New Promise of Tax Exemption for Knowledge-Based Companies

Insufficient Resources for the Innovation Fund

Almost 10 days have passed since Hussein Afshinzadeh was appointed as the Vice President for Science, Technology, and Knowledge-Based Economy, and this week he participated in the second event of the National Network of Research, Development, and Innovation Managers, engaging with managers in this field. At the outset, he identified infrastructure, human resources, and financial support as the three main pillars of the innovation ecosystem, emphasizing the role of the Vice Presidency in facilitating and removing obstacles to achieve optimal outcomes from this ecosystem.

Afshinzadeh noted the country’s declining rank in the Global Innovation Index and stressed that “new programs and resources must be created for financial support. The tax credit provisions under the Knowledge-Based Production Leap Law will undoubtedly be one of these resources. This provision aims to foster university-industry collaboration by providing tax exemptions for research and development contracts between industries with R&D units and universities or research centers, especially in the province where the industry or production unit is located. Unfortunately, universities’ performance in this regard has been low.”

According to the Vice President, both memoranda of understanding and contracts are acceptable forms of reviving university-industry connections. He further stated, “The Innovation and Prosperity Fund is the financial arm of the country’s innovation and technology ecosystem. Under this fund, research and technology funds have been established, and it needs to be assessed whether their capital increase is commensurate with inflation.”

Afshinzadeh also described adding approximately $166 million (10 trillion rials) to the Innovation and Prosperity Fund as insufficient given the number of knowledge-based companies, explaining: “Currently, there are 10,000 knowledge-based companies, and this number is expected to reach 30,000 by the end of the Seventh Development Plan. To finance these companies, we need to create new resources.”

He highlighted the Innovation and Prosperity Fund as a leader among financial support funds, emphasizing: “The fund’s capacity should focus on research and development since R&D is the foundation for creating knowledge-based companies. Large companies should lead in infrastructure, and holding companies and large firms should be pioneers in R&D. The Vice Presidency’s role is to facilitate and support these efforts in the technology and innovation ecosystem.”

Need for Reform of the Production Leap Law

The Knowledge-Based Production Leap Law was passed and enacted in 2022. Article 11 of this law provides tax incentives for the development of innovation and the knowledge-based economy, benefiting companies engaged in research and development with tax credits. Ensuring the full implementation of this law is a serious demand from the actors and stakeholders in the digital economy ecosystem from the Vice President for Science and Technology.

In his first official meeting, Afshinzadeh discussed the need to reform the Knowledge-Based Production Leap Law, stating: “Last year, 4.2 trillion rials (approximately $70 million) in tax credits were approved for knowledge-based companies, but only 1.5 trillion rials (approximately $25 million) of this amount was utilized. 80% of the law is executable, and only about 20% may need reform. However, reforming the law is not easy; its issues should be identified during implementation, and we should allow a three to four-year period for this. Additionally, challenges related to customs, exports, and currency are obstacles that need to be removed for knowledge-based companies.

Afshin on Insufficient R&D Investment and Innovation Fund Resources”

Afshin, in his remarks, deemed the 0.7% share of research and development (R&D) in the country’s GDP as insufficient, stating: “Among this, the private sector’s share in GDP for R&D is only 0.3%. The average share of R&D in GDP in advanced countries is 2.5%, and in countries like China, the USA, and South Korea, it is around 3.5%. Therefore, we need to take more significant steps in this direction.” He identified understanding R&D and its literature as one way to increase its share in GDP, emphasizing that universities play a crucial role in this understanding. Afshin assured knowledge-based companies that the Vice Presidency will use all its legal capacities to secure tax exemptions for R&D.

$1.78 Billion Sales of Knowledge-Based Companies

In another part of the event, Mohammad-Sadegh Khayyatian, President of the Innovation and Prosperity Fund, announced seven services the fund offers as part of its serious involvement in the “National Network of Research, Development, and Innovation Managers” program. He said: “To actively participate in this program, the Innovation Fund will provide services including investment, grants, laboratory services, prototype development, intellectual property protection, event organization, networking, and acceleration support.”

Grant services include providing approximately $11.7 million (500 million rials) as non-repayable funds for R&D projects. Additionally, small, medium, and startup companies with sales of less than approximately $583,000 (35 billion rials) in the previous year will receive up to approximately $7.5 million (300 million rials) in non-repayable laboratory services from reputable laboratories.

Moreover, about $335,000 (14 trillion rials) worth of intellectual property services, including patent registration, trademarks, and industrial designs both domestically and internationally, will be provided. These services are aimed at protecting research achievements in the R&D sector. Prototype development services are offered with interest-free loans up to approximately $71 million (3 billion rials), with a maximum grace and repayment period of three years.

Khayyatian also shared statistics on the number of knowledge-based companies and their sales. According to him, the number of knowledge-based companies has surpassed 10,000, and in 2024, their total sales have reached approximately $1.78 billion (530 trillion rials), with 370,000 people currently employed in these companies. He reported that $1.07 billion (64 trillion rials) in financial services have been provided to knowledge-based companies, highlighting four main services of the Innovation and Prosperity Fund:

loans, investments, issuing guarantees, and capacity building. He noted that various tools and services have been considered for developing R&D, and a lack of R&D systems and processes within companies is a significant issue. The challenges include unclear identity, lack of coherent strategies, insufficient use of outsourcing, over-reliance on internal financial resources, neglect of macro trends and global technology trends, inadequate use of existing technical knowledge, and insufficient knowledge of intellectual property protection methods.

Khayyatian outlined the fund’s approaches including networking among R&D professionals, helping to cover R&D costs, and assisting in the commercialization of R&D achievements. He added:

“The R&D program in the Vice Presidency for Science, Technology, and Knowledge-Based Economy has begun, and the Innovation and Prosperity Fund will participate seriously in this program. Tax credits are considered an advanced tool worldwide, and this is included in the Knowledge-Based Production Leap Law. Investors in the knowledge-based sector can benefit from these tax credits. Recently, this provision was approved by the Fourteenth Government’s Cabinet, allowing for increased investment in the Innovation and Prosperity Fund or participation in projects managed by this fund to be eligible for tax credits. These resources will be invested in the knowledge-based sector and in strengthening the R&D section of these companies.”

We will have to wait and see what decisions Hussein Afshin will make in the coming months regarding the development of infrastructure, strengthening human resources, and providing financial support as the three vital pillars of the country’s innovation ecosystem.