifying assets
- tax treatment differs between similar investments
- administrative and compliance costs increase
- investment decisions may become distorted toward tax-favored assets
A broader system applying equally across entire asset classes avoids many of these problems.
Comparison with the United States
The US applies full expensing much more broadly.
Permanent full expensing applies to machinery, equipment, and many other short-lived business assets following legislation enacted in 2025.
The US also temporarily allows full expensing for qualifying manufacturing structures where:
- construction begins between January 19, 2025 and January 1, 2029
- the property enters service between July 4, 2025 and January 1, 2031
These qualifying manufacturing structures represent approximately 10-15 percent of US buildings and structures.
Tax Foundation modeling estimates permanent equipment expensing increases long-run:
- GDP by 0.6%
- capital stock by 1.0%
- wages by 0.5%
The temporary manufacturing-structure provision primarily accelerates investment during its eligibility period and is not expected to increase long-run GDP after expiration.
US R&D expensing
The One Big Beautiful Bill Act restored immediate deductions for domestic research and experimental expenditures.
Immediate expensing covers:
- domestic R&D
- software development
- qualifying research expenditures (net of applicable R&D tax credits)
Certain small businesses may apply the rule retroactively to expenses incurred after December 31, 2021.
Still excluded are:
- foreign R&D
- acquired patents
- licenses
- oil and gas exploration
- certain land purchases
Comparison with the United Kingdom
The UK introduced permanent full expensing for machinery and equipment in 2023.
Additional provisions include:
- permanent 100% Annual Investment Allowance for qualifying plant and machinery investments up to £1 million
- permanent 50% first-year allowance for certain long-life assets and integral building features
Joint modeling estimates permanent full expensing increases long-run:
- GDP by 0.9%
- capital stock by 1.5%
- wages by 0.8%
UK R&D allowance
The UK’s Research and Development Allowance permits immediate deductions for:
- plant
- machinery
- research buildings
- structures
- software development
- exploration related to oil and gas
Excluded are:
- intellectual property rights
- licenses
- dwellings
- bare land
Compared with the proposed EU system, UK software development receives more favorable treatment.
Current position of EU Member States
Only a few EU countries currently provide tax treatment broadly equivalent to full expensing.
Estonia and Latvia
Both countries tax corporate profits only when distributed, producing an outcome broadly equivalent to full expensing across all asset classes.
Lithuania
Beginning in 2026, Lithuania introduced permanent full expensing for:
- machinery
- equipment
- software
- acquired rights
Most other Member States continue using traditional depreciation schedules.
Capital cost recovery across Europe
Average weighted capital allowances in the EU (excluding Estonia and Latvia) recover approximately 69.2% of investment costs in present-value terms.
This means businesses fail to recover roughly 30.8% of the real value of their investment costs because deductions lose value over time.
Selected weighted averages include:
| Country | Capital Allowances |
|---|---|
| Estonia | 100.00% |
| Latvia | 100.00% |
| Lithuania | 92.88% |
| Croatia | 87.16% |
| Italy | 76.34% |
| France | 74.19% |
| Germany | 67.58% |
| Netherlands | 62.63% |
| Spain | 61.31% |
| Poland | 59.32% |
| Hungary | 58.34% |
| EU Average | 71.49% |
| United Kingdom | 72.36% |
| United States | 94.52% |
The United States achieves particularly high recovery because machinery and equipment receive immediate deductions.
Existing R&D incentives in Europe
Member States already use numerous R&D incentives, including:
- super-deductions
- tax credits
- accelerated depreciation
- immediate deductions under some accounting rules
For large profitable firms, the average implied R&D tax subsidy across Europe is approximately 17%.
Support varies significantly:
- Portugal provides an implied subsidy approaching 39%
- Bulgaria, Denmark, Latvia, Luxembourg, and Malta provide less than 1%
The proposal would interact with these existing incentives differently depending on national rules.
Simply adding R&D expensing to existing incentives could increase subsidy rates and administrative complexity.
Replacing existing incentives with broader expensing could provide similar investment benefits while reducing complexity.
Software development remains a major difference
One of the largest differences between the EU proposal and the US and UK systems concerns software.
The proposed EU regime does not appear to provide immediate deductions for software development costs.
Both the United States and the United Kingdom include software development within their R&D expensing regimes.
This leaves many technology-intensive businesses facing less favorable treatment in the EU.
Accelerated depreciation versus full expensing
Accelerated depreciation moves deductions forward but still spreads them over multiple years.
Full expensing allows businesses to recover the entire cost immediately.
The analysis argues this distinction has measurable economic effects.
Germany illustrates the difference.
Making Germany’s accelerated depreciation for machinery permanent is estimated to increase:
- GDP by 0.8%
- investment by 1.1%
- wages by 0.7%
Moving instead to full expensing for machinery and equipment could potentially increase those gains to approximately:
- GDP: 1.6%
- capital stock: 2.5%
- wages: 1.4%
Super-deductions and tax credits
The analysis distinguishes full expensing from other tax incentives.
Super-deductions
Super-deductions allow businesses to deduct more than 100% of qualifying investment costs.
Because deductions exceed actual investment, they operate as subsidies and may encourage investments that would otherwise not be profitable.
Tax credits
Tax credits reduce tax liability directly rather than reducing taxable income.
Their effect depends less on corporate tax rates and may either:
- fail to eliminate tax penalties on investment, or
- exceed neutrality and subsidize investment.
Full expensing instead aims to preserve the real value of investment deductions without exceeding actual investment costs.
Additional policy changes suggested
The analysis argues Member States could improve competitiveness further by strengthening broader cost recovery rules.
Better treatment of net operating losses
Capital-intensive businesses often incur losses for several years before earning profits.
More flexible net operating loss (NOL) rules would allow companies to carry losses forward without restrictive limits, reducing the tax penalty associated with long development periods.
Among 35 major European countries:
- 20 allow unlimited carryforward periods
- 9 permit some carryback of losses
Some countries still limit how much taxable income may be offset each year.
Neutral cost recovery
Neutral cost recovery adjusts depreciation deductions for inflation and a notional return on capital, preserving their real value even when deductions remain spread over time.
The analysis describes this approach as producing economic effects broadly comparable to full expensing while potentially reducing fiscal costs.
Among OECD countries, only:
- Chile
- Israel
- Mexico
currently adjust capital allowances for inflation.
The Council could permit Member States to adopt neutral cost recovery as an alternative to the proposed R&D expensing requirement.
Debt bias
The analysis identifies one important caveat.
Combining full expensing with deductible interest payments can produce negative effective marginal tax rates on highly leveraged investments.
In these situations, tax deductions may exceed the actual economic return, effectively subsidizing debt-financed investment.
The underlying issue is that:
- interest payments are generally deductible
- equity returns are generally not
One proposed solution is limiting or eliminating corporate interest deductions, reducing the tax preference for debt while offsetting some of the short-term revenue cost associated with immediate expensing.
Overall assessment
The proposed EU Tax Omnibus R&D expensing regime would establish a harmonized minimum standard for immediate deductions on qualifying R&D-related tangible assets and move the EU closer to the investment tax treatment available in the US and UK.
However, because it focuses narrowly on tangible assets used for research and development, excludes important intangible assets such as software development and acquired intellectual property, and does not broaden expensing across major asset classes, it would not fully match the broader cost-recovery systems used by its principal competitors.
According to the analysis, Member States could build on the proposal by expanding full expensing to broader categories of investment, improving net operating loss rules, considering neutral cost recovery, and addressing the interaction between immediate deductions and corporate debt financing.
Source article: taxfoundation.org
