With an annual funding amount of up to EUR 2,500,000 or EUR 3,500,000 for small and medium-sized companies, the tax incentives for R&D are an interesting instrument for financially optimizing own or commissioned research and development projects and reducing the tax burden.
In addition to the wages of the researching employees, the expenses incurred within the scope of the contract research and the depreciation of the movable fixed assets required for the research are eligible.
The tax incentives for R&D reduce the income tax burden in the next tax assessment. Any remaining surpluses are not carried forward but refunded directly. This means that companies can benefit directly even if the tax incentives for R&D claimed are higher than the current income tax burden. We will be happy to support you with optimal structuring, checking the application requirements, the application process or further questions, whether tax, technical or legal. We have outlined our consulting services in this regard in the Services section. We look forward to hearing from you!
We have compiled more detailed information on the relevant key points below. Please note that applications can be submitted not only for future research and development projects, but also for ongoing and completed projects. This means that applications can also be submitted for financial years that have already been completed. However, the conditions and framework conditions may vary due to changes in the law.
Eligible companies
Companies with unlimited and limited tax liability within the meaning of the Income and Corporation Tax Act that meet the other application requirements are eligible.Sole proprietorships, corporations or domestic permanent establishments can therefore benefit from the research allowance. Partnerships are also eligible, whereby the tax incentives for R&D are paid out at partner level.
Exclusion of certain companies
The tax incentives for R&D consider the requirements of the General Block Exemption Regulation (GBER). This is a European Union regulation that allows member states to grant certain groups of state aid without prior approval from the European Commission.Based on these provisions, companies in particular that are in difficulty are excluded from the research allowance. The GBER sets out the binding criteria that must be met in order to qualify as a company in difficulty. An examination on the basis of the GBER is therefore required before an application is submitted. Although the assessment must generally be carried out at the level of the applicant company, the consolidated financial statements are decisive for companies that are fully consolidated within the framework of consolidated financial statements.
As the criteria must be fulfilled for reasons of state aid law at the time of acquisition of the legal entitlement to a research allowance, the economic framework conditions must be examined at the end of each financial year for which an application for tax incentives for R&D is to be submitted.
Research and development projects
Research and development projects are eligible for tax relief if they are classified as basic research, industrial research or experimental development. The distinction is also made here based on the definitions of the General Block Exemption Regulation (GBER), which are substantiated by the statements and explanations of the OECD Frascati Manual.Among other things, a distinction must be made between this and a routine improvement, which does not fall under the scope of research and development and is therefore not covered by the research allowance. In terms of time, the tax incentives for R&D are granted until the product or process is established and from then on, the focus is solely on market development as the primary objective.
Attention should already be paid to the exact project description in the application for eligibility, which in practice is quite a challenge due to the limited length of the text that can be submitted. Relevant experience in formulation is helpful and increases the chances of a successful application.
Funding
In-house research and development
The gross wages of the employees involved in the research and the employer's social security contributions are eligible for funding as part of in-house research and development.The wages attributable to the research and development project must be verified and meaningful documentation must be kept. As a rule, this requires the recording of hours and consequently leads to a certain amount of administrative work. In addition to using the time sheet provided by the Federal Ministry of Finance, it is also possible to record hours via your ERP system or via special software solutions.
In addition, the depreciation of depreciable movable fixed assets is also included in the assessment basis for the research allowance. However, the assets may only be used for the company's own purposes. In addition, they must be necessary for the implementation of the research and development project.
Sub-areas of in-house research and development can also be outsourced. The resulting expenses are included in the assessment basis for the tax incentives for R&D on a pro rata basis. The same conditions apply here as for research and development projects that are carried out exclusively as part of contract research.
While the client benefits from the tax incentives for R&D in the context of contract research, the contractor is not entitled to claim it. This means that in-house research does not exist if a company conducts research on behalf of another company. In this case, the contractor is not eligible for funding. However, if the requirements are met, the client can benefit from the research allowance.
The boundary between in-house research and contract research is fluid in individual cases. For example, contracts in which special products are developed on behalf of a customer can, depending on their structure, lead to in-house research by the researching company or to contract research by the customer as the client.
Contract research
In the case of contract research, 70 % of the remuneration paid to the contractor is taken into account when determining the research allowance.As the tax incentives for R&D is 25 % or 35 % for small and medium-sized enterprises, the tax incentives for R&D for contract research amounts to 17.5 % or 24.5 % of the remuneration.
