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The R&D deduction: 110% deduction on your development expenses
The R&D deduction (Tax Code § 8 B) is a tax deduction that gives you 110% deduction on your expenses for research and development.
It means: for every 100,000 DKK you spend on qualifying R&D, you get a deduction of 110,000 DKK on your corporate tax. With a tax rate of 22%, the real savings are ~24,200 DKK per 100,000 DKK in expenses.
Example: 500,000 DKK in R&D expenses
🛑 The software trap: Why most tech companies get it wrong
The problem: Most software companies think all coding is R&D. "We're developing a new app", "We're making a new feature", "We're building a marketplace" — it sounds like innovation, but in the eyes of tax law, it is often operations, not R&D.
The distinction between R&D and operations is critical. R&D is about exploring the unknown — solving a technical problem that you don't know if you can solve. Operations is about building known solutions — implementing an app with known technologies and methods.
Operations (NOT R&D):
- "We're building an e-commerce app with Shopify API, Stripe payment, and a standard React frontend."
- "We're making a booking platform with known technologies: Node.js, PostgreSQL, a calendar widget."
- "We're building a CRM app for our industry — like Salesforce, but for our specific use case."
R&D (qualifies):
- "We're developing a NEW reinforcement learning algorithm to optimize logistics routes that can reduce drive time by 40% — we don't know if it can succeed."
- "We're building a new distributed database architecture that can handle 1 million writes per second without data loss — it's technically untested."
- "We're researching whether WebAssembly can run machine learning inference in the browser without GPU with <100ms latency — existing libraries cannot."
The 5 criteria: How the Tax Agency assesses R&D
The Danish Tax Agency assesses whether your expenses qualify as R&D based on these 5 criteria from OECD's Frascati Manual. If you meet all 5, the expenses are deductible.
The work must be planned, documented and carried out with a clear method. It's not enough to "try things out" — you must have a research protocol.
Software example: You have a technical design doc describing hypotheses, test method, success criteria, and a plan for how you validate the result. You keep a dev log.
The work must require creativity — you must come up with new solutions or new ways to combine existing technology. It's not enough to follow a tutorial.
Software example: You combine transformer architecture with graph networks in a way that hasn't been published in papers. Or you invent a new cache eviction algorithm.
The purpose must be to create new knowledge — to find out something the world doesn't know yet. If the answer is found in Stack Overflow or documentation, it's not new.
Software example: You don't know if your new compression algorithm can achieve 10:1 ratio without loss on medical images. It's new knowledge if you find out.
There must be a concrete technical uncertainty — you must not know if your project is possible to complete. If the solution is known, there is no uncertainty.
Key question: "Can we Google our way to the solution?" If yes → not R&D.
Software example: You don't know if your distributed consensus algorithm can maintain <50ms latency at 10,000 nodes. That is technically uncertain.
The result must be different from known solutions. Building "Uber for X" or "Airbnb for Y" is not different — it's a known business model with known technology.
Software example: Your new protocol fundamentally differs from HTTP by using peer-to-peer routing instead of client-server. That is different.
✅ Examples of what qualifies as R&D in software
Here are concrete examples from Danish software companies that have had their R&D deduction approved:
- Development of a new neural network architecture for image recognition that uses 90% fewer parameters than SOTA.
- A new pathfinding algorithm for logistics that combines A* with reinforcement learning.
- Custom recommendation algorithm that learns from implicit feedback (scroll, hover) without explicit ratings.
- A distributed time-series database that can handle 10M data points/sec with <10ms query latency.
- A new index structure for geospatial data that reduces lookup time from O(log n) to O(1) in 99% of queries.
- Research into whether CRDTs can be used for eventual consistency in offline-first apps with <1s sync after reconnect.
- A peer-to-peer protocol for IoT using mesh networking that can operate without a central server.
- A new WebRTC-based architecture for real-time collaboration that maintains <50ms latency with 100 concurrent users.
- Can WebAssembly run ML inference (BERT) in the browser without GPU with <100ms latency? (Answer unknown before you test).
- Can blockchain-based audit trail maintain GDPR compliance with "right to be forgotten"? (Technical paradox).
❌ Examples of what does NOT qualify
These are the most common examples of software development that is not R&D — even though it feels like innovation:
- A booking platform, marketplace, or "Uber for X" built with known frameworks (React, Node, PostgreSQL).
- A CRM system, HR tool, or project management app — even if it's tailored to your industry.
