Promotion of research and development

Small and medium-sized enterprises will be able to receive a tax research allowance of up to €1 million from 2020.

The new tax research allowance is intended to encourage small and medium-sized enterprises in particular to invest more in their own research and development activities from 2020. The research allowance is independent of the company's respective profit situation because it is not based on the assessment basis for determining income and also not on the tax to be assessed. Instead, the personnel expenses for research activities are subsidized. This also includes the activities of business owners or sole proprietors.

In order to make the regulations on the new research allowance clearer, they are not regulated in the Income Tax Act or the Corporate Income Tax Act, but in a separate tax law. The Federal Ministry of Finance expects the allowance to cost around EUR 1.4 billion per year. Every eligible company that meets the requirements will receive the research allowance; there is no provision for a limit on funding due to limited budgetary resources.

• Prerequisites: All companies that are taxable in Germany themselves or through their shareholders are entitled to the research allowance. In particular, tax-exempt corporations are not eligible. In the case of partnerships, the tax liability of the partner is a prerequisite, but it is not the partner but the partnership itself that is eligible.

• Research Fields: Whether basic research, industrial research or experimental development - research and development projects from all these categories are generally eligible for funding. The law does not provide for any restriction to specific industries or activities. If, on the other hand, a product or process is essentially established and the primary goal of the further activity is market development or smooth production, the activity no longer falls into the eligible categories.

  

• Project definition: Beneficiary research and development projects must have a well-defined, indivisible economic, scientific or technical mission with clearly established objectives. A project may consist of several work packages, activities or services. It includes activities to be carried out in order to achieve these objectives, as well as specific targets against which the results of these activities can be determined and compared with the objectives. If several projects cannot be clearly separated from each other and individually have no prospect of technological success, they are considered as one project.

• Criteria: The explanatory memorandum to the law lists five criteria to specify the project requirements. According to these, a project must aim to gain new knowledge, be based on non-obvious concepts and hypotheses, be uncertain in terms of the end result, follow a plan and be budgeted for, and lead to reproducible results.

• Cooperations: Beneficiaries are not only in-house research and development projects and contract research, but also research and development projects within the framework of a cooperation with at least one other company or one or more research institutions.

• Personnel expenses: The primary assessment basis for the research allowance is the salaries of employees who participate in beneficiary projects and are subject to wage tax deduction, as well as the employer's expenses for securing their future. This also includes benefits based on an employment contract between a corporation and a shareholder, which are subject to wage tax deduction.

• Own contributions: The work of a sole proprietor is also eligible for funding. For each documented working hour that the sole proprietor is engaged in research and development activities, 40 euros are to be recognized as eligible expenses for a maximum of 40 working hours per week. If a partnership has contractually agreed with partners on remuneration for activities in beneficiary projects, this is also eligible, provided it does not exceed 40 euros per working hour with a maximum of 40 working hours per week. The prerequisite is that the agreement is effective under civil law, is actually implemented and is drafted in such a clear and unambiguous manner that it can be distinguished from other remuneration for activities in the service of the company.

  

• Contract Research: Smaller companies in particular often rely on contract research for their research due to a lack of in-house research capacity. Therefore, the client of a research contract can also receive funding. For commissioned research and development projects, the assessment basis is 60 % of the remuneration paid by the client. However, the prerequisite is that the contractor must be based in the EU or an EEA state.

• Height: The new research allowance amounts to 25 % of the assessment basis. However, a maximum of EUR 2 million per company or group and per fiscal year is eligible. This results in a maximum possible research allowance per fiscal year of 500,000 euros. However, as a result of the Corona stimulus package, the maximum assessment basis was subsequently doubled to EUR 4 million from 2020 to 2025. In addition, the total amount of state aid granted for a project, including the research allowance, may not exceed EUR 15 million per company and project.

• Certification: The basis for determining the research allowance is the certificate issued by a body about which the Federal Ministry of Research will regulate further details in the course of the year. The first certification for a business year is in any case free of charge for the applicant, for further certifications fees may apply.

• Motion: After the end of the financial year in which the eligible personnel expenses and other expenses were incurred, the company must submit an electronic application for the research allowance to the tax office responsible for tax assessment. The application must be accompanied by the certificate issued for the project.

• Disbursement: The research allowance is credited against the company's tax liability after the application is filed. If the allowance is higher than the tax assessed as part of the next assessment, this amount is paid out as a tax refund. This also supports research and development in companies that are in a loss-making phase (start-ups) and therefore pay little or no tax.

• Beneficiary period: The allowance may only be claimed for research and development projects for which work is commenced or for which the contract is awarded after January 1, 2020.