Does the EU Tax Omnibus’ R&D Expensing Proposal Make the EU More Competitive

Key Findings

• The EU TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Omnibus proposal would create an EU-wide minimum standard for full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs., but it confines that standard to qualifying tangible assets used in research and development (R&D) rather than to broader asset classes.
• The proposal's central limitation is its narrow, hard-to-delineate "assets used in R&D" scope, which excludes intangible assets central to R&D activity, covers only a small share of investment, and creates distortions between tax-preferred and other assets.
• The broad-based regimes in the US and the UK apply full expensing to entire asset classes, such as plant and machinery and industrial buildings. Those classes are easier to delineate and large enough to produce a sizeable economic effect.
• However, a harmonized R&D expensing floor is a second-best measure and represents a positive step for investment and growth in the EU. Replacing existing R&D preferences with R&D expensing would let Member States capture the proposal's economic benefits while avoiding the costs of preferential tax treatment.
• Member States should go further by broadening full expensing to entire asset classes and by strengthening other cost-recovery rules, such as the treatment of net operating losses, to support investment and innovation.

On 24 June, the European Commission announced its Tax Omnibus proposal aiming to simplify the tax code and boost EU competitiveness.[1] One of the flagship reforms is to create a harmonized minimum standard for full expensing of certain tangible assets used for research and development (R&D). According to the proposal's impact assessment, the measure draws inspiration from expensing rules in the US and the UK to boost investment and economic growth. But does the EU proposal go far enough to put the EU on a level playing field with its main trading partners? And why should Member States embrace such a policy at the risk of reduced short-term revenue loss? While the new proposal would move the EU closer to the US and UK, it would fall short of restoring full competitiveness. However, Member States could choose to go beyond the minimum floor provided by the EU and improve their competitiveness standing vis-à-vis the US and UK.

What Is Full Expensing?

DepreciationDepreciation is a measurement of the "useful life" of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco schedules require businesses to deduct investment costs from their taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. Taxable income differs from-and is less than-gross income. over multiple years, typically reflecting an asset's expected lifespan. However, when deductions arrive only gradually, inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a "hidden tax," as it leaves taxpayers less well-off due to higher costs and "bracket creep," while increasing the government's spendin and the time value of money erode their value in real terms, raising the cost of capital and discouraging investment. The longer the depreciation schedule, the smaller the share of investment costs businesses can recover, making firms more hesitant to invest.

By contrast, full expensing allows companies to write off the entire cost of capital expenditures in the year they make them, minimizing the tax cost of capital investment. Accelerated depreciation policies can move tax policy closer towards this ideal by compressing the time frame over which businesses can deduct their capital expenses, so that firms can recover their investment costs sooner and at a higher real value.

Accelerated depreciation achieves a high investment impact at relatively low fiscal cost.[2] Since each deduction for investment costs can only be claimed once, accelerating depreciation simply shifts the timing of write-offs without increasing total deductions. And because these rules apply solely to new investments, firms gain upfront while tax revenue from returns on existing assets remains unaffected.

Ideally, full expensing should be implemented equally across asset groups and not narrowly confined to tax-preferred assets. Narrowly targeted policies create delineation problems and distortions between asset groups, producing significant administrative and compliance costs and causing businesses to misallocate funds to tax-preferred asset classes.[3]

US and UK Expensing Regimes Cover Large Portion of Investments

The US and the UK are examples of countries that have applied full expensing to machinery and equipment broadly, covering a large portion of investment expenditures in their economies.

In the US, full expensing for equipment and other short-lived business assets was adopted in 2017 but started phasing out in 2023, with first-year bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain "short-lived" investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. dropping by 20 percentage points each year. In 2025, full expensing was made permanent.

Additionally, the US started to temporarily provide 100 percent expensing for qualifying structures (covering a substantial portion of all industrial buildings), with the beginning of construction occurring between January 19, 2025, and January 1, 2029, and placed in service between July 4, 2025, and January 1, 2031. This represents roughly 10-15 percent of all buildings and structures in the US.

