R&D Tax Deduction for Software: How to Apply Article 35 of the Spanish Corporate Income Tax Law
Most companies developing custom software or artificial intelligence projects are leaving money on the table. Article 35 of the Spanish Corporate Income Tax Law (Ley 27/2014, LIS) allows a deduction of up to 42% of R&D expenditure on the amount exceeding the average of the two preceding tax years, according to the Spanish Tax Agency (Agencia Tributaria). Yet many technical teams are unaware that their day-to-day work — training a model, designing a non-trivial architecture, solving a problem for which no standard market solution exists — generates an entitlement to a tax deduction.
The problem is rarely one of eligibility. It is one of classification and evidence. The same software project can qualify as Research and Development (R&D), attracting deduction rates of 25% or 42%, or as Technological Innovation (TI), attracting 12%. And if it is not properly documented, the Tax Agency can disallow the deduction years later. This guide explains how to distinguish between the two scenarios, which costs are eligible, and how to protect the deduction from challenge.
Key takeaway: what a technical team builds — custom software and AI — typically fits within Article 35 LIS. The difference between recovering 12% or 42% depends on how the project is classified and documented, not on the effort invested.
Does Software Development Qualify as R&D or Technological Innovation?
Short answer: it depends on novelty. If the project resolves a scientific or technological uncertainty through an objectively new advance (no known solution exists), it is R&D and attracts a deduction of 25% or 42%. If the advance is new to the company but already exists in the market, it is Technological Innovation and attracts 12%. Non-trivial custom software development and most serious AI projects tend to fall into one of the two categories.
Article 35 LIS defines R&D as original, planned inquiry aimed at discovering new knowledge and a deeper scientific or technological understanding, together with the materialisation of those results in a plan, schema or prototype. The key is objective novelty: the outcome must be new relative to the state of the art, not merely new relative to the company's prior experience.
Technological Innovation, regulated under Article 35.2 LIS, sets a lower threshold. Subjective novelty is sufficient: the product, process or service need only be new or substantially improved for the company, even if it already exists in the sector. This is why many software developments that integrate existing technology in a way that is novel for the organisation qualify as TI.
In practice, a software project is rarely 100% R&D or 100% TI. It is common for an R&D phase (resolving the technical challenge for which no known solution exists) to coexist with a TI phase (industrialisation and production deployment). Correctly classifying each phase is what maximises the deduction.
R&D (25/42%) vs Technological Innovation (12%): The Decision Table
The financial difference between the two classifications is substantial. The following rates are currently in force under Article 35 LIS and as published by the Tax Agency:
| Concept | Basis / requirement | Deduction rate |
|---|---|---|
| R&D (standard rate) | R&D expenditure for the tax year | 25% |
| R&D (excess rate) | Expenditure exceeding the average of the 2 preceding years | 42% on the excess |
| R&D — research staff | Qualified personnel assigned exclusively to R&D | +17% additional |
| R&D — capital investment | Tangible/intangible fixed assets used for R&D (excluding buildings and land) | +8% additional |
| Technological Innovation (TI) | Technological innovation expenditure for the tax year | 12% |
For a software project the reading is straightforward. If the development is classified as R&D and, in addition, the research team works exclusively on that activity, the incentive combines the 25% (or 42% on the excess) with an additional 17% on those staff costs. The gap relative to the 12% TI rate is considerable and fully justifies investment in a sound technical classification.
CTA: Not sure whether your software project is R&D or TI? An incorrect classification can multiply or reduce your deduction to a third. Speak to an expert before filing your Corporate Income Tax return.
Which Project Costs Are Eligible?
Short answer: eligible costs are those directly attributable to the project and individually identifiable: technical staff, subcontracting (subject to limits), depreciation of equipment and software, and cloud services used for the activity. The golden rule is that the cost must be identifiable, justifiable and linked to the R&D or TI activity.
The main categories for a software or AI development project are as follows:
- Technical staff. Hours worked by engineers, data scientists, architects and developers on the activity. Where qualified research personnel are assigned exclusively to R&D, those costs generate the additional 17%.
- Subcontracting. Work commissioned from third parties (companies, universities, technology centres) is eligible. As a market reference, standard practice applies limits of 75% of the contracted amount for domestic entities and 50% for international subcontracting (source: sector guidelines 2026).
- Fixed asset depreciation. Depreciation of equipment, servers and intangible assets (including specific software licences) used in the project. For R&D, investment in tangible/intangible fixed assets — excluding buildings and land — also generates the additional 8%.
- Cloud infrastructure and licences. Cloud consumption (compute for training models, storage, GPU capacity) and licences for project-specific tools, in the proportion attributable to the activity.
The common condition is traceability. A cost only counts if it can be linked to the project through timesheets, contracts, invoices and technical documentation. Eligibility and proof are therefore two sides of the same coin: it is not enough for the cost to exist; its allocation must be demonstrable.
How to Protect the Deduction from Tax Authority Challenge
Short answer: with robust technical documentation and, above all, a Binding Reasoned Report (Informe Motivado Vinculante, IMV). The IMV is issued by a certifying body accredited by ENAC and is binding on the Tax Agency as regards the fiscal classification of the project, which eliminates the risk of the deduction being disallowed years later.
The greatest risk with the R&D and innovation tax deduction is not applying it incorrectly, but applying it correctly and being unable to prove it at an inspection. The Tax Agency can review deductions from prior years and, without documentary support, demand repayment with interest. Protection is built at three levels:
- Technical project documentation. A report describing the objectives pursued, the technical uncertainties, the methodology used and the results achieved, with associated cost traceability.
