“The government expects that, by encouraging companies to undertake R&D in South Africa, local companies will strengthen their capabilities of developing value-added products, technologies and services.” (Department of Science and Innovation (DSI) – South Africa)
Research and development (R&D) is essential to boost innovation in the business sector, as it improves the capability to develop new products and processes and to improve existing ones. This is crucial for improving competitiveness and growth of the South African economy.
Section 11D of the Income Tax Act offers a R&D tax incentive to promote private sector R&D investment in South Africa. In the following paragraphs, you will find out what the incentive offers, which companies qualify, and the terms and conditions that apply.
Section 11D allows R&D spending to be considered when determining taxable income in two ways:
According to the DSI, the tax deduction will help to reduce the cost of R&D, which will enable companies to finance their R&D and scale up or undertake R&D activities sooner than otherwise.
To be eligible, a company must be an incorporated entity and recognised as a company under the Income Tax Act. Individuals, non-profit organisations and trusts are not eligible.
As the aim is to encourage South African companies to invest in R&D, the incentive is available to businesses of all sizes and in all economic sectors.
Companies can also claim a deduction of R&D it outsources to another company, or to a South African university or science council. Companies in joint ventures (JVs) can claim to the extent that they fund the R&D. Prototypes and pilot plants created solely for purposes of R&D are also eligible.
However, where a company receives funding from government, a public entity or a municipality towards its R&D activities, this funding will be excluded when the R&D tax deduction is calculated.
Before claiming the R&D tax incentive against taxable income, and certainly before commencing any R&D activities in reliance on the tax incentive being allowed, ask your accountant to confirm that you can benefit optimally from this substantial incentive, while meeting all the requirements.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.