The percentage of 70 % to be applied represents the flat rate share of eligible expenses. Individual verification of personnel expenses and depreciation at contractor level is therefore not necessary, but also not possible, so that both a reduction and an increase in the percentage rate are ruled out.
Consequently, in the case of capital-intensive research and development projects, contract research can be advantageous compared to in-house research, as 70 % of the remuneration can exceed the actual wages and depreciation incurred.
As it is irrelevant for the granting of the tax incentives for R&D whether the contractor is an external company, a public institution such as a university or a company from the same group of companies, there are opportunities for optimization. Collaborations in which every cooperation partner is entitled to a claim can also be advantageous. However, all framework parameters should always be taken into account. Examples include the subsequent operational use of the know-how gained, withholding taxes or transfer prices, including relocation of functions.
Funding for contract research is not limited to domestic contractors. Beneficiary projects also include contractual relationships in which the contractor has its management in a member state of the European Union or another state to which the Agreement on the European Economic Area (EEA Agreement; in the case of existing administrative assistance) applies.
It should be noted that the contracts must meet certain requirements. A prior review of the contracts can therefore prevent the tax incentives for R&D from not being granted later and help to secure the funding.
Special features for sole proprietorships and partnerships
The Research Allowance Act (Forschungszulagengesetz, FZulG) provides for special regulations for sole proprietorships and partners in a partnership. Accordingly, proven personal contributions by sole proprietors and partners may be eligible for funding at a flat rate (EUR 70 per working hour, maximum 40 working hours per week).This means that companies that are not organized as corporations can even then benefit from the allowance if it is not the employees but the sole proprietor or the partners themselves who carry out the research. However, the de minimis rules under state aid law must be observed, which may require further examination in individual cases.
Amount of the tax incentives for R&D
The tax incentives for R&D amount to 25 % of the assessment basis.The funding rate is increased by 10 percentage points for small and medium-sized enterprises (SMEs) within the meaning of the General Block Exemption Regulation (GBER) and thus amounts to 35 % for these companies.
The assessment basis to be used is limited to EUR 10,000,000, so that maximum annual tax incentives for R&D of EUR 2,500,000 can be claimed. For SMEs, the maximum annual amount is EUR 3,500,000.
In the case of affiliated companies, the above maximum amounts apply to the group of companies, whereby the group of companies is defined according to the controlling influence under commercial law. Companies that are only horizontally linked to each other via asset management company structures (e. g. private equity funds, venture capital funds, business angels) without these companies being able to coordinate with each other are not to be regarded as affiliated companies.
The maximum amount of EUR 15,000,000 for state aid including the tax incentives for R&D per company and research and development project must be observed.
Other subsidies
The use of other funding measures for the research and development project, e.g. as part of project funding, does not necessarily lead to an exclusion of the research allowance. The Research Allowance Act expressly provides for the possibility of cumulation.However, the same expenses may not be claimed twice. This means that expenses that are included in the assessment basis for the tax incentives for R&D may not be included in other grants or subsidies, which restricts the scope for complementary funding measures for the same project. The funding conditions of the other funding measures must also be checked.
Application for funding
The research grant is subject to application. A one-off application for eligibility must be submitted for the respective research and development project and an annual application must be submitted for all research and development projects in the respective financial year to determine the research allowance. This is therefore also referred to as a two-stage application procedure.The application for eligibility of the research and development project must be submitted electronically to the tax incentives for R&D certification office. The application must include some key data on the applicant company and describe the research and development projects. However, the presentation is limited in scope, which requires a very brief and concise presentation. Experience in submitting applications is therefore very helpful to sufficiently explain the aspects and critical points relevant to the examination by the certification body.
The certification body checks whether the activities described in the application constitute a project eligible for funding within the meaning of the Research Allowance Act and thus primarily relates to the technical part of the project. If the project is eligible for funding, it issues a certificate that is binding for the tax office.
Based on the certificate, the eligible company can apply for tax incentives for R&D to its tax office after the end of the respective financial year.
The tax incentives for R&D are determined in a separate notice and are fully offset against the tax assessed in the next first income or corporation tax assessment of a year. If the tax incentives for R&D exceed the assessed tax, a refund is made so that companies with a low tax burden as well as companies in loss-making phases also receive direct support. This means that the tax incentives for R&D are also an interesting subsidy for start-ups with start-up losses.