Candice Horbacz
Brussels, Belgium – On June 24, the European Commission formally announced its comprehensive Tax Omnibus proposal, a significant legislative initiative designed to streamline the European Union’s tax code and enhance the bloc’s global economic competitiveness. A cornerstone of this ambitious package is the establishment of a harmonized minimum standard for the full expensing of certain tangible assets dedicated to research and development (R&D) activities. This move, explicitly drawing inspiration from similar robust expensing rules in the United States and the United Kingdom, seeks to stimulate investment and foster economic growth across the 27-member state union. However, the proposal’s scope, particularly its exclusion of intangible assets, immediately raises questions about whether it goes far enough to truly place the EU on an equal footing with its primary international trading partners and if Member States will be prepared to absorb the potential short-term revenue implications for long-term strategic gains.
Contextualizing the EU’s Strategic Imperative
The European Union finds itself at a critical juncture, navigating a complex global economic landscape characterized by intense competition, rapid technological advancement, and persistent geopolitical shifts. In the wake of global economic disruptions, including the COVID-19 pandemic and ongoing supply chain vulnerabilities, the impetus to fortify the EU’s internal market and boost its innovation capacity has become paramount. The Commission’s proposal is part of a broader strategy to ensure the EU remains an attractive destination for investment, capable of fostering cutting-edge research and development that drives productivity and job creation.
For years, many economists and business leaders have pointed to the fragmentation of national tax systems within the EU as a hindrance to competitiveness, creating complexity and disincentivizing cross-border investment. The absence of a uniform approach to critical areas like capital allowances means businesses often face disparate rules, raising compliance costs and distorting investment decisions. The Tax Omnibus proposal, therefore, represents a concerted effort to address these structural inefficiencies, beginning with a targeted reform aimed at one of the most vital engines of modern economic growth: R&D.
Understanding Full Expensing: A Catalyst for Investment
At its core, full expensing is a tax policy that permits businesses to deduct the entire cost of capital expenditures in the year they are incurred. This contrasts sharply with traditional depreciation schedules, which require companies to spread these deductions over multiple years, typically aligning with an asset’s estimated useful life. While seemingly a minor technical detail, the timing of these deductions has profound implications for investment decisions.
Under conventional depreciation, the real value of deductions diminishes over time due to inflation and the time value of money. This erosion effectively increases the after-tax cost of capital, making businesses more hesitant to invest in new machinery, equipment, or other long-term assets. Full expensing, by allowing immediate recovery of investment costs, minimizes this tax cost, thereby incentivizing firms to allocate capital towards productive investments. It is a powerful tool for accelerating economic activity, as it reduces the disincentive created by tax systems that penalize upfront capital outlays.
Crucially, accelerated depreciation, including full expensing, achieves a high investment impact with a relatively contained fiscal cost. This is because deductions for investment costs can only be claimed once; acceleration merely shifts the timing of these write-offs rather than increasing their total sum. Furthermore, these rules apply exclusively to new investments, ensuring that existing assets continue to generate tax revenue and providing an immediate boost to future-oriented capital deployment. Ideally, such a policy should be applied broadly across all asset groups to avoid creating distortions and administrative burdens that push businesses toward tax-preferred asset classes.
Global Benchmarks: The US and UK Lead the Way
To gauge the EU proposal’s potential impact, it is essential to examine the full expensing regimes already in place among its key trading partners, particularly the United States and the United Kingdom. Both nations have implemented broad expensing policies covering significant portions of their economies’ investment expenditures.
In the United States, full expensing for machinery and equipment, along with other short-lived business assets, was initially adopted in 2017. While it underwent a temporary phase-out starting in 2023, with first-year bonus depreciation incrementally decreasing, it was permanently re-established in 2025. Beyond this, the U.S. also introduced temporary 100 percent expensing for qualifying industrial structures, covering a substantial portion of commercial buildings, for construction initiated between January 2025 and January 2029 and placed in service by January 2031. This temporary measure alone impacts roughly 10-15 percent of all buildings and structures. Tax Foundation modeling projects that permanent full expensing for machinery and equipment could elevate long-run U.S. GDP by 0.6 percent, capital stock by 1.0 percent, and wages by 0.5 percent, relative to a scenario of continued phase-out.