- An e-commerce app with Shopify/WooCommerce integration and standard payment gateway.
- Integration with Stripe, Twilio, SendGrid, Google Maps or other known APIs with existing SDKs.
- REST or GraphQL APIs built with standard frameworks (Express, FastAPI, Apollo).
- Webhook handling, rate limiting, auth flows with OAuth2/JWT — all documented in best practices.
- New responsive website, SPA (Single Page App), user flow — even if it's "innovative design".
- User login, dashboard, admin panel, notifications — standard UI components.
- A/B testing of different UI designs (it's marketing, not R&D).
- Bug fixes, performance optimization (with known techniques), security patches.
- Updating to newer versions of frameworks (React 17 → React 18).
- Refactoring for better code structure (with known pattern like MVC, Clean Architecture).
Calculation: How to calculate your R&D deduction
The R&D deduction is calculated as 110% of your qualifying expenses. In practice, you must identify which employees have worked on R&D, how many hours they have spent, and what other expenses are directly related.
Example: Software company with AI project
What can be included in the calculation:
- Salary for own employees — actual salary incl. pension and holiday pay, allocated to R&D hours
- External consultants — if they perform R&D work (not project management or design)
- Materials and software — cloud compute, databases, licenses directly used in R&D
Documentation: What the Tax Agency expects
The Tax Agency can ask for documentation of your R&D deduction up to 5 years back. If you cannot document, you must repay the deduction — with interest.
Minimum documentation:
- Project description — What is the technical problem? What is the uncertainty? What is the new knowledge you seek?
- Timesheets — Who worked on the project, how many hours, when?
- Technical documentation — Design docs, research notes, test results, code commits with descriptions
- Accounting receipts — Pay slips, invoices from consultants, cloud bills
Combination with grants: Maximize your value
The R&D deduction can be combined with Innobooster, SMV:Digital and other grants — but not on the same expenses. Here is the strategy:
Combination: Innobooster + R&D deduction
The 5 most common errors
This is by far the most common error. The company deducts all developer time, even though 80% is normal operations.
Solution: Divide your time into "R&D hours" (with technical uncertainty) and "Operations hours" (implementation of the known). Use the 5 criteria as a checklist.
The company deducts, but has no timesheets, no project description, no technical documentation.
Solution: Start documentation from day 1. Use a simple Google Doc: "Project X — R&D log". Write what you test, what you learn.
Hours spent on UX design, A/B testing of UI, SEO or content marketing are incorrectly classified as R&D.
Solution: R&D is only technical research — not business development or design. If you test "which button color converts best", it's marketing.
When the year is over, the company "estimates" that "about 40% of our time has been R&D" without concrete documentation.
Solution: Keep ongoing timesheets. If you use Toggl, Harvest or similar, add tags: "R&D" vs. "Operations".
The company gets Innobooster to cover 35% of expenses, but still deducts 110% of the entire amount on tax.
Solution: You can only use the R&D deduction on the part you pay yourself (the 65%). Keep the budgets separated.
Frequently asked questions
Yes and no. The deduction reduces your taxable income — so if you have a loss, the deduction is "saved" for future years. But if you want the money in cash NOW (as a startup), see instead
the tax credit (135% + cash payout).They send a request for documentation. You typically have 30 days to respond. If you cannot document that the activities meet the 5 criteria, you must repay the deduction + interest. You can appeal to the National Tax Tribunal.
Only if your contribution constitutes real R&D. If you develop a NEW algorithm and publish it as open source, the time can qualify. But if you just "maintain a package" or "fix bugs", it's operations.
Training a model with existing libraries (scikit-learn, TensorFlow) on your data is NOT automatically R&D. But developing a NEW architecture, a NEW loss function, or researching whether X method works on Y problem — that CAN be R&D.
Related guides
Tax credit for startups: 135% + cash
Get the R&D deduction paid out in cash, even if you have a loss.
Read guide →Innobooster application 2026
Combine Innobooster with R&D deduction for maximum value.
Read guide →The three-layer strategy
How to combine all three layers for maximum value.
Read guide →Want to know if your project qualifies?
Our free CVR scan gives you a clear answer on whether you can use the R&D deduction. The Action Plan includes an R&D assessment of your project and documentation templates.
Disclaimer: This guide is general guidance. R&D deduction is complex and requires individual assessment. TilskudTjek is not an accountant or tax advisor. Always ask your accountant for specific advice.