For years, Czech technology firms and start-ups have faced a paradox: whilst the state offered tax relief for research and development (R&D), most companies were afraid to take advantage of it due to excessive bureaucracy and the tax authorities’ strict approach.

However, the rules that came into force on 1 January 2026 mark a major turning point. They make the rates more attractive and, crucially, change the game when it comes to the dreaded project documentation. How does it all work, what can you actually claim as a deduction, and how should you account for the whole process correctly?

1. The appeal of dual use: How the deduction actually works

The research and development tax relief is not an EU grant where you have to wait for a call for proposals and write hundred-page applications. It is a tool that you have full control over via your tax return.

The principle is based on what is known as the ‘double deduction’ of expenses. Ordinary development costs (such as a developer’s salary) are normally recorded in your accounts and reduce your tax base. The trick is that, when claiming the R&D tax relief, you take this very same cost and deduct it from your tax base once more, outside the accounts. This allows you to legally and significantly reduce your total corporation tax, and the cash saved remains with the company.

2.What has changed: A comparison of the rules (Up to 2025 vs. From 2026)

The new legislation has focused primarily on reducing the administrative burden (the so-called ‘end of project hell’) and providing greater support for small and medium-sized enterprises.

Parameter	By the end of 2025	From 1 January 2026
Basic deduction rate	100% of eligible expenditure	150% of eligible expenditure (up to CZK 50 million)
Preparation of documentation	Extreme formalism. It had to be signed strictly before work commenced.	Emphasis on the materiality principle. It can be amended and finalised during the course of the year.
The tax authorities’ approach	Penalties even for a missing date on a document, even if the development demonstrably took place.	Assessment focuses primarily on whether the research actually took place and what obstacles it addressed.

3.What you can claim as expenses (and what the authorities will reject)

The law clearly defines which specific expenses you can multiply by the favourable 150 per cent rate. The rules here are very strict.

What is ELIGIBLE FOR THE DEDUCTION:

• Salaries of permanent staff (full-time): Salaries of developers, engineers, testers and part of a project manager’s salary. A prerequisite is perfect time recording (timesheets) so that you only claim the time when they can be proven to have been working on research.
• Depreciation of company assets: A proportionate share of the tax depreciation of the company’s own servers, 3D printers, CNC machines or measuring instruments used for the project in question.
• Materials used: Physical components, metals, plastics or electronics that you destroy or use up irrevocably during the construction and testing of prototypes.

What is NOT eligible for deduction (common mistakes):

• Services and invoices issued to a business registration number (IČO): This is a trap for many companies. If you pay programmers or engineers via their business registration number (B2B), this is treated for tax purposes as the purchase of a service and cannot be claimed.
• Contracts (DPP/DPČ): If you do not pay social security and health insurance contributions on these, they are not eligible for deduction.

Cloud and APIs: Payments for AWS servers, software subscriptions or token fees. Again, these are services purchased from commercial entities.

4.Routine innovation vs. genuine research (the tax authority’s perspective)

This is where businesses make their biggest mistakes. For a CEO, ‘development’ means any new product feature. The tax authority, however, follows the strict international Frascati Manual.

The dividing line is technological uncertainty. Ordinary innovation means that you know how to build it technologically (using standard procedures and existing components), but you do not know whether the product will sell. Genuine research means that, at the outset, you are tackling a problem for which it is not at all clear how to solve it.

A specific real-world example: The development of an industrial IoT solution

• Routine innovation: Deploying smart sensors to measure temperature and vibrations on a production line. You purchase off-the-shelf sensors, connect them via standard Wi-Fi or Bluetooth, and use an existing API to send the data to the cloud, where it is displayed on a dashboard. This is an innovation for your company, but from a technological perspective, you are simply linking together existing components.

Real R&D: You need to measure data inside an industrial furnace subject to extreme electromagnetic interference and high temperatures, where standard sensors fail immediately and Wi-Fi signals cannot get through. You need to develop a completely new type of hardware enclosure using non-standard alloys and programme your own communication protocol capable of filtering out noise and guaranteeing transmission without dropouts. No such solution exists on the market; you have to test various materials and algorithms, and there is a real risk that it won’t work at all. That is research par excellence.

5. How to account for it correctly (Methodology for accountants)

It is essential for accountants to understand one thing: a research and development deduction does not involve any ‘double entry’ in the profit and loss account under expense accounts.

All operating costs (wages, materials, depreciation) are posted in the standard manner throughout the year, at 100 per cent, to Class 5 expense accounts. The magic of the 150 per cent deduction takes place off-balance-sheet when preparing the corporation tax return.

However, to ensure the tax office does not dispute the deduction in the return, the accountant must complete three key steps.

Step 1: Mandatory analytical records

The Income Tax Act (Section 34) requires that research and development costs be recorded in separate analytical accounts. If an accountant combines R&D costs with ordinary operating costs in a single synthetic account, the company forfeits its entitlement to the tax deduction.

