Overseas R&D Expenditure: Why UK Companies Need a Local-Country Claim Strategy

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Overseas R&D expenditure has become a board-level funding issue for UK companies with offshore developers, overseas trials, international test facilities or group R&D teams. The question is no longer only whether a cost fits the UK claim. It is whether that activity should be reviewed locally, evidenced locally and claimed in the right jurisdiction.

What is overseas R&D expenditure?

Overseas R&D expenditure is expenditure connected to research and development activity performed outside the UK. It can include contractor work, externally provided workers, overseas group staff, testing facilities, regulatory studies, clinical trials, prototype production or specialist technical analysis delivered outside the UK.

The commercial activity may still be directed by a UK company. The tax treatment may still depend on where the work is physically performed, who bears the financial risk, who owns or benefits from the intellectual property, and which entity is entitled to claim under local law.

What changed for UK claims?

For accounting periods beginning on or after 1 April 2024, the UK moved into a reformed R&D tax relief framework built around the merged R&D expenditure credit scheme and Enhanced R&D Intensive Support for qualifying loss-making SMEs.

At the same time, the UK introduced more restrictive treatment for certain overseas costs. HMRC’s guidance states that overseas restrictions apply to contractor payments and externally provided worker payments. For contractors, the restriction depends on where the activity is carried out. For externally provided workers, the rules focus on whether the worker’s earnings are subject to UK PAYE and Class 1 National Insurance contributions.

There are exceptions where conditions make it necessary for the R&D to take place overseas, but these exceptions need evidence. A lower cost overseas team, commercial preference or historic delivery model will not normally be enough. Finance teams therefore need a structured review before the company forecasts the expected R&D tax benefit.

Why UK companies now need a local-country claim strategy

A local-country claim strategy is a governance process for deciding where R&D costs should be reviewed, evidenced and claimed. It does not assume that a cost excluded or restricted in the UK has disappeared from the funding picture. It asks whether the country where the R&D is performed has its own tax credit, super-deduction, payroll relief, grant route or innovation income incentive.

This matters because international R&D incentives are not uniform. Some countries support payroll costs. Others focus on tax credits, additional deductions, pre-approved projects, refundable credits or IP income. Deadlines, claimant rules, documentation and grant interaction can also differ significantly.

For a UK finance team, this changes the annual claim process in three ways:

R&D expenditure should be mapped by country, entity, cost type and project before year-end.

Local incentive routes should be reviewed before costs are removed from the UK claim forecast.

Evidence should be prepared so that both the UK position and any local claim can withstand scrutiny.

Countries and headline R&D benefit amounts

The table below gives an indicative comparison of headline R&D tax incentive benefits across the 18 countries listed. It is not a substitute for local tax advice. Rates, caps, refundability and eligibility can change, and the correct claimant may be a local entity rather than the UK parent company.

