Germany’s research and development (R&D) tax credit, or Die Steuergutschrift Für Forschung Und Entwicklung, was introduced on January 1st 2020 by the German Research Allowance Act (Forschungszulagengesetz). It is a tax incentive program that promotes companies of all types that invest in research and development.
All companies that conduct research and development projects are eligible to tax credits regardless of their size, industry, financial situation, and legal form, by getting additional funding.
We will explain Germany’s R&D tax credit in this article and also show how businesses can profit from it in an efficient way.
Understanding Die Steuergutschrift Für Forschung Und Entwicklung
Any eligible business is free to claim qualifying R&D expenses under Germany’s R&D tax credit program and, as a result, be granted up to 25% of this amount as a tax incentive. Tax credits are used to counterbalance corporate taxes businesses need to pay towards the end of the financial year.
The maximum amount that companies can claim in R&D costs is €4 million. Therefore, this means that companies in Germany can get a maximum of €1 million per fiscal year. This translates to at least €1 million in savings every year, if you claim €4 million in qualifying R&D expenses.
Germany’s R&D Tax Credit
The R&D tax credit amounting to €1 million per fiscal year will be credited against tax payable or is included in the tax refund in the next tax assessment like an advance tax payment. This results in additional liquidity, regardless of the company’s financial status. The company is qualified to receive the credit so long as they meet the requirements for it.
Projects that qualify for funding include research and development projects in the field of ‘industrial research’, ‘fundamental research, and/or ‘experimental development’.
The OECD’s definition of R&D—which German authorities use to determine eligibility—is broad. Apart from the classical R&D fields of engineering and hard sciences, the OECD also provides some examples of R&D performed by IT companies or in the field of social sciences.
Qualified R&D projects may be performed independently or in collaboration with other research institutes or companies. Contract research expenses also qualify for the tax credit, but only at the level of the client company. The amount of tax credit is 25% of the sum of the wage costs incurred for the R&D personnel within internal R&D projects, and 60% of the expenditures for contract research.
R&D projects must be evaluated for their eligibility for the tax incentive by a central authority. They will be handed an assessment certificate which serves as verification of eligibility for the yearly application for the tax credit at the local fiscal authorities. Local fiscal authorities cannot challenge this verification.
More information with regards to the funding of R&D activities of individual companies and corporations can be found in many German news articles on the draft law for the tax incentive.
How Do You Know if Your Startup Qualifies?
The thing with Die Steuergutschrift Für Forschung Und Entwicklung is that all types of businesses can qualify for it. Whether it is a sole proprietorship, partnership, or corporation, a business can qualify so long as they meet the criteria.
Only companies that fall under the General Block Exemption (GBER) regulation do not qualify for the tax credit. But, as the GBER exemption focuses mostly on businesses that are not financially well-off, you shouldn’t be worried at all.
In addition, all startups, profitable and loss-making businesses, qualify for the incentive. It doesn’t matter if a startup isn’t profitable yet (which means it doesn’t have any corporate tax liability to compensate against the tax incentive).
Startups and other loss-making businesses can carry forward the tax credit they’re eligible for in the future. This means they can use it when their business becomes profitable and they can reduce their tax expenditures accordingly.
What is a Qualifying R&D?
A qualifying R&D is defined as an expense that falls under industrial research, fundamental research, and experimental development. This includes, for example, development expenses for software businesses.
However, there are a couple of limitations. For instance, a business isn’t qualified to claim R&D expenses for projects that are:
- Already established and their only objective involves market development or commercialization.
- Considered as routine development (for instance, periodical improvements).
This means that before you apply for Die Steuergutschrift Für Forschung Und Entwicklung, you have to evaluate the costs your business incurred that fall under research and development but are not purely related to commercialization or routine developments of your products and/or services.
How is The Eligibility of a Project for the R&D Tax Credit Assessed?
It is possible for companies to apply for the assessment of eligibility for R&D projects (both proposed and ongoing) online. The positive response of such assessment is a requirement that must be carried out so taxpayers can claim the R&D tax credit from their local fiscal authorities every year.
The eligibility will be evaluated at a central office that is managed by the Federal Ministry of Education and Research. The assessment of eligibility is said to take about three months to process. The beginning particularly takes a bit longer due to the high number of expected applications.
It’s not necessary for you to have started an R&D project or projects to apply for an assessment of eligibility. Getting a positive assessment is imperative for local fiscal authorities. They can help managers in evaluating the company’s future R&D program while taking into consideration of the tax credit.
Claiming the R&D Tax Credit
If your business or company is paying taxes in Germany, it automatically qualifies for Die Steuergutschrift Für Forschung Und Entwicklung. To make the most out of your R&D credit, you need to take a high-level assessment of possibly eligible projects first.
This is so you can avoid missing out on a tax credit for current expenses. This also prepares you for the eligibility assessment application.
It is also recommended that you review current accounting for possibly qualified projects, so that the base for the R&D credit for said projects is determined, delimited, and recorded in a manner that is acceptable to the fiscal authorities.