ACT | The App Association’s small business members are the leading edge of innovation in the ever-evolving digital economy. Governments are racing to create mechanisms to measure and tax the value of digital activity. Unfortunately, the rapid shifting of tax laws and policy globally has complicated small businesses’ ability to compete and grow in digital markets. Regions worldwide are exploring ways to capture tax revenue from digital services, often through digital service taxes (DSTs) targeting major tech firms. Simultaneously, research and development (R&D) tax incentives, critical for fostering innovation and encouraging investment in technological advancements, are under threat. Many countries are revisiting their tax policies, considering rollbacks or reductions in these vital incentives while mulling drastic liability expansions. Adding to the problem, governments are taking differing approaches to digital taxes, leading to conflicting frameworks that make compliance unnecessarily complex.

This second installment of our “Digital Tax Follies” blog series dives into how various nations approach digital services taxes (DSTs) and R&D incentives – two tax policies that shape the landscape for tech businesses, particularly small and mid-sized companies. We will explore how nations like the Netherlands, Finland, and many more navigate this balance and what it means for tech companies aiming to expand their borders.

For a detailed breakdown of what DSTs and R&D tax incentives are, including their mechanics, policy rationale, and a comparative analysis, check out our first installment in this series. There, we outline the foundational distinctions between these tax frameworks and provide a side-by-side comparison chart for deeper insight. Building on that foundation, let’s explore how national tax policies shape innovation, investment, and the competitive landscape of the digital economy.

DSTs and R&D tax incentives in Europe

European countries are navigating a complex landscape of digital service taxes and R&D tax incentives. Countries like France and Italy raced ahead to implement their own DSTs to capture revenue from tech giants, while the European Commission has advocated against an uncoordinated patchwork, pushing instead for a cohesive approach across Member States. Simultaneously, many nations offer robust R&D tax credits to stimulate investment in technology and research, essential for maintaining competitiveness in a rapidly evolving market. As Europe balances these priorities, the ongoing dialogue around digital taxation and R&D incentives will significantly influence the region’s ability to foster innovation while ensuring equitable contributions from digital enterprises.

The United Kingdom

The United Kingdom has implemented specific tax policies to address the digital services sector and to encourage R&D activities.

  • DST Rundown
    • Beginning in April 2020, the UK imposed a DST rate of 2 per cent on revenues derived from UK citizens above £25 million
      • Even for qualifying companies, the first £25 million derived from UK citizens is not subject to the DST
    • The DST applies to companies with a global revenue that exceeds £500 million
    • DST applies to revenue derived from:
      • Online social platforms
      • Search engines
      • Online marketplaces
      • Online advertising
    • R&D Rundown
      • The UK provides two main R&D credits:
        • The R&D Expenditure Credit (RDEC) is available for any small or medium-sized enterprise (SME) that can claim R&D expenditures
          • Qualifying expenditures include salaries, materials and tools, software; and subcontracts/consulting (see link above for full list)
          • As of 1 April 2023, the RDEC credit is 20 per cent of the company’s qualifying R&D expenditure
        • The Enhanced R&D Intensive Support (ERIS) is available only for ‘R&D intensive’ SMEs that are operating at a loss and for which at least 40 per cent of their expenditures are on R&D
          • The same expenditures qualify for ERIS as those that qualify for RDEC (see above)
          • ERIS allows qualifying taxpayers to claim a deduction of 86 per cent of qualifying R&D expenses

Germany

Germany’s tax policies concerning digital services and R&D are designed to address the evolving digital economy while fostering innovation. Although lacking a standalone DST, Germany has created other policies to implement tax provisions through existing value-added tax (VAT) rules.