Tax Foundation modeling estimates that permanent full expensing for machinery and equipment will raise long-run US GDP by 0.6 percent, capital stock by 1.0 percent, and wages by 0.5 percent, relative to continued phaseout and a return to pre-2017 law.[4] This accounts for half of the estimated impact of the One Big Beautiful Bill Act (OBBBA) on GDP. In contrast, temporary full expensing for certain structures with construction starting between 2025 and 2028 will only stimulate investment temporarily during this time period before dropping below its pre-reform trajectory after expiring, leaving no mark on long-run GDP.[5]

In the UK, the Spring Budget 2023 introduced full expensing for machinery and equipment and extended a 50 percent first-year allowance to certain "integral features" and "long-life items" that do not qualify for full expensing.[6] Both were made permanent in the Autumn Budget 2023. Further, the Annual Investment Allowance (AIA)-which provides 100 percent first-year relief for plant and machinery investments up to £1 million for all businesses-was made a permanent feature of the tax code.

Joint modeling by the Tax Foundation and the Centre for Policy Studies estimates that making full expensing permanent will raise GDP by 0.9 percent, capital stock by 1.5 percent, and wages by 0.8 percent relative to a return to the pre-2021 regime.[7]

US and UK Also Have R&D-Specific Expensing Regimes

Besides their broader full expensing regimes, the US and the UK also have specific expensing regimes for R&D.

In the US, the OBBBA re-established full expensing for domestic research or experimental expenditures, scrapping its temporary R&D amortization regime in place from 2022 to 2024.[8] Full expensing applies to domestic R&D expenses (less any R&D tax creditA tax credit is a provision that reduces a taxpayer's final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income rather than the taxpayer's tax bill directly. amount), including software development costs. For certain small businesses, the measure applies retroactively to R&D expenses incurred after December 31, 2021.

Foreign R&D expenses, acquired patents and licenses, exploration costs for the discovery of oil and gas, and certain land acquisitions remain outside the scope of full expensing.[9]

In the UK, the research and development allowance (RDA) allows taxpayers to fully deduct capital expenditures for plant, equipment, buildings, structures, exploration for the discovery of oil and gas, and software development used for research and development purposes, in the year of acquisition. Licenses, IP rights, dwellings, and bare land are out of its scope.[10]

Few EU Member States Offer Full Expensing

In the EU, only a few countries offer capital cost recoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions. provisions equivalent to full expensing. The distribution-based corporate tax systems in Estonia and Latvia are comparable to regimes of full expensing for all asset classes, as they impose their corporate income taxes only upon profit distribution. Lithuania also implemented permanent full expensing for machinery and equipment, as well as for software and acquired rights, starting from 2026.

The capital allowanceA capital allowance is the amount of capital investment costs, or money directed towards a company's long-term growth, a business can deduct each year from its revenue via depreciation. These are also sometimes referred to as depreciation allowances. provisions in the rest of the EU Member States generally fall short of allowing businesses to recover the full cost of their capital investment in real terms.

Table 1. Net Present Value of Capital Allowances in Europe, 2026

Source: Cristina Enache, "Capital Cost Recovery in the OECD - 2026 Update," Tax Foundation, 2026, https://github.com/TaxFoundation/capital-cost-recovery.

Per 2026 data, the average weighted capital allowances (the percentage of the net present value of investment costs that businesses can write off over the life of an asset) among EU Member States, excluding Estonia and Latvia, is around 69.9 percent. This means that 30.1 percent of the net present value of capital investment costs is not recovered by businesses.

The Commission's Proposal Focuses on Tangible Assets for R&D

The Tax Omnibus proposal does not attempt to fundamentally change this but limits its reach to introducing an R&D full expensing regime across the EU. Concerns of subsidiarity and of technical feasibility of a broad full expensing regime without a harmonized corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. across the EU might be valid justifications for that.

According to the proposal, Member States would have to introduce a minimum research and development (R&D) expenditure-based incentive that allows full expensing for certain tangible assets directly used for, or in support of, R&D activity. The measure covers tangible assets used for R&D purposes, including land and dwellings with some limitations. The measure does not cover intangibles, nor land and dwellings in some instances.

At first glance, excluding intangible assets may seem very broad. However, many R&D costs related to intangible assets are wages, which are generally expensed immediately for accounting and tax purposes. That means a separate full expensing rule is often unnecessary. Two relevant categories remain outside, though: acquired intangible assets that are capitalized, like patent rights and IP licenses, and internally developed intangible assets whose development costs (in some cases including wages) are capitalized.

