Portugal offers the most generous research and development tax incentives among major European countries, with an implied tax subsidy rate of 39 percent for large profitable firms, according to a 2025 report from the Tax Foundation. France and Poland follow with rates of 36 percent each, while the average across 33 European countries sits at 16 percent. The report tracks how governments use tax policy to encourage corporate investment in innovation, comparing the generosity of R&D relief programs across Europe and beyond.
The tax subsidy rates vary dramatically across the continent. Denmark grants just 1 percent relief to large profitable firms, the lowest among countries offering notable incentives, while Cyprus provides 2 percent and Estonia 4 percent. Six countries—Bulgaria, Georgia, Latvia, Luxembourg, Malta, and Switzerland—show no significant expenditure-based R&D tax relief at all. Outside Europe, the United States offers a subsidy rate of only 7 percent for large profitable firms, far below the European average, while China's rate reaches 32 percent. Most European countries provide identical relief to both large firms and small and medium-sized enterprises, though France (for loss-making firms), Germany, Iceland, and the Netherlands are more generous to SMEs. Croatia tilts slightly in favor of large firms.
The report notes that some countries include refunds and carryover provisions in their R&D incentives, which changes the implied subsidy rates for loss-making firms compared to profitable ones. This has resulted in lower average subsidies for loss-making firms relative to profitable firms across both SMEs and large companies. Several European countries increased their R&D tax subsidies in 2025: Lithuania and the Slovak Republic raised corporate tax rates, pushing their implied subsidy rates from 31 to 34 percent and from 28 to 33 percent respectively, while the Netherlands explicitly raised tax credit rates for qualifying R&D, lifting its rate from 31 to 35 percent. The United States also increased its rate from 3 to 7 percent by scrapping temporary R&D amortization requirements and restoring its pre-2022 expensing regime.
The report warns that while R&D tax incentives can encourage businesses to increase research spending, "targeting investment in genuine innovation with positive spillovers to the wider economy can be challenging and result in increased administrative and compliance costs." The difficulty lies in containing fiscal losses and determining which expenditures actually qualify for relief. Policymakers can often support innovation at lower cost, the report argues, by improving the general tax treatment of risky investment that innovative firms undertake—specifically by allowing them to fully recover capital costs and offset operating losses, rather than creating R&D-specific preferences. The implication is that broad-based tax reform may deliver better innovation outcomes than targeted subsidies, even when those subsidies reach rates as high as Portugal's 39 percent.