  • DST/VAT Rundown
    • VAT on Digital Services
      • Digital services in Germany fall under the umbrella of electronically supplied services (ESS)
      • ESS are subject to the standard VAT rate of 19 per cent
      • This applies to services like
        • Website hosting,
        • Software as a Service (SaaS)
        • Online marketplaces
        • E-commerce
        • Cloud gaming
        • Streaming services
      • Cross-border services
        • For business-to-consumer (B2C) supplies, the EU’s ESS rules apply. If a company’s total sales of digital services exceed €10,000 annually across the EU, it must register for VAT in Germany or use the EU’s One-Stop Shop (OSS) regime
      • R&D Tax Incentives Rundown
        • Research Allowance Act
          • Effective January 2020, Germany introduced a federal R&D subsidy
          • This provided a tax-free subsidy of 25 per cent of salaries and wages for specific R&D expenditures, with a limit of £500,000
        • Growth Opportunities Act
          • In March 2024, the Growth Opportunities Act was introduced
          • Among other things, eligible expenses may include depreciation expenses from movable fixed assets acquired or manufactured after 27 March 2024. Furthermore, the maximum assessment basis for eligible expenses incurred after 27 March 2024 has been increased up to
            €10 million, resulting in a maximum amount of the R&D allowance of
            €2.5 million per year (€3.5 million for certain SMEs)
          • In addition, the eligible costs for contract research have been increased from 60 per cent to 70 per cent of the consideration paid by the contracting entity to the contractor – SMEs can now also apply for an increase in the research allowance by 10 percentage points to 35 per cent of the assessment basis

Netherlands

The Netherlands, renowned for its open economy and strategic location, has established a robust framework to support digital services and foster innovation through R&D. Similar to Germany, the Netherlands has yet to establish a DST rate.

  • DST/VAT Rundown
    • VAT on Digital Services
      • Like in Germany, digital services provided fall under the ESS, which is subject to the standard VAT rate of 21 per cent
      • This applies to
        • Online journals or newspapers
        • Online data storage
        • Streaming services
        • Online marketplaces
      • Cross-border services
        • For business-to-consumer (B2C) supplies, the EU’s ESS rules apply. If a company’s total sales of digital services exceed €10,000 annually across the EU, it must register for VAT in the Netherlands or use the EU’s One-Stop Shop (OSS) regime.
      • R&D Tax Incentive Rundown
        • R&D Tax Credit (WBSO)
          • The WBSO is a unique credit that reduces payroll tax liability on wages of employees working on R&D projects.
          • From 2025, for the first €380,000 of R&D wage costs and other expenses, the reduction is 36 per cent
          • For amounts exceeding €380,000, the reduction is 16 per cent
          • For startup companies, the reduction for the first €380,000 is increased to 40 per cent
        • Innovation Box
          • This is a special tariff box on your corporate tax return. Profits derived from self-developed intangible assets, such as patents or software, may qualify for a lower effective corporate income tax rate under the Innovation Box regime
          • The effective tax rate for qualifying profits is 9 per cent, compared to the standard corporate income tax rate of 25.8 per cent

Finland

Finland has been a growing hub for technological exploration in Europe. Contributing about 6 per cent to its GDP, the tech hub is thriving, employing more than 300,00 professionals in Finland. Like Germany and the Netherlands, Finland does not apply a DST toward digital services but rather aligns with the EU’s VAT framework on digital services.

  • R&D Tax Incentive Rundown
    • Additional Tax Deduction for R&D subcontracting and cooperation (2021-2027)
      • Deduction Rate of 150 per cent of eligible subcontracting costs incurred through collaboration with accredited research organisations
        • Deduction Limits of €5,000 to a maximum of €500,000 per tax year.
      • Eligibility
        • Expenses must be directly related to R&D activities and involve cooperation with accredited research organisations
      • Enhanced R&D Tax Incentive Policy of 2023
        • As of January 2023, a new law is in force that provides a tax incentive for R&D activities
        • General Additional Deduction
          • 50 per cent deduction on R&D-related wages and purchased services
        • Extra Additional Deduction
          • Starting from the tax year of 2024, an additional 45 per cent deduction is available based on the increase in R&D expenses compared to the previous year
        • Deduction Limits
          • Each deduction component has a cap of €500,000 per tax year, allowing for a combined maximum deduction of up to €1 million annually
        • Eligibility
          • Applicable to companies conducting qualifying R&D projects, with expenses including personnel salaries (excluding social security contributions) and subcontracting costs

Sweden

Sweden’s tax strategy around digital services has yet to take shape, but with an emerging startup tech hub and some global giants such as Spotify and Klarna already blazing Sweden’s tech trail, its government seeks to embrace job creation from tech. Like Finland and Denmark, Sweden has yet to adopt a DST policy. Sweden has emphasised collaboration with the OCED tax agreements.

