EU Tax Omnibus Proposal: Limited R&D Expensing Risks Competitiveness in Global Markets

Key Insights on the EU Tax Omnibus Proposal

The European Commission's Tax Omnibus proposal, unveiled on June 24, aims to modernize the EU’s tax code while enhancing the bloc's competitive edge in global markets. A hallmark of this proposal is the introduction of a minimum standard for full expensing related to tangible assets utilized in research and development (R&D). While this move draws some of its principles from full expensing rules already in place in the US and UK, its implementation raises pressing questions about adequacy and scope. Here’s the crux of the issue: while the EU's proposed framework is a step forward, its narrow focus on specific assets utilized in R&D does little to level the playing field against the broader and more comprehensive regimes implemented in the US and UK. By limiting full expensing to a constrained set of “assets used in R&D,” the proposal not only ignores significant intangible assets but also creates distortions in how different assets are taxed. This could hinder investment, as companies may receive preferential treatment only for a small subset of what they use. The US and UK models, contrastingly, cover entire swathes of capital investments—like machinery, buildings, and equipment—expanding their economic impact significantly. These regimes enable businesses to quickly recoup their investment, a dynamic that’s crucial in fostering a thriving business environment. However, the EU’s attempt at a harmonized expensing floor could serve as a useful framework, especially if Member States take it a step further by extending full expensing beyond the limited R&D focus. Such actions could unlock significant economic benefits and pave the way for a more favorable investment landscape. While the proposal is undeniably a positive development, its potential falls short of fully restoring the EU’s competitive position against key global players. If you’re navigating this space, consider the implications: the EU's tax strategy may offer improved investment terms, but the restrictions might stifle broader growth. Going beyond the minimum required could prove vital for Member States seeking to bolster their competitiveness in the long term.

Understanding Full Expensing

To grasp the impact of the proposed changes, it’s essential to understand full expensing itself. This tax approach allows businesses to write off the total costs of capital investments in the year they occur, contrasting sharply with traditional depreciation methods, which require a gradual deduction over multiple years. This immediate deduction is significant—by allowing businesses to recover investments quickly, it effectively reduces the cost of capital, thereby encouraging more robust investment activities. Yet, there's a catch. The longer an asset’s depreciation schedule, the less beneficial it becomes due to inflation and diminishing returns. For businesses, delayed recovery of costs can deter them from pursuing necessary investments. Full expensing mitigates this concern, presenting companies with a clear incentive to invest by minimizing the tax burdens tied to capital expenditure. Accelerated depreciation mechanisms can offer a similar boost, allowing firms to deduct costs sooner, which can also help shift the economic needle toward growth at a lower fiscal cost. However, the broader goal should be to ensure that full expensing policies are uniformly applied across various asset categories, rather than confined to selective investments. Narrowly targeted measures create complications and distort funding decisions, leading to inefficiencies in capital allocation. The differences with US and UK frameworks are stark: both nations apply full expensing across a broad index of capital investments, fostering a more conducive environment for economic growth. The clear delineation of what qualifies under these tax regimes makes it simpler and more effective than the EU’s proposed model. While the EU's approach is certainly a step forward, it’s only a partial solution. Increasing the breadth of full expensing could empower Member States not only to meet investment targets but also significantly enhance their economic prospects. For policy makers, the challenge lies in recognizing and addressing the limitations of this new proposal.<

ISO-3	Country	Weighted Average	Machinery	Industrial buildings	Intangibles
EST	Estonia	100.00%	100.00%	100.00%	100.00%
LVA	Latvia	100.00%	100.00%	100.00%	100.00%
LTU	Lithuania	92.88%	82.69%	100.00%	100.00%
HRV	Croatia	87.16%	73.79%	96.51%	96.51%
ITA	Italy	76.34%	57.67%	86.99%	96.51%
FRA	France	74.19%	54.80%	88.03%	86.99%
SVK	Slovakia	73.91%	54.80%	87.39%	86.99%
BEL	Belgium	73.73%	54.80%	86.99%	86.99%
CZE	Czech Republic	73.29%	54.32%	87.39%	84.13%
BGR	Bulgaria	72.45%	47.93%	92.11%	82.25%
LUX	Luxembourg	71.07%	47.93%	87.34%	86.99%
SWE	Sweden	70.33%	47.93%	86.00%	86.00%
PRT	Portugal	69.75%	54.80%	88.84%	54.80%
FIN	Finland	68.69%	51.90%	82.69%	73.79%
DEU	Germany	67.58%	39.14%	87.65%	86.99%
AUT	Austria	66.68%	40.88%	88.44%	73.79%
ROU	Romania	65.80%	33.85%	89.10%	85.40%
SVN	Slovenia	65.32%	39.14%	86.99%	73.79%
MLT	Malta	64.67%	37.56%	86.99%	73.79%
DNK	Denmark	64.56%	39.14%	82.69%	81.34%
IRL	Ireland	63.94%	47.93%	78.71%	64.63%
CYP	Cyprus	63.14%	47.93%	73.79%	73.79%
GRC	Greece	63.14%	47.93%	73.79%	73.79%
NLD	Netherlands	62.63%	33.85%	81.35%	86.99%
ESP	Spain	61.31%	39.14%	77.86%	73.79%
POL	Poland	59.32%	33.85%	73.79%	86.99%
HUN	Hungary	58.34%	27.90%	81.62%	73.79%
EUR	EU Average	71.49%	51.54%	86.41%	82.62%
GBR	United Kingdom	72.36%	39.14%	100.00%	82.69%
USA	United States	94.52%	100.00%	100.00%	63.28%