Similarly, the United Kingdom’s Spring Budget 2023 introduced full expensing for machinery and equipment, alongside a 50 percent first-year allowance for certain "integral features" and "long-life items" not covered by full expensing. Both provisions were made permanent in the Autumn Budget 2023. The UK also cemented its Annual Investment Allowance (AIA), offering 100 percent first-year relief for plant and machinery investments up to £1 million for all businesses, as a permanent feature of its tax code. Joint modeling by the Tax Foundation and the Centre for Policy Studies estimates that the permanence of full expensing in the UK could boost GDP by 0.9 percent, capital stock by 1.5 percent, and wages by 0.8 percent compared to a return to the pre-2021 regime.
Beyond these general expensing regimes, both the US and UK also maintain specific provisions for R&D expenditures. The U.S., through the One Big Beautiful Bill Act (OBBBA), restored full expensing for domestic research or experimental expenditures, effectively replacing a temporary amortization regime from 2022 to 2024. This includes software development costs and applies retroactively for certain small businesses. The UK’s Research and Development Allowance (RDA) permits immediate deduction of capital expenditures for plant, equipment, buildings, structures, and software development used for R&D purposes. While both regimes have certain exclusions (e.g., foreign R&D expenses, acquired patents in the US; licenses, IP rights, dwellings in the UK), they demonstrate a clear commitment to fostering innovation through immediate cost recovery.
The EU Landscape: A Patchwork of Approaches
In stark contrast to the comprehensive approaches of the US and UK, the EU Member States currently present a fragmented landscape regarding capital cost recovery. Only a handful of countries offer provisions truly equivalent to full expensing across broad asset classes. Estonia and Latvia, with their distribution-based corporate tax systems that tax profits only upon distribution, effectively provide full expensing for all asset categories. Lithuania has also moved towards this ideal, implementing permanent full expensing for machinery, equipment, software, and acquired rights starting in 2026.
However, the majority of EU Member States fall short. The average weighted capital allowances across the EU (excluding Estonia and Latvia) stand at approximately 69.2 percent, according to 2026 data. This means that, on average, over 30 percent of the net present value of capital investment costs are not recovered by businesses, creating a significant disincentive for investment compared to jurisdictions with full expensing. Germany, for instance, recovers only 39.14% for machinery, while France recovers 54.80%. Even countries like Ireland (47.93%) and the Netherlands (33.85%) for machinery show considerable room for improvement. This disparity creates an uneven playing field within the Single Market and puts the entire bloc at a disadvantage globally.
The Commission’s Proposal: A Targeted Step Forward
Recognizing the complexities of implementing a broad, generalized full expensing regime across a union with diverse corporate tax bases and national fiscal autonomies, the European Commission’s Tax Omnibus proposal adopts a more targeted approach. It focuses specifically on introducing a minimum R&D full expensing regime. The proposal mandates that Member States allow full expensing for certain tangible assets directly used for, or in support of, R&D activities. This covers items such as specialized machinery, equipment, and even land and dwellings (with some limitations) when employed for R&D purposes.
A notable limitation of the EU proposal, however, is its exclusion of intangible assets. While many R&D costs associated with intangibles, such as wages for researchers, are typically expensed immediately for accounting and tax purposes, two critical categories remain outside the proposal’s scope: acquired intangible assets (e.g., patent rights, IP licenses) and internally developed intangible assets whose development costs (including, in some cases, wages) are capitalized under accounting standards. This creates a significant divergence from the R&D-specific expensing regimes in the US and UK, both of which notably include software development costs within their full expensing provisions.
The exclusion of capitalized intangible assets is particularly pertinent given the increasing importance of intellectual property and digital innovation in modern economies. International Financial Reporting Standards (IFRS) and comparable national accounting standards often require companies to capitalize development costs for intangible assets once certain recognition criteria are met. Without a specific tax rule allowing immediate expensing, these capitalized costs would continue to be depreciated over time, undermining the full expensing principle for a crucial component of R&D. While the Commission cites concerns of subsidiarity and technical feasibility for a broader regime without a harmonized corporate tax base, this specific omission represents a potential gap in achieving full competitiveness with the US and UK.
Beyond the Minimum: Opportunities for Member States
While the EU proposal sets a crucial minimum standard, Member States have the opportunity, and indeed the incentive, to go further. Improving other aspects of capital cost recovery can significantly amplify the benefits of the R&D expensing regime.
