The Research Allowance
The Act on Tax Incentives for Research and Development (Research Incentives Act – FzulG) of December 14, 2019 (BGBI. I p. 2763) introduced tax incentives for research and development for the German economy with effect from January 1, 2020.
Basic research
Basic research
Research and development (R&D) projects are eligible if they fall into one or more of the categories of basic research, industrial research or experimental development. All income and corporate taxpayers are eligible, regardless of company size and sector. The research allowance is independent of the respective profit situation of the eligible companies.
Basic research
Research and development (R&D) projects are eligible if they fall into one or more of the categories of basic research, industrial research or experimental development. All income and corporate taxpayers are eligible, regardless of company size and sector. The research allowance is independent of the respective profit situation of the eligible companies.
Eligible research and development projects
Eligible research and development projects aim to carry out a precisely defined indivisible task of an economic, scientific or technical nature with defined objectives. This means clear objectives, specific activities and measures of target achievement. The specific activities must also go beyond ensuring the smooth functioning of a production system. Excluded from research funding are products or processes that are essentially defined and whose primary objective is market development/launch. If two R&D projects cannot be clearly separated from each other, they are regarded as one project. Many companies do not see themselves as a “classic” research company and therefore believe that they are not entitled to research funding. However, it is a fact that many production and technology companies in particular create new developments, prototypes and pilot plants or initiate significant further developments and improvements to processes and products.
Eligible research and development projects
Eligible research and development projects
Eligible research and development projects aim to carry out a precisely defined indivisible task of an economic, scientific or technical nature with defined objectives. This means clear objectives, specific activities and measures of target achievement. The specific activities must also go beyond ensuring the smooth functioning of a production system. Excluded from research funding are products or processes that are essentially defined and whose primary objective is market development/launch. If two R&D projects cannot be clearly separated from each other, they are regarded as one project. Many companies do not see themselves as a “classic” research company and therefore believe that they are not entitled to research funding. However, it is a fact that many production and technology companies in particular create new developments, prototypes and pilot plants or initiate significant further developments and improvements to processes and products.
Eligible expenses
Eligible expenses
Eligible expenses are wages subject to wage tax deduction and expenses for securing the future (tax-free social security contributions) of employees entrusted with the research and development work of the project. R&D work carried out by a sole proprietor is also eligible. For each proven hour of work, EUR 40 for a total of 40 hours per week can be claimed as eligible expenses. If partners in a co-entrepreneurship have contractually agreed that one or more partners will receive remuneration for activities in the relevant research and development projects, EUR 40 each for a total of 40 hours per week can also be claimed here. The prerequisite is that the agreement is effective under civil law, genuinely intended, actually implemented and clearly and unambiguously distinguished from other remuneration for activities in the service of the company.
Eligible expenses
Eligible expenses are wages subject to wage tax deduction and expenses for securing the future (tax-free social security contributions) of employees entrusted with the research and development work of the project. R&D work carried out by a sole proprietor is also eligible. For each proven hour of work, EUR 40 for a total of 40 hours per week can be claimed as eligible expenses. If partners in a co-entrepreneurship have contractually agreed that one or more partners will receive remuneration for activities in the relevant research and development projects, EUR 40 each for a total of 40 hours per week can also be claimed here. The prerequisite is that the agreement is effective under civil law, genuinely intended, actually implemented and clearly and unambiguously distinguished from other remuneration for activities in the service of the company.
Assessment basis
The maximum assessment basis for the research allowance is EUR 4 million per financial year. This limit applies to affiliated companies as a whole. The amount of funding for in-house research and development is 25% of the assessment basis, i.e. a maximum of EUR 1 million per financial year. Contract research is also subsidized at 25%, but only up to 60% of the fee paid by the client, which corresponds to an actual subsidy of 15%. The entitlement arises at the end of the financial year.
Assessment basis
Assessment basis
The maximum assessment basis for the research allowance is EUR 4 million per financial year. This limit applies to affiliated companies as a whole. The amount of funding for in-house research and development is 25% of the assessment basis, i.e. a maximum of EUR 1 million per financial year. Contract research is also subsidized at 25%, but only up to 60% of the fee paid by the client, which corresponds to an actual subsidy of 15%. The entitlement arises at the end of the financial year.
Application for funding
Application for funding
1) application for a certificate from the certification office
In order to be able to apply to the tax office for a research allowance for the R&D projects of a financial year, a certificate of eligibility must first be applied for from a certification office (BSFZ). The certification office assesses whether the R&D project is eligible for funding and issues a certificate. The application for a research grant must contain information on the R&D project for which a certificate is requested; in particular, a meaningful, comprehensible description of the content of the project, an indication of whether it is in-house research, contract research or a cooperative project, as well as the time, personnel and financial scope of the R&D project. The required information must be limited to 4,000 characters. The examination of an application for a research grant is based on the information provided by the applicant. The certifying body will apply standards that are essentially based on common R&D criteria, it may request additional documents as part of the review and, if necessary, carry out on-site inspections. The certification office does not provide individual advice on the research allowance. The certificate is the basis for the assessment of the research allowance by the tax office.
2) application to the tax office for assessment of the research allowance
The research allowance is applied for at the responsible tax office after the end of the financial year. The certificate must be attached to the application. The applicant must confirm that the facts of the R&D project on which the certificate is based have not changed. The tax office will determine the amount of the research allowance in a separate notice, which will be fully offset against the tax liability in the next income/corporate tax assessment. If the research allowance exceeds the tax liability, the excess amount is refunded, so that up to 100% of the determined research allowance is paid out in periods of loss. Only R&D projects for which work began after January 1, 2020 or for which the contract was awarded after this date are eligible. The Research Allowance Act is an ancillary law to income and corporation tax and is therefore subject to the principle of proper documentation. It is therefore important that the research and development activities eligible for funding are structured, calculated and documented in accordance with the requirements.
Application for funding
1)application for a certificate from the certification office
In order to be able to apply to the tax office for a research allowance for the R&D projects of a financial year, a certificate of eligibility must first be applied for from a certification office (BSFZ). The certification office assesses whether the R&D project is eligible for funding and issues a certificate. The application for a research grant must contain information on the R&D project for which a certificate is requested; in particular, a meaningful, comprehensible description of the content of the project, an indication of whether it is in-house research, contract research or a cooperative project, as well as the time, personnel and financial scope of the R&D project. The required information must be limited to 4,000 characters. The examination of an application for a research grant is based on the information provided by the applicant. The certifying body will apply standards that are essentially based on common R&D criteria, it may request additional documents as part of the review and, if necessary, carry out on-site inspections. The certification office does not provide individual advice on the research allowance. The certificate is the basis for the assessment of the research allowance by the tax office.
2)application to the tax office for assessment of the research allowance
The research allowance is applied for at the responsible tax office after the end of the financial year. The certificate must be attached to the application. The applicant must confirm that the facts of the R&D project on which the certificate is based have not changed. The tax office will determine the amount of the research allowance in a separate notice, which will be fully offset against the tax liability in the next income/corporate tax assessment. If the research allowance exceeds the tax liability, the excess amount is refunded, so that up to 100% of the determined research allowance is paid out in periods of loss. Only R&D projects for which work began after January 1, 2020 or for which the contract was awarded after this date are eligible. The Research Allowance Act is an ancillary law to income and corporation tax and is therefore subject to the principle of proper documentation. It is therefore important that the research and development activities eligible for funding are structured, calculated and documented in accordance with the requirements.