Source: Cristina Enache, “Capital Cost Recovery in the OECD – 2026 Update,” Tax Foundation, 2026, https://github.com/TaxFoundation/capital-cost-recovery.  The 2026 analysis reveals that EU Member States, excluding the outliers Estonia and Latvia, average a weighted capital allowance of roughly 69.2%. This leaves a striking 30.8% of the value of capital investments unrecoverable by businesses. This essentially means that entities within these nations are not adequately incentivized to recover their investments over time.

Focusing on Tangibles: The Commission's Narrow Approach

The Tax Omnibus proposal notably restricts its ambitions, zeroing in on a full expensing model for tangible assets tied to research and development (R&D). While there are legitimate concerns about subsidiarity and the feasibility of a uniform corporate tax base across diverse EU Member States, it does suggest a limited scope for engagement with capital allowances. This proposal requires Member States to implement a baseline incentive based on R&D expenditures, specifically endorsing full expensing for certain tangible assets directly linked to R&D activities. However, it intentionally excludes intangible assets from this arrangement, a point that merits further scrutiny. Many costs associated with intangibles, especially those related to personnel, typically get expensed immediately. Thus, the need for a full-expensing rule in this context is often redundant. Still, two categories deserve attention: purchased intangible assets, like patents, which are capitalized, and self-developed intangibles, whose development outlays can be capitalized.

Understanding Treatment of Intangibles in Tax Proceedings

International accounting standards, such as IAS 38 regarding Intangible Assets, obligate companies to capitalize development costs when certain criteria are fulfilled. Different national accounting frameworks may diverge from these standards. Depending on how a nation's tax regulations align with accounting principles, many countries might depreciate intangible development costs instead of allowing for immediate expense claims. Most regularly, wages accumulated in this process can be deducted in the year incurred. These contrasting treatments yield three dominant scenarios among EU nations. The first involves countries that disallow immediate expensing for intangible development due to adherence to IFRS without supplementary tax provisions. The second allows immediate expensing only if no capitalization occurs in accounting. Lastly, some nations permit immediate expensing across the board, providing a clearer path for businesses to offset R&D costs. Member States’ R&D incentives also show remarkable diversity, often existing in tandem with or as alternatives to immediate expensing strategies. These can include super-deductions, tax credits, and accelerated depreciation. For profitable large firms, the average tax subsidy allocated to R&D expenditures stands at around 17%, ranging from 39% in countries like Portugal to virtually nonexistent support lower than one percent in nations such as Bulgaria and Malta. While these incentives have the potential to spur increased R&D spending, they may not effectively target investments in meaningful innovation with the desired spillover benefits to the broader economy. The complexity often introduced by R&D tax preferences can lead to increased administrative burdens and compliance costs as businesses and regulators navigate the challenges of qualifying expenditures. Regardless of how an R&D-specific expensing policy is structured, the same fiscal hurdles will arise at both the EU and national levels. Its ultimate success hinges on how it integrates with existing Member State policies. Simply layering this new expensing rule atop existing incentives may unintentionally inflate R&D subsidy rates while amplifying compliance and administrative expenses. Instead, a more beneficial approach might involve replacing outdated incentives with a more expansive R&D expensing model, which could not only optimize investment climates but also streamline tax incentives to encourage more balanced capital investment across various asset classes.