Member States' Expenditure-Based Tax Incentives for R&D

The rules set out for the treatment of intangibles under international accounting standards (IAS 38 - Intangible Assets) require companies to capitalize development costs for intangible assets when recognition criteria are met.[11] National accounting standards may align with or diverge from that approach. Depending on how closely a tax system follows accounting standards, development costs for intangible assets may only be depreciated rather than immediately expensed. Wages and payroll costs are usually deductible in the year of expenditure.

Across EU Member States, this creates three broad scenarios. In the first, Member States may disallow immediate expensing of development costs for intangible assets because they follow the International Financial Reporting Standards (IFRS) or comparable national accounting standards and do not provide a separate tax rule. In the second, Member States may allow immediate expensing only if a company does not capitalize development costs for accounting purposes. In the third, Member States may allow immediate expensing regardless of accounting treatment.

Member States also use a wide range of R&D incentives that apply alongside, or instead of, immediate expensing.[12] These include super-deductions, tax credits, and accelerated depreciation. Overall, the implied tax subsidy on R&D expenditures averages 17 percent for profitable, large companies, with a wide range from 39 percent in Portugal to negligible relief below one percent in Bulgaria, Denmark, Latvia, Luxembourg, and Malta.[13]

While these R&D tax incentives can encourage businesses to spend more on research and development activities, targeting investment in genuine innovation with positive spillovers to the wider economy can be challenging. Tax preferences for R&D spending often result in increased administrative and compliance costs to contain fiscal losses and determine qualified expenditures.

Any policy option for an R&D-specific expensing requirement will face the same challenges at the EU or national level. Its ultimate effects will also depend on the interaction with Member State policies. Simply adding the expensing for equipment used in R&D to their existing preferences could correct for tax preferences that favor labor expenses over equipment used in R&D while raising the R&D subsidy rate and amplifying associated administrative, compliance, and fiscal costs. Replacing their existing R&D preferences with broader R&D expensing could capture its benefits while mitigating some of these costs. Finally, extending full expensing to broader asset classes has the potential to improve their overall investment climate while reducing delineation problems associated with specific tax preferences.

Does the EU's Proposal Restore Competition with the US and UK?

The three jurisdictions' approaches (US, UK, and EU) to full expensing can be compared in two major ways: by their general full expensing regimes and the R&D-specific ones. While the US and the UK have full expensing provisions that capture a vast proportion of the capital investments in their respective economies, the EU has a variety of approaches, with Estonia, Latvia, and Lithuania being the only countries with regimes of, or equivalent to, full expensing for all (or broad) asset classes. The Tax Omnibus proposal does not attempt to change this but limits its reach to tangible assets used for R&D.

Comparing the three R&D full expensing systems shows that each tends to favor investment in qualified plant and machinery, limits the coverage of land, and excludes IP rights and licenses. The key difference is software development. The US and UK regimes allow immediate expensing for software development costs, while the EU proposal does not appear to do so.

The EU proposal aims to set a minimum standard for full expensing and bring the EU closer to its main trading partners. However, leaving intangible assets outside the proposal's scope will generally leave taxpayers to amortize the acquisition costs of intangibles that are an essential ingredient in R&D. Practices of Member States that mandate businesses to amortize the development costs of capitalized intangibles instead of allowing for immediate expensing would also be unaffected. This puts the proposed EU minimum standard for R&D expensing behind the R&D-specific provisions in the US and UK.

Providing super-deductions, tax credits, or accelerated depreciation as alternatives to full expensing would not lead to equivalent economic results. Full expensing lets a business deduct its capital investment costs in the year of expenditure, allowing it to recover its full value in real terms. Accelerated depreciation moves the tax treatment of investment in the same direction, pulling deductions forward into earlier years after expenditure while stopping short of a full deduction in year one, thereby leaving some potential gains from further acceleration on the table.

For example, if Germany made its accelerated depreciation policy for machinery permanent instead of letting it phase out after 2027, at the country's current corporate tax rates, it would boost long-run GDP by 0.8 percent, investment by 1.1 percent, and the wage level by 0.7 percent, according to Tax Foundation Europe modeling. Moving to full expensing for all machinery and equipment could potentially raise these gains up to 1.6 percent of GDP, a 2.5 percent larger capital stock, and a 1.4 percent higher wage level.

