The economic prosperity and growth of the national economy depend to a large extent on individual mental activities. There is a strong link between economic growth and prosperity, and investment in research and development. In order to promote investment in research and development, there is the so-called research allowance. It is a tax relief. The eligible amount must be counted against the tax. We explain the exact design in this article and give tips on how you can optimally use it.

1st basics of the research allowance

Initially, Germany invested directly in research and development activities. There were funding programmes at both state and federal level. This complexity made it easier for large companies and research institutions in particular to obtain the necessary funds. However, there was no indirect tax support. This changed on 14.12.2019 by the introduction of the research allowance. The research allowance is derived from the “Law on Tax Promotion of Research and Development (Research Allowance Act – FZulG)”. It included a tax break for research and development costs and is open to industry and projects as an instrument.

In 2021, Germany already invested 3.1% of its gross domestic product in research and development. In its coalition agreement, the current German government agreed to increase the share of general government expenditure to 3.5% of gross domestic product. To achieve this goal, the Federal Government relies, among other things, on the so-called research allowance.

A total of 15 474 applications and 20 126 projects were received from 16.09.2023 to 30.06.2023. A clear application focus is emerging in the field of IT. An evaluation of the research allowance should only take place after five years. Currently, however, it is believed that it is primarily attractive for small and medium-sized enterprises.

At the same time, other EU countries also rely on tax instruments to increase their spending on research and development. This is why some EU countries have introduced preferential tax rules for intellectual property, so-called IP boxes or patent boxes. The research activities for research companies are to be increased due to the lower tax burden.

2nd design of the research allowance

2.1 Eligibility for funding

The eligibility for the research allowance is governed by § 1 (1), (2) FZulG. Accordingly, in principle, all taxpayers within the meaning of the EStG and KStG are entitled to receive income from profits. Therefore, exempt entities are not eligible. However, co-entrepreneurships and companies opting in accordance with § 1a KStG are eligible.

In addition to the individual beneficiaries, research collaborations can also submit an application. Such research collaborations may be entered into with another company, university or research institution. As a result, however, this does not lead to a different eligibility, but only justifies an eligibility of expenses for the beneficiaries. Tax exempt entities involved in research cooperation, on the other hand, are still not eligible.

Support for companies in difficulty is excluded. These include, for example, companies for which insolvency proceedings have been opened, which have received rescue aid and have not yet repaid it, and companies with limited liability, which have caused more than half of their share capital as a result of accumulated losses.

2.2. Relevant research and development activities

2.2.1. Overarching requirements

The respective projects must meet the criterion of novelty, uncertainty (risk) and regularity of implementation in order to be covered by the research allowance. By way of derogation, no eligible operation is available for activities which are aimed at market development and the proper functioning of the production system. Furthermore, the research and development activity must fall within the category of basic research, industrial research or experimental research.

2.2.1. Basic research

Basic research involves experimental or theoretical work primarily aimed at acquiring new basic knowledge without discernible direct commercial applications. By way of derogation, there is no eligible research and development project for activities aimed at market development and the smooth functioning of the production system.

2.2.2. Industrial research

Industrial research involves planned research or critical research to acquire new knowledge and skills with the aim of developing new products, processes or services or bringing about significant improvements in existing products, processes or services. This includes the development of parts of complex systems and possibly the construction of prototypes in a laboratory environment.

2.2.3. Experimental research

Experimental research means the acquisition, combination, design and use of existing scientific, technical economic and other relevant knowledge and skills with the aim of developing new or improved products, processes or services. This includes, for example, activities for the design, planning and documentation of new products, processes or services.

Experimental development may include the development of prototypes, demonstration activities, pilot projects and the testing and validation of new or improved products, processes and services in an environment representative of real-world conditions of use, where the main objective of such activities is to further improve substantially undefined products, processes or services.

2.3 Eligible expenses

2.3.1. Basic rules

The implementation of the research and development projects is possible in-house, in the cooperation project but also as contract research. § 3 (1) – (4) FZulG regulates all eligible expenses. In principle, they include wages, the own contribution of a sole proprietor and a share of the remuneration for contract research.

The assessment base for the eligible expenditure incurred in the marketing year from the period 01.01.2020 to 01.07.2020 maximum 2 million. Euro. For the period from 30.06.2020 to 01.07.2023, the tax base was raised to 4 million euros. Euro increased. From 31.12.2023, the tax base is to be set at 12 million. The euro will be raised.

2.3.2. Work wages

The wages of employees employed in research and development projects subject to the payroll tax deduction are eligible under the research allowance, including securing the future within the meaning of § 3 no. 63 EStG. An allocation of the wages paid, including securing the future, to the beneficiary R&D project must be made and appropriate internal documentation must be kept. A flat-rate approach of internal staff deployment rates and average salaries is not permitted.

2.3.3. Own contributions of the entrepreneur

Furthermore, own contributions of the sole proprietor or partial remuneration of a fellow proprietor also constitute an eligible expense. The proven working hours of the sole proprietor are limited to a maximum of 40 working hours per week. From 31.12.2023, the hourly rate for the research allowance will be increased to 70. For the recording of eligible working hours, the Federal Ministry of Finance has provided a model hour sheet. In the case of an employed shareholder in a corporation, on the other hand, only the wage and not the own contribution can be recognised.

2.3.4. Contract research

Remuneration for a contract research is only 60 % eligible.

2.3.5 Acquisition costs and manufacturing costs

Eligible expenses under the research allowance include, from 2024 onwards, acquisition costs and production costs for usable movable assets of the fixed assets, insofar as they are used exclusively on their own initiative in the beneficiary project. However, low-value assets or assets for which a aggregate item has been formed are not included. The actual eligible impairment is classically determined by the rules on depreciation for wear.

2.3.6. Mixed expenses

The projects can also be of a mixed nature. This is the case, among other things, when in-house research and contract research are combined. Then the in-house research can be completely consumed by the contract research, if the contract research is indispensable for the achievement of the goal of the project and the contract requires personnel services and material costs.

2.4. Research allowance procedure

There is a legal right to the research allowance, provided that the project meets the requirements. The research allowance shall be granted in a two-stage procedure.

In the first step, a competent body checks the eligibility for funding on the ground. This function is performed by the certifying authority Forschungszulage GbR (BSFZ). In the second step, the actual support is requested.

The research allowance is fixed in a research allowance notice according to § 10 (1) sentence 1 FZulG. According to § 10 (1) sentence 2 of the FZulG, the research allowance is credited in full to the established tax in the context of the next initial determination of the income tax or corporation tax. In conjunction with § 36 (2) no. 3, paragraph 4 sentence 2 EStG, a possible surplus will be paid in favour of the taxpayer after the research allowance has been charged and the tax assessment has been published. This indirect tax exemption of the research allowance is derived from the justification of the tax refund. However, the Federal Audit Office considers this derivation to be not legally certain.

The application can be submitted to the BSFZ before, after or during the project. That the project fulfils the conditions is certified. This increases legal certainty. The disbursement is subsequently carried out by the determination procedure at tax office level. Entitlement to the research allowance shall be granted at the end of the marketing year in which the eligible expenditure was incurred. The sum of the research allowance granted, including further aid granted for a project, may amount to 15 million. not exceeding the euro.

Our tips for the research allowance

For foreign subsidiaries, care must be taken that there are no differences between the application for the research allowance and the respective transfer pricing documentation.

In the case of national contract research between organ companies, however, this question arises only to a limited extent, since the arm's length principle does not apply here. The latter model does not make sense, however, since only 60% of the expenses are eligible for funding, since contract research is then available. If, on the other hand, you are researching for contracts awarded after 31.12.2023,