Aggregate account	R&D analytical account	Account name
521 – Gross wages	521 100	Developers’ wages – R&D Project A
524 – Statutory insurance	524 100	Social security and health insurance for R&D A
501 – Consumption of materials	501 100	Consumption of materials and components, R&D A
551 – Depreciation of assets	551 100	Depreciation of hardware/machinery allocated to R&D A

A practical tip for accountants: If a company is running several research projects at the same time, it is necessary to create cost centres (or cost units/contracts) for each project separately (e.g. 521 101 for Project A, 521 102 for Project B).

Step 2: Linking to source documents (Audit Trail)

Every amount in the R&D analytical account must be traceable back to the source document:

1. Wages (521 xxx / 524 xxx): The supporting document is the monthly timesheet with an hourly rate.
2. Depreciation (551 xxx): The supporting document is the asset card and an internal allocation document (e.g. 60% of server usage for research).
3. Materials (501 xxx): The supporting document is a stock issue note marked with the project code.

Step 3: Reporting in the corporation tax return and recognising the tax saving

At the end of the tax period, the accountant totals the balances of all analytical accounts designated for R&D.

• Calculation in the tax return (off-balance sheet): When the total costs on the R&D analytical accounts amount to 10,000,000 CZK, the 150% deduction claimed is:

10 000 000CZK} X 1,5 =  15 000 000 CZK

This amount is entered in Table F of the separate annex to the corporation tax return and subsequently transferred to line 242 (items deductible from the tax base).

• Posting the income tax itself: As line 242 reduces the tax base by 15 million CZK, the company’s income tax liability will be lower (at a rate of 21%, it will save 3,150,000 CZK in tax). The accountant posts the final, reduced tax using the standard entry:

Dr 591 (Income tax payable / Cr 341 (Income tax)

Thanks to the lower expense in account 591, the net profit after tax (operating result) automatically increases; this remains with the company and is carried forward to subsequent years.

6.How to prepare project documentation and pass the audit

Project documentation is the most important thing for a company – it acts as a shield, protecting you from additional tax assessments during an audit by the tax authorities. The most common mistake companies make is to write it as a marketing pitch for investors (about how great the product will be and how much profit it will generate). However, a tax official or court-appointed expert is interested in just one thing: a technical report on how the problem is being overcome.

Despite the more relaxed rules coming into force in 2026, the documentation must still contain the mandatory elements set out in Section 34c of the Income Tax Act. Usually, 3 to 7 pages of high-quality text, divided into two parts, are sufficient.

Part A: Formal requirements (minimum requirements)

Not a single item may be missing here; otherwise, the project is invalid from the outset. This is usually set out in a table on the first page:

• Identification: Basic details about your company (name, registered office, company registration number).
• Timeline: Precise definition of the project duration (e.g. 1 April 2026 – 31 December 2027).
• Who will carry it out: Project organisation. A list of key personnel (development manager, expert supervisors) and their qualifications for the research in question. You do not need to list all junior staff.
• Budget: The projected total expenditure on the project and its estimated breakdown by year (e.g. Estimate for 2026: CZK 2 million; for 2027: CZK 1.5 million). This is an estimate for planning purposes; actual expenditure may vary.
• Monitoring: Method of monitoring and evaluating the progress of the project (e.g. regular monthly code reviews and quarterly reports to company management on milestones achieved).

Part B: Project objectives (This is where it all comes down to)

This is the core of the entire documentation. Here, you demonstrate the existence of technological uncertainty (see point 4). You must phrase the text in such a way that even a non-IT person (or a civil servant with the help of an expert) can understand what the problem was. Divide this section into three logical paragraphs:

1. State of the Art (Current situation and limitations): Briefly describe what is currently working on the market or within the company, and, most importantly, why it is no longer sufficient. E.g.: “The current XY communication protocols are capable of transferring data within time Z. However, in our specific case, this solution fails due to limitations on network throughput when the load exceeds X requests.”
2. Technological challenge (Proper R&D objective): Define a problem for which there is no guide or ready-made library. E.g.: “The aim of the project is therefore the experimental development of a proprietary asynchronous database architecture capable of scaling the processing of unstructured data in real time, something that standard relational databases do not allow.”
3. Approach (How you will test it): Explain that you are anticipating failures and will be trying out different approaches. For example: “In the first phase, we will test Algorithm A. If we encounter a memory limit, we will proceed to develop an alternative module, B. We will verify functionality through stress testing in a simulated environment.”

A golden rule to finish with: Remember that research is a process. Even if, at the end of 2027, you find that the path you chose has led nowhere, the architecture isn’t working and you have to cancel the project, you do not lose your entitlement to the tax deduction for the entire period. You have discovered a ‘dead end’, which, according to the Frascati Manual, is a valid research outcome. Your documentation must cover you even in the event of failure.