Research and development will be more worthwhile from 2026. Clear rules apply, however. 

 

 

How companies can use the increased research and development deduction of up to 150% of qualifying expenditure from 2026 and achieve tax savings of up to 31.5%

What conditions development projects must meet and why timely notification to the tax administrator, proper documentation and ongoing cost records are essential

How claiming the deduction may affect transfer pricing and the top-up tax for multinational groups, and what risks to watch out for

 

Investment in developing a new product, technology, material or software solution may bring companies significantly greater tax savings from 2026. The research and development allowance has increased to up to 150% of qualifying expenditure. The period during which it can be used has also been extended.

More favourable terms do not mean that every company developing or improving something automatically qualifies for the deduction. The key requirements remain the correct definition of the research or development project, timely notification to the tax administrator and, above all, the ability to document what the company actually worked on, who was involved in the project and which expenditure related to it.

What is more advantageous from 2026?

The research and development allowance is an additional deduction that reduces the tax base. The company first claims qualifying costs as a tax expense in the usual way and then deducts a specified portion of them from its tax base again.

From 2026, the deduction is:
 

• 150% of qualifying expenditure up to CZK 50 million,
• 100% of expenditure above this threshold.

At the corporate income tax rate of 21%, the deduction may therefore provide additional tax savings of up to 31.5% of qualifying expenditure within the specified limit.

For example, if a company spends CZK 10 million on a qualifying development project, it may deduct a further CZK 15 million from its tax base. If its tax base is sufficiently high, this represents savings of up to CZK 3.15 million. Under the previous regime, the same amount of expenditure would have generated savings of CZK 2.1 million.

For associated companies, however, the CZK 50 million limit is not automatically assessed separately for each company. A deduction group is being introduced, and use of the increased rate will be monitored for the group as a whole. Groups with several Czech companies must therefore determine in advance which entities incur qualifying expenditure and how the limit will be allocated between them.

Another change is the extension of the period for using the deduction. If a company cannot use it immediately because of a low tax base or a tax loss, it may carry it forward to the next five tax periods instead of the previous three.

Which companies will benefit most from the deduction?

The deduction has the greatest economic benefit for profitable companies that invest in their own development over the long term and incur significant personnel, material or technology costs.

Typical sectors include:
 

• engineering, automotive and industrial manufacturing;
• automation, robotics and energy;
• chemicals, new materials and food production;
• pharmaceuticals, medical technology and biotechnology;
• software development, data solutions and cyber security;
• electronics, telecommunications and design engineering.

The deduction is not limited to companies with their own research laboratory. A qualifying project may also involve developing a new production technology, prototype, engineering solution or software functionality. It must, however, involve an appreciable element of novelty and technical or scientific uncertainty.

In other words, at the outset of the project the company does not yet know the solution and must reach it through systematic verification, calculations, experiments, design work or testing different options.

Research and development generally does not include:
 

• routine maintenance and repairs;
• routine modifications to existing products;
• implementation of a technological solution that is already known;
• standard customisation of software to meet customer requirements;
• design changes without technical uncertainty;
• routine quality checks or testing of a completed solution.

For software projects, the fact that a new application or functionality is being created is therefore not enough. The company must be able to explain what technical problem it was addressing, why it could not be solved using standard procedures and which options it tested during development (i.e. it must adequately explain the technical uncertainty it faced when seeking a solution).

When might the deduction not be the right tool?

The deduction has a less immediate effect for start-ups or companies that have been loss-making over the long term. It is not a refundable tax credit, so the company will not receive the support as a cash payment. It can only use the deduction against a future tax base, now within the next five tax periods.

Companies that outsource a substantial part of their development should also pay attention. Purchased services generally cannot be included in the deduction. The law allows only selected exceptions, such as certain services purchased from public universities or research organisations, or costs of mandatory verification of development results.

Nor can the deduction include costs for which the company has received even partial support from public funds. The deduction may be combined with grants at project level, but the same cost cannot be supported twice. Subsidised and non-subsidised expenditure must therefore be clearly separated.

The greatest risk arises before the company calculates the deduction

Companies often start considering the deduction only when preparing their tax return. By then, however, it may be too late.

Expenditure may be included in the deduction only from the date on which the company notifies the tax administrator of its intention to claim it. Costs incurred before the notification cannot be remedied retrospectively, even by filing a supplementary tax return. A separate notification must be submitted for each project, and its name must reflect the project’s actual focus.

The company must also prepare project documentation and approve it no later than the deadline for filing the regular tax return for the first period in which it intends to use the deduction.

The documentation should describe, in particular:
 

• the project’s objectives;
• the period over which it will be carried out;
• the expected expenditure (total and broken down by individual project years);
• all individuals involved in the project;
• how the progress and results of the project will be monitored and evaluated.

If there are doubts, the substantive requirements for project documentation may also be supported by other evidence. This does not mean, however, that the project documentation need not be prepared or that a vaguely defined project can be rectified retrospectively. Basic documentation, a properly defined objective and timely notification remain essential. The documentation should also adequately describe the project’s starting and target positions and how its implementation will be monitored and assessed on an ongoing basis. The Financial Administration has frequently challenged this recently, and case law, including that of the Supreme Administrative Court, confirms this approach. It is therefore worth allowing sufficient time to prepare the project documentation.

