This article was written by Futura Digital co-founder Alexandra Kurdyumova and associate Roman Motorin.
One common strategy used by governments to attract digital or R&D-intensive businesses is through offering tax benefits.
Corporate income tax (CIT) is a significant tax burden for businesses, so tax benefits often focus on this area.
In this article, we will provide a summary of the most commonly used CIT benefits that are relevant to IT and game development businesses.
1. R&D deductions
What is the tax benefit: Software development costs can be deducted immediately at a rate higher than 100%.
Examples of jurisdictions: Czech Republic, Denmark
Relevant for: Companies with high development costs, startups with high cash-burn rate.
One company benefitting from R&D deductions is a Czech company that can deduct costs at a 200% rate, reducing its taxable income significantly.
Businesses with high R&D benefit the most from these deduction rules.
High R&D costs lead to less CIT payment and a greater untaxed income share for companies.
2. Tax deferral
What is the tax benefit: CIT is deferred until profits are distributed.
Examples of jurisdictions: Estonia, Georgia
Relevant for: Holding companies, venture capital funds, cost centers.
Companies in Estonia or Georgia do not pay CIT until dividends are distributed, allowing reinvestment of profits.
The company is not taxed on its profits until it distributes dividends, enabling reinvestment.
Establishing a holding company in these jurisdictions facilitates reinvestment in assets without immediate tax obligations.
3. Reduction of tax under IP-box regime
What is the tax benefit: CIT reduction through a reduced rate or tax base reduction.
Examples of jurisdictions: Cyprus, UAE, Kazakhstan
Relevant for: Companies involved in software development and publishing/licensing.
Including intellectual property development, the CIT is reduced based on nexus ratio calculations in these jurisdictions.
The nexus ratio determines the portion of profits that benefit from the tax incentive, encouraging investment in assets.
Calculating the ratio allows companies to benefit from reduced CIT rates on qualified development costs.
Consult with a tax advisor to determine the best tax benefit for your business needs.
