Opening a research centre in the Canary Islands: a business case

Opening a research centre in the Canary Islands: a business case

The traditional architecture for R&D organization has changed over the years. The classic model with one central R&D office where all the research takes place and where all the staff has to move in from all over the world in order to do the work has given way to a network- based organization of R&D where companies have opened smaller R&D centres all over the world. A variation to this approach to R&D organization is also very common: having one main R&D centre and a network of purpose-specific smaller centres around the world.

These R&D organization principles have allowed companies to recruit talent from around the world more easily, reduce costs, learn more and adapt to local markets to which new products and services are aimed. An example of this type of R&D organization is HP Labs, with centres located in seven different regions around the world like India, China, Russia, Israel and, of course, the Unites States of America.

So, when pressure is mounting for companies to come up with new knowledge that can be translated to new product and services because competition is increasing and fast-paced, creating an efficient network of R&D centres and managing it efficiently is a must.

When considering your next location to open an R&D centre that integrates in your existing network, efficiency in terms of reduced overheads and economic R&D incentives can create advantages that are hard to exaggerate.

The Canary Islands offer the highest refundable R&D incentives on the planet

R&D activities in the Canary Islands have a 45% Corporate Income Tax deduction that growths to 75.6% for the first year the activities are being carried out and for the amount of expenditure in R&D in the current year that surpasses the mean of R&D expenses of the previous 2 years. Don’t worry, we’ll see below this example about opening a research centre in the #CanaryIslands, which will clarify this for better.

This incentive means 3 things for you: your initial capital needs are reduced by up to 75.6% as is your activity cost and this means that staffing your R&D centre with an European workforce become equivalent in cost to hiring your staff in India.

If you’re wondering how is a corporate income tax deduction useful when your R&D centre won’t have taxes to pay, because its nature is not to make a profit for some time while it’s investing heavily in R&D and it still hasn’t churned out new knowledge that can be translate into product sales and profits, here’s the three ways you can realize the deduction:

  1. Subtracting the percentage of the deduction from the profits generated in profit-generating periods.
  2. Accumulating the deduction for up to 18 years in order to be able to apply it in a profitable year.
  3. Monetizing the deduction and receiving actual cash from the Spanish Government at the end of each year.

As you can see, it’s a useful economic incentive that has different options to impact positively in your actual cost structure. Let’s see a detailed example in which a new R&D project will be carried out by a new R&D centre in the #CanaryIslands opened by a company in the current year. The project’s budget looks like this:

The current year the savings derived from the R&D incentive looks like this:

R&D DEDUCTION

R&D expenses in the current year € 208,500
R&D deduction: 75.6% (45% + 30.6%) € 157,626
Let’s consider now a scenario where the R&D centre has been operating and expending in this project for two years:

So, savings derived from R&D are solid in the Canary Islands. Maybe is the puzzle piece missing that you were looking for in a European destination to be the home for your new R&D centre.

Remember that you can put this savings to work by reducing taxes over profits dramatically, by stocking them to use them in a profitable year or by injecting new cash in the company via monetization. You can even use the savings to compensate for labour costs of a European workforce compared to very competitive places like India.

Take the Canary Islands into consideration as a prospect for your new R&D centre; it can be a very efficient node in your R&D global network.