Country	Main incentive route	Headline benefit amount	Local-country review point
Argentina	Knowledge Economy regime	Up to 60% income tax relief; 70% to 80% credit against eligible employer social security contributions.	Check whether the local activity qualifies as a promoted knowledge-based activity and whether registration is in place.
Austria	Research premium	14% cash premium on qualifying R&D expenditure.	Confirm that the determining R&D activities are carried out through an Austrian business or permanent establishment.
Belgium	R&D payroll and innovation income incentives	Up to 80% professional withholding tax exemption for qualifying researchers; 85% innovation income deduction for qualifying IP income.	Review researcher qualifications, project registration and whether innovation income can be mapped to eligible IP.
Brazil	Lei do Bem	60% to 100% additional deduction for eligible R&D expenditure, generally creating a 20.4% to 34% tax effect.	Requires local qualifying activity, taxable profit and sufficient technical and tax documentation.
Canada	SR&ED	Federal 15% investment tax credit; enhanced 35% refundable credit for eligible Canadian-controlled private corporations and certain public corporations on the first C$6m of qualifying expenditure, subject to thresholds.	Assess federal and provincial credits, claimant status, capital expenditure treatment and local performance of work.
Chile	R&D tax credit certified by CORFO	35% tax credit on certified R&D expenditure; remaining 65% may be deductible as necessary expenditure.	CORFO certification is central, and at least part of the strategy should address whether work is certified before the claim is made.
Colombia	CTeI tax benefits	50% fiscal credit or 30% tax discount on qualifying investment, subject to programme conditions and call availability.	Check annual calls, recognised actor endorsement and whether the project meets the science, technology and innovation criteria.
France	Crédit d’Impôt Recherche	30% credit on R&D expenditure up to €100m, then 5% above that threshold. Higher rates can apply in some overseas territories.	Map research work, public subsidies, subcontracting and refundability by company profile.
Germany	Forschungszulage	25% research allowance, increased to 35% for SMEs, with a maximum annual assessment base of €10m.	Requires project certification and a separate application to the tax authority after eligible expenditure is incurred.
Italy	R&D, innovation, design and aesthetic ideation tax credit	Indicative rates include 10% for qualifying R&D and 5% for certain innovation, design or sustainability categories, with caps and periods varying by activity.	Confirm the applicable year, activity category, certification model and any interaction with wider Transizione 4.0 or Transizione 5.0 measures.
Ireland	R&D corporation tax credit	30% credit for accounting periods commencing on or after 1 January 2024, rising to 35% for later periods under current Revenue guidance.	Review whether the Irish entity carries out qualifying activity and whether group, grant or subcontracting rules affect the claim.
Peru	Additional deduction for R&D and technological innovation	160% to 240% total deduction depending on company size and whether activity is performed in Peru or through overseas centres. Projects qualified within the statutory window may continue to benefit to 2027.	Check current availability, CONCYTEC approval timing and whether the project was qualified within the applicable statutory window.
Poland	R&D relief and IP Box	100% additional deduction for many qualifying R&D costs; 200% for certain staff costs and R&D centres. IP Box may tax eligible IP income at 5%.	Ensure R&D costs are separately recorded and check whether IP Box and R&D relief can be combined for the same innovation lifecycle.
Portugal	SIFIDE	32.5% base credit plus 50% incremental credit, with practical recovery of up to 82.5% of qualifying R&D investment.	Claims require ANI certification and should be planned around the fifth-month filing deadline after the fiscal year.
Singapore	Enterprise Innovation Scheme and R&D tax measures	Up to 400% enhanced deduction or allowance on the first S$400,000 of qualifying expenditure per qualifying activity for YA 2024 to YA 2028.	Review whether the company is the beneficiary of the R&D and whether cash payout or deduction treatment is more suitable.
Spain	R&D and technological innovation deductions	25% R&D deduction, 42% incremental deduction, 17% additional deduction for dedicated researchers, 8% for certain R&D assets and 12% for technological innovation.	Confirm whether activities are carried out in Spain, the EU or the EEA and whether certification or monetisation is relevant.
UK	Merged RDEC and ERIS	20% taxable above-the-line credit under the merged scheme, often a 15% net benefit at 25% corporation tax. ERIS can provide up to 27% for eligible loss-making R&D-intensive SMEs.	Overseas contractor and EPW costs now need separate review under HMRC overseas restrictions.
USA	Federal research credit	Regular credit can be up to 20% above base amount; alternative simplified credit is 14% above 50% of the average QREs from the three prior years, or 6% where there is no prior QRE base. Qualified small businesses may elect up to $500,000 against payroll tax.	Federal and state credits should be reviewed together, with attention to Section 174 capitalisation, documentation and payroll offset eligibility.

How a local-country claim strategy works

Map the activity: Identify where each R&D activity physically takes place, which entity directs it, and which team or supplier performs it.
Classify the cost: Separate employees, contractors, externally provided workers, connected-party charges, testing costs, materials, software, cloud, clinical costs and capital expenditure.
Test the UK position: Review whether the expenditure remains eligible in the UK claim, including whether any overseas exception may apply.
Review the local route: Check whether the country where the work is performed has a local R&D tax credit, deduction, payroll incentive, grant programme or IP income regime.
Reconcile ownership and benefit: Check which entity bears the cost, controls the project, owns or can exploit the outcome, and has the tax capacity to use the incentive.
Build a shared evidence pack: Prepare technical narratives, cost schedules, contracts, timesheets, project records and local filing evidence in a form that can support both UK and overseas reviews.

Eligibility issues finance teams should review

The most common error is treating the overseas restriction as a purely UK tax adjustment. In practice, the analysis should include legal, operational and finance inputs.

Cost location: Where was the R&D work physically performed, and can this be demonstrated?