In contrast, a super-deductionA super-deduction is a tax deduction that permits businesses to deduct more than 100 percent of their eligible expenses from their taxable income. As such, the super-deduction is effectively a subsidy for certain costs. This policy sometimes applies to capital costs or research and development (R&D) spending. goes beyond full expensing by letting a business deduct more than the cost of investment, providing a subsidy that can potentially encourage unprofitable investments.

Unlike deductions, tax credits let businesses deduct their investment costs from their tax liability instead of their taxable income, which makes their effect largely independent of the effective marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. and may result either in it falling short of removing tax penalties on investment or going beyond to provide a subsidy that encourages even unprofitable investment.

How Member States Can Improve Upon the EU Tax Omnibus Proposal

Member States can go beyond the minimum floor that the EU Tax Omnibus proposal would create. In previous recommendations, the Commission rightly emphasized that accelerated depreciation must be paired with more flexible loss‐carryover rules. The same holds true for the Tax Omnibus R&D full expensing proposal.

When firms embark on capital-intensive projects, profits often lag early-stage losses by years. By lifting time and deductibility caps on net operating losses (NOLs), liberalizing Member States' NOL carryover provisions would let companies "smooth" their risk and income, making the tax code more neutral across investments and over time, rather than punishing early-stage losses or risk-taking.[14] Conversely, strict time limits or ceilings on loss offsets raise the after-tax cost of capital, deterring investment, especially in sectors with volatile income profiles.[15] Ideally, a tax code allows businesses to carry over their losses for an unlimited number of years, ensuring that a business is taxed on its average profitability over time.

Today, 20 out of 35 major European countries already allow businesses to carry forward their NOLs for an unlimited number of years, and nine countries allow some losses to be carried back to prior years.[16] In addition to time limits, several countries impose deductibility limits that restrict how much of their taxable income may be used for loss offsets in a given year. Yet even where time and deductibility limits are absent, loss-making firms may not be able to take full advantage of accelerated depreciation: without taxable income, early write-offs must be postponed, eroding their real value.

For those cases, neutral cost recovery (NCR) offers a solution. By adjusting depreciation allowances for inflation and a notional return on capital, governments preserve the real value of capital deductions. To date, among 38 OECD nations, only Chile, Israel, and Mexico index capital allowances for inflation, shielding firms from the erosion of high price growth and removing tax barriers to risky and long-term investments.[17]

Upon negotiations of a final text for a Tax Omnibus directive, the Council might consider granting Member States the option to adopt NCR as an alternative to the R&D full expensing. NCR indexes capital allowances for inflation plus a notional return on capital, leveling the playing field for businesses making investments with risky or distant returns, providing economic benefits broadly equivalent to full expensing, while giving the Member States more fiscal room. [18]

Eliminating Debt-Bias and Avoiding Negative Effective Marginal Tax Rates Is an Important Caveat

One valid concern with accelerated depreciation schedules is that, when combined with interest deductibility, it can lead to negative effective marginal tax rates (EMTRs) for some highly leveraged investment projects. In these cases, the tax value of deductions exceeds the actual return on investment, turning the tax code into a subsidy for debt-financed capital investment.

The core issue is the asymmetric tax treatment between debt and equity. Interest payments are typically deductible from taxable income, while returns to equity are not. When both interest and investment costs are fully deductible, the result can be over-investment in some assets that are suitable for high leverage.

A practical solution is to disallow interest deductions at the corporate level.[19] This removes the debt bias by aligning the tax treatment across financing methods and ensures that full expensing works as intended for all asset and financing combinations. Disallowing interest expenses can also compensate for the upfront fiscal costs of full expensing.

In conclusion, acknowledging the difficulties of proposing a generalized full expensing regime across the EU, untied from R&D, the proposed EU R&D full expensing regime could be a valuable second-best option, as it would create a useful minimum incentive for investment in capitalized tangible assets. However, excluding intangible assets creates an important divergence from the US and UK regimes, particularly for software development. Member States could go beyond the EU floor by improving other capital cost recovery treatment such as NOLs, but a broader common approach would do more to support competitiveness and reduce fragmentation across the Single Market.

References

[1] European Commission, Proposal for a Council Directive Amending Directives 2003/49/EC, 2009/133/EC, 2011/96/EU, (EU) 2016/1164, (EU) 2017/1852, and (EU) 2025/50 as Regards the Simplification of the Union Framework on Direct Taxation and Supporting Growth and Competitiveness of the EU, Jun. 24, 2026, https://www.eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52026PC0560.