The Financial Administration does not require project documentation to be excessively extensive. It must, however, be prepared so that an average professional in the relevant field can understand what the project involves and what gives it its research and development character.

Another important requirement for the project documentation is the date of its approval and the name and signature of the person who approved it (usually a member of the company’s statutory body).

What should a company monitor throughout the project?

Good supporting documentation cannot be created in a one-off exercise at the end of the year. From the start of the project, the company should connect its technical, personnel and financial records.

1. Time worked

For each employee, it is advisable to record how much time they spent on specific research or development activities. A general statement that an employee works in development is not enough. The records should distinguish development from ordinary production, customer support, administration or routine modifications.

2. Technical progress of the project

For example, the company should keep records of:
 

• technical notes and calculations;
• proposed solutions;
• test results;
• design documentation;
• software versions;
• records of unsuccessful attempts;
• decisions explaining why a particular option was abandoned.

Dead ends and unsuccessful tests often provide the clearest evidence that the company faced genuine technical uncertainty and was not merely carrying out routine activities.

3. Costs allocated to the project

Qualifying costs may include, in particular, relevant personnel costs, materials, energy, tax depreciation of equipment and other costs directly related to the project. If equipment or an employee is also used for other activities, only a reasonable proportion of the costs may be included.

Each project should therefore have its own cost centre, job number or other accounting code. Records outside the accounting system are possible, but they must be verifiable and regularly reconciled with accounting and payroll data.

4. Project changes

During implementation, changes to the project team, timetable, budget and monitoring arrangements must be tracked. The project’s name and objectives cannot, however, be changed while it is in progress. If its direction or intended outcome changes substantially, it may be necessary to notify a new project.

Take care with development carried out within a multinational group!

In addition to the conditions for the deduction itself, multinational groups must also address transfer pricing. For example, a Czech company may operate as a contract development centre, providing services to a foreign parent company and receiving remuneration calculated as costs plus a mark-up.

In such a case, it is necessary to verify whether the contractual arrangements reflect reality:
 

• Who decides the direction of development?
• Who bears the risk of failure?
• Who funds the project?
• Who owns and uses the resulting know-how or intellectual property?
• Does the Czech company perform only a routine role, or is a substantial part of the value created there?

Transfer pricing must reflect the functions actually performed, the assets used and the risks borne. Legal ownership of the development result abroad is not sufficient if key decisions and value creation take place in the Czech Republic. OECD rules are based on the principle that profit allocation should reflect actual economic activity and value creation.

The Czech project must also be properly defined for the purposes of the deduction. Describing the group’s global development programme is not enough. The Czech company must be able to define its own objective, its own technical uncertainty and the activities it actually performs. The Financial Administration expressly points out that partial involvement in group development does not in itself mean that the Czech entity is carrying out qualifying research and development.

The group should also assess whether and how the tax deduction affects intra-group pricing. It is not automatic that the entire benefit belongs to the Czech company or should be transferred to the foreign client through a lower price. This depends on the contractual relationship, the allocation of risks and the transfer pricing method.

The deduction may affect the top-up tax!

Another important area is the top-up tax under the OECD Pillar Two rules. It applies to multinational and large domestic groups with consolidated revenue of at least EUR 750 million.

Although the Czech corporate income tax rate is 21%, the research and development deduction reduces the tax actually payable. Combined with tax losses, investment incentives, deferred tax or low profitability of the Czech company, the effective rate calculated under Pillar Two may fall below 15%.

In such a case, Czech top-up tax may arise. Some of the savings obtained through the deduction could therefore turn into another tax liability.

For example, a Czech development company may be at risk if it:
 

• operates on a low cost-plus mark-up;
• reports relatively low accounting profits;
• and at the same time claims a substantial research and development deduction.

For large groups, the decision to use the deduction should therefore not be based solely on the Czech corporate income tax return. The company should model in advance the impact on the jurisdictional effective tax rate, the safe harbour and any Czech top-up tax. BDO’s internal experience confirms that the research and development deduction may be one of the factors reducing effective taxation below the 15% threshold.

An amendment to the Top-up Taxes Act is currently being prepared which should, among other things, prevent the use of the research and development deduction from having a negative effect on the top-up tax.

What should be considered before claiming the deduction?

Before deciding to claim the deduction, a company should answer the following questions:
 

• Does the project involve genuine technical or scientific uncertainty?
• Can we clearly distinguish development activities from routine work?
• Can we submit the notification before the costs we intend to claim start to arise?
• Have we appointed a project owner from both the technical team and finance?
• Can we properly and continuously record time, costs, changes and test results?
• Are any of the same costs covered by a grant or other public support?
• Has the project documentation been properly prepared and approved on time?

For multinational companies, also:
 

• Can we coordinate the CZK 50 million limit across the entire deduction group?
• Do the transfer pricing arrangements reflect the actual allocation of functions, risks and intellectual property?
• Have we assessed the impact on the top-up tax?

The increased deduction makes research and development support a significantly more attractive tool from 2026. The greatest benefit will go to companies that do not treat it as a one-off item in their tax return. Successful use requires cooperation between the technical team, finance, accounting and tax specialists from the first day of the project.

A well-designed process will not only deliver tax savings. It will also help the company manage development projects more effectively, understand the true cost of innovation and provide management with more reliable decision-making data.