One critical area is the treatment of Net Operating Losses (NOLs). When firms undertake capital-intensive projects, particularly in R&D, early-stage losses are common, often preceding years of profitability. Liberalizing NOL carryover provisions – by lifting time and deductibility caps – allows companies to "smooth" their risk and income profiles, making the tax code more neutral across investments and over time. Currently, 20 out of 35 major European countries allow unlimited carryforward of NOLs, and nine permit carrybacks. However, many still impose deductibility limits, which can hinder the full benefit of accelerated depreciation for loss-making firms. Removing these restrictions would be a powerful complement to R&D full expensing.
Another advanced solution is Neutral Cost Recovery (NCR). NCR adjusts depreciation allowances for inflation and a notional return on capital, preserving the real value of capital deductions. This shields firms from the erosive effects of inflation and removes tax barriers to risky, long-term investments, providing economic benefits broadly equivalent to full expensing while offering Member States more fiscal flexibility. To date, only Chile, Israel, and Mexico among OECD nations consistently index capital allowances for inflation. The Council, during negotiations, could consider granting Member States the option to adopt NCR as an alternative to, or alongside, the R&D full expensing mandate.
Addressing the Debt-Bias Caveat
A valid concern often raised with accelerated depreciation schedules, particularly full expensing, is the potential for creating negative effective marginal tax rates (EMTRs) for highly leveraged investment projects when combined with interest deductibility. This occurs when the tax value of deductions exceeds the actual return on investment, effectively turning the tax code into a subsidy for debt-financed capital investment. The root cause lies in the asymmetric tax treatment of debt and equity, where interest payments are typically deductible from taxable income, but returns to equity are not.
A practical solution to this "debt bias" is to disallow interest deductions at the corporate level. This approach aligns the tax treatment across different financing methods, ensuring that full expensing operates as intended without inadvertently subsidizing certain debt-financed projects. Furthermore, disallowing interest expenses could help offset some of the upfront fiscal costs associated with implementing full expensing.
Reactions and Implications
While specific official reactions from Member States are still emerging as the proposal moves through the legislative process, the general sentiment among business associations and tax experts is likely to be cautiously optimistic. The European Commission’s explicit goal of enhancing competitiveness and simplifying tax rules aligns with long-standing industry demands. However, the proposal’s limitations, especially regarding intangible assets and software development, will undoubtedly be a point of contention. Industry groups representing tech, biotech, and other innovation-driven sectors are expected to advocate for an expansion of the scope to include these crucial assets.
Economists, while generally supportive of the principle of full expensing for its proven ability to stimulate investment, will likely highlight the potential for continued fragmentation if Member States do not go beyond the minimum standard. The modeling results from the US and UK underscore the substantial economic benefits (GDP growth, capital stock increase, wage growth) achievable with broad, permanent full expensing. The EU’s piecemeal approach, while a step in the right direction, risks leaving significant untapped potential on the table.
The legislative journey for the Tax Omnibus proposal will involve detailed negotiations within the Council of the European Union, where Member States will weigh the benefits of increased investment and competitiveness against concerns about short-term revenue impacts and national fiscal sovereignty. The European Parliament will also provide its input, further shaping the final directive. This process offers a crucial opportunity to refine the proposal, potentially expanding its scope or encouraging more robust national implementation strategies.
In conclusion, the European Commission’s Tax Omnibus proposal, with its harmonized minimum standard for R&D tangible asset expensing, represents a welcome and necessary step towards modernizing the EU’s tax landscape and boosting its global competitiveness. It is a valuable "second-best option" that addresses a critical need for investment in innovation. However, the exclusion of intangible assets, particularly software development costs, creates a clear divergence from the more comprehensive regimes in the US and UK, leaving the EU still somewhat behind its main trading partners. For the EU to truly level the playing field and unlock its full economic potential, Member States must not only embrace this minimum standard but also be prepared to go beyond it, through complementary reforms like liberalized NOLs, consideration of neutral cost recovery, and potentially a broader common approach to capital cost recovery across the Single Market. The ultimate success of this initiative will hinge on the collective ambition and strategic foresight of European policymakers in the coming months and years.