Contracting chain: Who contracted with the supplier or worker, and which entity had technical control?

PAYE and payroll status: Are externally provided worker costs subject to the UK payroll conditions, or should they be reviewed locally?

Necessity of overseas work: Was the activity necessarily performed overseas due to environmental, geographical, regulatory or other objective conditions?

IP and economic benefit: Which entity can commercially exploit the R&D outcome or related IP?

Grant interaction: Has any public funding already supported the same expenditure, and does this restrict the tax claim route?

Local deadlines: Does the overseas jurisdiction require pre-approval, certification, notification or filing before a specific date?

Where FI Group by EPSA fits into the local-country review

FI Group by EPSA supports companies with international R&D tax and innovation incentive planning by combining local scheme expertise with a consistent governance approach across jurisdictions. For UK businesses affected by the overseas R&D expenditure restrictions, its international R&D tax incentives guide provides a useful reference point for comparing local routes, evidence expectations, grant interaction and IP considerations across multiple markets.

Common CFO challenges and practical mitigations

Challenge	Mitigation
The forecasted UK R&D benefit falls because overseas contractor costs are restricted.	Create a country-by-country review before finalising the claim forecast.
The R&D team cannot explain why work took place abroad.	Record the commercial and technical reason for the location decision while the project is live.
Local entities do not have the evidence needed for their own claims.	Create a shared evidence protocol covering technical narrative, cost capture and project ownership.
Different advisors use different definitions and document standards.	Adopt a central governance framework with local technical validation.
Grant funding overlaps with tax relief assumptions.	Reconcile grant budgets, funded costs and tax claim cost pools before filing.
The business reviews incentives only after year-end.	Run quarterly or milestone-based reviews for cross-border R&D activity.

A governance checklist for overseas R&D expenditure

Create a full map of R&D activity by project, country and legal entity.

Separate UK employees, overseas employees, contractors, externally provided workers and group recharge costs.

Identify costs potentially affected by the UK overseas restrictions.

Document whether any overseas work was objectively necessary.

Review local tax credit, deduction, payroll relief, grant and IP income routes.

Check local pre-approval, certification, registration and filing deadlines.

Reconcile project evidence with contracts, timesheets, ledgers and intercompany arrangements.

Confirm how grant funding affects the tax claim in each jurisdiction.

Agree who owns the final filing position in finance, tax, legal and technical teams.

Review the strategy before year-end rather than when the corporation tax return is due.

Conclusion

UK rule changes have made overseas R&D expenditure harder to treat as a routine extension of the UK claim. For internationally active companies, the better response is not simply to remove costs and accept a lower benefit. It is to build a local-country claim strategy that reviews where the activity took place, which entity is entitled to claim, what evidence is required and whether a local incentive can legitimately support the project.

The finance teams that adapt fastest will be those that treat cross-border R&D incentives as an in-year governance process, not an after-the-event tax adjustment.

FAQs

Can UK companies still claim overseas R&D expenditure?

Some overseas R&D expenditure can still be relevant, but UK relief is now more restricted. HMRC’s overseas restrictions apply mainly to contractor payments and externally provided worker costs, with limited exceptions where the activity must necessarily take place overseas. Each cost category needs separate review.

What counts as overseas R&D expenditure?

Overseas R&D expenditure generally means R&D costs connected to activity performed outside the UK. Common examples include offshore software development, overseas testing, international clinical trials, non-UK group engineering teams, and specialist facilities used outside the UK.

Can overseas contractors be included in a UK R&D tax claim?

Under the reformed UK rules, contractor payments are generally restricted by the location of the R&D activity. Some exceptions exist, but these should be evidenced carefully. Finance teams should avoid assuming that overseas contractor costs are either automatically eligible or automatically excluded.

Can a company claim R&D tax relief in another country instead?

Potentially, but only if the local entity, activity, expenditure and evidence meet the local scheme rules. A UK company cannot simply move a disallowed UK cost into a foreign claim. The local claimant, tax position, project control, payroll, IP and documentation requirements all matter.

Why does IP ownership matter for international R&D tax claims?

IP ownership, economic benefit and project control can affect which entity is entitled to claim in several jurisdictions. Even where formal IP ownership is not the only test, the claimant often needs to show that it bears the financial risk and can commercially benefit from the R&D outcome.