[2] Kyle Pomerleau and Scott Greenberg, "Full Expensing Costs Less Than You'd Think," Tax Foundation, Jun. 13, 2017, https://www.taxfoundation.org/data/all/federal/full-expensing-costs-less-than-youd-think/.

[3] Serena Fatica, "Do Corporate Taxes Distort Capital Allocation? Cross-Country Evidence from Industry-Level Data," European Commission Economic Papers, No. 503, 2013, https://www.ec.europa.eu/economy_finance/publications/economic_paper/2013/pdf/ecp503_en.pdf.

[4] Garrett Watson, Huaqun Li, Erica York, Alex Muresianu, Alan Cole, Peter Van Ness, and Alex Durante, "One Big Beautiful Bill Act Tax Policies: Details and Analysis," Tax Foundation, Feb. 10, 2026, https://www.taxfoundation.org/research/all/federal/big-beautiful-bill-senate-gop-tax-plan/.

[5] Ibid.

[6] Alex Mengden, "Understanding Full Expensing in the United Kingdom," Tax Foundation, Jun. 25, 2024, https://www.taxfoundation.org/blog/uk-full-expensing-capital-allowances/.

[7] Tom Clougherty, Kyle Pomerleau, and Daniel Bunn, "After the Super-Deduction Assessing Proposals for the Reform of Capital Allowances," Tax Foundation and Centre for Policy Studies, Sep. 21, 2022, https://taxfoundation.org/research/all/eu/uk-capital-allowances-super-deduction/.

[8] Alex Muresianu and Garrett Watson, "Reviewing the Federal Tax Treatment of Research & Development Expenses," Tax Foundation, Apr. 13, 2021, https://taxfoundation.org/research/all/federal/research-and-development-tax/; Akusti Leino, "Improving Tax Treatment of R&D Would Boost Productivity and Growth," Tax Foundation, May 7, 2025, https://taxfoundation.org/blog/us-rd-tax-full-expensing/.

[9] Tyler Parks, "The OBBBA Improved the Treatment of Investment-but There's Still Work to Do," Tax Foundation, Apr. 7, 2026, https://taxfoundation.org/blog/obbba-improved-investment-expensing/.

[10] OECD, "United Kingdom - R&D Tax Incentive (GBR3)," OECD Innovation Tax Incentives Compass, https://stip.oecd.org/innotax/incentives/GBR3.

[11] IFRS Accounting Standards Navigator, "IAS 38 Intangible Assets," Standard 2026 Issued, https://ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/#about.

[12] WTS Global, R&D Tax Allowance in Europe, https://www.wts.com/wts.com/publications/brochures/rd-tax-allowance-in-europe/wtsglobal-rd-tax-allowance-in-europe.pdf.

[13] Alex Mengden, "Tax Subsidies for R&D Expenditures in Europe, 2026," Tax Foundation, https://taxfoundation.org/data/all/eu/rd-tax-incentives-europe/.

[14] Alex Mengden, "Net Operating Loss (NOL) Tax Provisions in Europe, 2026," Tax Foundation, https://taxfoundation.org/data/all/eu/net-operating-loss-tax-europe/.

[15] Tibor Hanappi, "Loss Carryover Provisions: Measuring Effects on Tax Symmetry and Automatic Stabilisation," OECD Taxation Working Papers, No. 35, Feb. 22, 2018, https://doi.org/10.1787/bfbcd0db-en.

[16] Alex Mengden, "Net Operating Loss (NOL) Tax Provisions in Europe, 2024," Tax Foundation, May 21, 2024, https://taxfoundation.org/data/all/eu/net-operating-loss-tax-europe-2024/.

[17] Cristina Enache, "Capital Cost Recovery across the OECD, 2026 Update," Tax Foundation, Jul. 27, 2026, https://taxfoundation.org/data/all/global/capital-allowances-cost-recovery-2026/.

[18] Erica York, "Answering Four Questions About How Neutral Cost Recovery Works in Practice," Tax Foundation, Jun. 17, 2020, https://taxfoundation.org/blog/how-neutral-cost-recovery-works-in-practice/.

[19] Scott Greenberg, "The Bush Campaign Had a Few Really Interesting Tax Proposals," Tax Foundation, Feb. 23, 2016, https://taxfoundation.org/blog/bush-campaign-had-few-really-interesting-tax-proposals/.

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