Direct Taxation and R&D State Aid in the EU: Positive and Negative Economic Externalities, Compatibility, and Alternatives

Kristian Lange

Student thesis: Master thesis


The purpose of this paper is to examine the effects of state aid aimed to increase research and development by reduction of the direct taxation for income derived from IPR, also called an IP-box. Through economic theory of externalities, spillover effects and panel data of OECD countries, the paper analyses the nature of intellectual property, why states grant aid to cooperate R&D, and the positive effects such aid has on productivity and growth for the national economy. When the reasoning for state aid and its positive effects has been established, the paper analyses the negative effects of income based tax incentives for the internal market, drawing upon economic theories of negative externalities, International policy coordination problems, and tax competition with an inherent risk of a ”Race to the bottom”. Due to the negative effects that certain manners of state aid cause for the internal market through distortion of trade, and ineffective harmful tax competition, the EU has declared state aid that is granted on a selective basis to undertakings dealing abroad, and which might threaten to, or distort competition, incompatible with EU law. Through legal analysis drawing upon European legislature, court cases, commission cases and communications, the paper determines whether IP-boxes constitutes incompatible state aid under TEUF’s Articles 107-109. Finally, the paper draws the conclusions together and discusses the need for regulation to prevent negative externalities caused by IP-boxes, and whether harmonization and coordination of member states taxation and state aid policy could mitigate negative externalities caused by state aid.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2017
Number of pages86
SupervisorsSvend E. Hougaard Jensen & Michael Tell