Evaluating the Competitive Edge of the EU

When stacking up the full expensing strategies in the US, UK, and EU, two broad comparisons emerge: the general full expensing frameworks and the tailored R&D provisions that each jurisdiction offers. While the US and UK encompass extensive full expensing regimes that cover most capital investments, the EU presents a patchwork approach, with only Estonia, Latvia, and Lithuania known to maintain broad expensing policies. Examining the R&D-specific frameworks reveals a shared restriction: all three jurisdictions favor investments primarily in physical assets while excluding certain key areas, notably IP rights and software development. The EU proposal’s exclusion of software costs stands out, particularly as both the US and UK allow immediate expensing for such expenditures. As the EU aims to establish a minimum standard for full expensing to catch up with key trading partners, the omission of intangible assets could prove detrimental. This restricts taxpayers from effectively amortizing their acquisition costs associated with essential intangible inputs in R&D. Furthermore, Member State requirements that necessitate amortizing development costs rather than permitting immediate expensing could leave the EU's minimum standard trailing behind the more favorable conditions in both the US and UK. Comparing alternatives like super-deductions, tax credits, or accelerated depreciation to full expensing reveals significant differences in economic impact. Full expensing enables a business to fully write off its capital investment costs in the year incurred, providing timely recovery of its investment's real value. While accelerated depreciation offers some benefits, it stops short of enabling total immediacy, meaning some potential benefits from accelerated recovery are lost. For example, if Germany were to make its accelerated depreciation for machinery permanent, studies suggest it could add 0.8 percent to GDP long term. However, adopting full expensing for all machinery and equipment might amplify those gains much further, potentially contributing 1.6 percent to GDP increase, expanding the capital stock by 2.5 percent, and nudging wage levels higher by 1.4 percent. In contrast, implementing a super-deduction can create a subsidy effect, allowing businesses to deduct more than their actual investment costs, which might inadvertently encourage investments that aren't viable. Tax credits afford businesses a direct reduction in their tax liability, rather than in taxable income—this divergence means they can fall short of alleviating tax burdens on investments or potentially incentivize unproductive expenditures.

Charting a Progressive Course in Member State Strategies

Member States have the latitude to exceed the baseline minimum that the EU Tax Omnibus proposal establishes. Past recommendations from the Commission have rightly asserted that linking accelerated depreciation with more adaptable loss-carryover rules is essential. This principle applies to the proposed R&D full expensing structure as well. In capital-intensive endeavors, firms often face years of early-stage losses before profitability materializes. By liberalizing net operating loss (NOL) regulations, particularly by eliminating time limits and increasing deductibility flexibility, Member States can incentivize more stable risk and income trajectories for organizations, driving a more equitable investment landscape. Strict caps can deter investment, especially in volatile sectors where income can be inconsistent. Currently, 20 out of 35 major European economies allow indefinite NOL carryforwards, with an additional nine permitting some backward losses. However, even nations without strict limits may not adequately utilize accelerated depreciation benefits, as initial write-offs can require postponement due to insufficient taxable income. Without taxable gains, the practical value of such early deductions diminishes, underscoring the need for a more responsive tax approach.The potential adoption of neutral cost recovery (NCR) in the EU tax structure could represent a thoughtful pivot in how member states approach capital investments. NCR addresses inflation by adjusting depreciation allowances, a feature currently utilized by only a handful of OECD countries, including Chile, Israel, and Mexico. This mechanism helps preserve the value of capital deductions, countering the adverse impacts of soaring prices that can deter long-term investment. Consider this: as EU lawmakers contemplate a Tax Omnibus directive, they may grant member states the discretion to choose NCR as an option alongside R&D full expensing. The beauty of NCR lies in its ability to level the playing field for entities pursuing high-risk investments with distant returns, while also providing additional flexibility for national budgets. This could stimulate capital investment without over-burdening the fiscal landscape. ### The Pitfalls of Interest Deductibility However, a word of caution: implementing accelerated depreciation without addressing the bias towards debt financing could lead to counterproductive outcomes. Some heavily leveraged projects may find themselves benefiting too much from tax deductions to the point where they effectively face negative effective marginal tax rates (EMTRs). That raises significant issues if tax benefits exceed the actual returns on investments, essentially transforming the tax regime into an unintentional subsidy for debt-driven ventures. The underlying problem boils down to how debt and equity are taxed. Currently, interest payments can be deducted from taxable income while returns on equity cannot, creating a lopsided playing field. As a remedy, disallowing interest deductibility at the corporate level could eliminate this bias and keep NCR effective for all forms of capital financing. This approach not only aligns tax treatment more equitably but could also offset any fiscal challenges arising from implementing full expensing. ### A Valuable Second-Best Solution In the grand scheme of EU tax reform, introducing a generalized full expensing policy tied solely to R&D expenditures could serve as a pragmatic alternative. While it’s not a perfect solution—especially since it excludes intangibles like software—it provides a necessary incentive for investments into tangible assets. Member states still maintain the latitude to enhance their own capital cost recovery frameworks, potentially leading to stronger competitiveness across the bloc. However, a unified method could go a long way towards reducing tax fragmentation and fostering a more robust Single Market. In summary, the discussion around NCR and capital cost recovery is timely and significant for anyone operating within this space. The evolution of tax policies can either stimulate or stifle investment, and the choices made today will shape the competitiveness of EU businesses for years to come. Staying informed on these developments is essential for anyone looking to navigate the financial terrain effectively. To keep yourself updated on tax policies that can affect your business, consider subscribing to our free newsletter for the latest insights and analysis.