  • R&D Tax Incentive Rundown
    • Tax Deduction Policy “Forskiningsavdrag”
      • As of 1 January 2024, employers can reduce their social security contributions by 20 per cent for employees involved in R&D, up to a maximum of SEK 3 million per month. This equates to potential savings of up to SEK 600,000 monthly
    • Eligibility
      • To qualify, employees must dedicate at least 50 per cent of their working time, with a minimum of 15 hours per month, to R&D tasks
    • This incentive lowers monthly labor costs and stimulates innovation

Italy

Italy’s startup and tech ecosystem has been growing steadily, driven by government incentives, venture capital investments, and a thriving innovation culture. With hubs in Milan, Rome, and Turin, the country is fostering sectors like fintech, AI, and biotech, supported by initiatives such as the Italian Startup Act and the National Innovation Fund, which provide funding and regulatory support for emerging businesses. Italy aligns with the EU VAT system.

  • DST Rundown
    • Italy’s Budget Law for 2025
      • Applies as of 1 January 2025 and makes significant changes to the scope of Italy’s DST
        • Initially, the DST applied to companies with global revenues exceeding €750 million and at least €5.5 million from digital services in Italy. The 2025 Budget Law removes the €5.5 million domestic revenue threshold, broadening the tax’s applicability. Now, any entity with worldwide revenues over €750 million that provides taxable digital services in Italy is subject to a 3 per cent levy on revenues generated from these services
      • R&D Tax Incentive Rundown
        • Tax Credit Rates
          • For eligible R&D activities, companies can claim a tax credit equal to 20 per cent of qualifying expenses, up to a maximum annual amount of €4 million. This rate is set to decrease to 10 per cent for fiscal years 2024 and 2025, with the maximum annual credit limit increasing to €5 million
          • Qualifying costs include personnel expenses, depreciation of equipment and software used in R&D, expenses for external research contracts, costs related to industrial property rights, consultancy services, and materials used in R&D projects
        • Super Deduction for New Hires
          • For the only fiscal year following the one in progress on 31 December 2023 (i.e. FY 2024 for entities with calendar fiscal year), companies hiring permanent employees will benefit, under certain conditions, from a 20 per cent increase in the personnel cost deduction

Norway

Norway’s tech ecosystem is rapidly growing, driven by strong government support, a growing tech-skilled workforce, and a focus on green and sustainable tech innovation. Oslo serves as the main tech hub, home to incubators like StartupLab and organisations such as Innovation Norway that provide funding and mentorship. Norway’s access to renewable energy and its commitment to digital transformation make it an attractive destination for tech companies, while its investment in AI, blockchain, and green tech continues to shape the future of its economy. As of 2025, Norway has not implemented a DST. However, Norway has established a standard 25 per cent VAT on foreign digital services. While Norway does not have a DST on digital services, Norway has amended its 2025 National Budget on exit taxes.

  • 2025 National Budget Amendments
    • Taxation on Wealth
      • 84 per cent rate on unrealised capital, including shares, ownership interests, and certain other financial instruments for individuals seeking to leave Norway.
    • These tax policies have led some influential entrepreneurs to leave Norway’s digital innovation ecosystem. Their departure may leave many developers struggling on their own, as they often rely on entrepreneurial innovation to support their business ventures.
  • R&D Tax Incentive Rundown
    • SkatteFUNN R&D Initiative Scheme
      • Tax Deduction
        • All Norwegian companies with R&D projects can apply for a deduction of 19 per cent of incurred costs, limited up to a cost base of NOK 25 million annually
      • If the company does not have taxable income for the income year in question, the company will receive a cash refund for the year following the income year.

Moving Forward

Understanding and adapting to various tax policies is crucial for small businesses in the app economy aiming to compete and scale up on the global stage. From DSTs that target digital revenue to R&D incentives that encourage innovation, these policies have long-term implications for the success and future of our small to mid-sized companies. As tax policies continue to shift and new proposals emerge, companies must keep a close eye on how these changes could shape their operations and cash flows. Stay tuned for future installments of our ‘Digital Tax Follies’ blog series. Each post will dive into the nuances of DSTs and R&D incentives around the globe. Whether you’re a tech startup or an established player, these insights will equip you with the knowledge to make informed decisions and drive sustainable growth in the digital age.