- Binding Reasoned Report (IMV). This is the mechanism that provides legal certainty. Because it is binding on the Tax Agency, the project classification (R&D or TI) and the deduction base are protected. We analyse this instrument in detail in our article on the binding report for AI projects.
- Monetisation (Article 39.2 LIS). If the company does not have sufficient tax liability to absorb the deduction, Article 39.2 LIS allows it to be applied without a quota limit subject to a 20% discount — or to request a cash refund — provided the requirements relating to workforce maintenance, reinvestment and a binding report are met. This is particularly relevant for start-ups and high-growth companies that are not yet generating profits.
In addition to the deduction, a 40% rebate on employer social security contributions for common contingencies of research staff assigned exclusively to RDI activities is available under Royal Decree 475/2014, and is compatible with the tax deduction on the terms set out in that Royal Decree.
The Link Between Building Software and Recovering Investment
Here is the connection that many companies fail to make: the software and AI developed day to day are, in fiscal terms, RDI activity. When a team trains a language model on a proprietary use case, designs a non-trivial data architecture or automates a process for which no standard market solution exists, it is generating exactly the kind of advance that Article 35 LIS is designed to incentivise.
At Technova we design and build Data and Artificial Intelligence platforms for businesses. A significant proportion of those projects — by virtue of their novelty and the technical uncertainties they resolve — generates entitlement to an R&D or TI deduction. That is why development and tax planning must go hand in hand from the outset: the best documentation for a deduction is the documentation produced while the project is being built, not documentation reconstructed after the fact.
Key takeaway: do not separate the technical decision from the tax decision. Documenting uncertainties and project milestones from day one is what turns a software investment into a defensible deduction.
A Specialist Partner for Tax Classification
Classifying projects as R&D vs TI and obtaining the Binding Reasoned Report requires expertise that combines engineering and tax law. At Technova we work with Tecnocim Innova to support our clients through this phase. Tecnocim Innova is a consultancy with more than 30 years of experience, backed by EU funds, the Spanish Ministry of Industry and Tourism, and the Escuela de Organización Industrial (EOI), whose R&D and innovation tax deduction specialists help businesses recover up to 42% of their innovation investment.
Their scope covers the full cycle: strategic consulting, R&D grants, tax deductions, social security rebates (up to 40%), and M&A and industrial transfer transactions. This combination of credentials — experience, institutional backing and technical specialisation — is what provides the legal certainty that a deduction, if poorly documented, can lose entirely.
If you want to understand how the deduction fits within a broader funding strategy, see our overview of innovation funding, RDI and M&A and the guide to grants for technology companies, which can be combined with the tax deduction.
Frequently Asked Questions
Does custom software always qualify for an R&D and innovation deduction?
Not always, but frequently yes. Trivial software or straightforward adaptations do not qualify. However, non-trivial custom development and AI projects typically involve a degree of novelty — objective (R&D) or subjective to the company (TI) — that falls within Article 35 LIS. The key is to analyse the technical uncertainty and document the advance achieved.
What is the difference between the 42% and 12% deduction rates?
The 42% applies to R&D, on the expenditure exceeding the average of the two preceding tax years (the standard R&D rate is 25%). The 12% applies to Technological Innovation. The difference lies in novelty: R&D requires an objectively new advance, whereas TI only requires that the advance be new to the company.
Can I claim the deduction if my company is not profitable?
Yes. Article 39.2 LIS provides for monetisation: it allows the deduction to be applied without a quota limit subject to a 20% discount, or to be claimed as a cash refund, provided the requirements relating to workforce maintenance, reinvestment and a binding report are met. This is a particularly useful route for start-ups and loss-making companies investing in R&D.
What is the Binding Reasoned Report and why do I need it?
It is a report issued by a certifying body accredited by ENAC that classifies the project as R&D or TI. Its binding character with respect to the Tax Agency provides legal certainty: the Administration cannot subsequently reject the classification covered by the report. It is the primary mechanism for protecting the deduction in the event of an inspection.
Is the R&D and innovation deduction compatible with the social security rebate?
Yes, on the terms of Royal Decree 475/2014. The 40% rebate on employer social security contributions for common contingencies of exclusively assigned research staff is compatible with the tax deduction for SMEs holding "Innovative SME" or EBT status, and for other companies provided a binding report is in place.
Are cloud and GPU costs for training AI models eligible?
Yes, in the proportion attributable to the project. Cloud infrastructure consumption (compute, storage, GPU capacity) and project-specific licences are eligible costs provided they are identifiable, individually attributable and supported by documentation as part of the RDI activity.
Conclusion
Software and AI development is not merely a technology investment: in fiscal terms, it is one of the activities most actively incentivised by the legislator. The difference between recovering 12% or up to 42% of that investment does not depend on the team's effort, but on correctly classifying each project phase and protecting the deduction with technical documentation and a Binding Reasoned Report.
At Technova we build the software; we also help ensure that work generates a fiscal return. Tell us about your project and we will analyse together how it fits within Article 35 LIS. Let's talk about your project and design a strategy that combines development, tax deduction and, where applicable, grants.
Sources: Agencia Tributaria (sede.agenciatributaria.gob.es), Ley 27/2014 del Impuesto sobre Sociedades (Articles 35 and 39.2 LIS), Royal Decree 475/2014 on social security rebates for research staff, ENAC (Entidad Nacional de Acreditación). Market data on subcontracting limits based on sector guidelines 2026.
