Understanding Germany’s New Research and Development Tax Credit

by Sudarsan

Research and development are the foundation of the future of any economy around the world. With research and development, countries can continue creating new and innovative products and systems that help businesses grow and also push the economy forward. Governments are constantly encouraging businesses to innovate and one way the German government does this is with Die Steuergutschrift Für Forschung Und Entwicklung.

What are Research and Development?

Research and Development (R&D) is that part of a company’s operations whose objective is to develop, design, and improve its products, services, technologies, and operations. In addition to creating new products and improving features of old ones, investing in research and development brings together different parts of a company’s business plan and strategy, like marketing and cost reduction.

There are many benefits to research and development, such as the potential for increased productivity and new product lines.

In 2020, the German Research Allowance Act (Forschungszulagengesetz) created the tax incentive Die Steuergutschrift Für Forschung Und Entwicklung to promote companies of all shapes and sizes to invest in research and development.

The tax incentive basically allows any eligible business to claim qualifying R&D expenses under Germany’s R&D tax credit scheme. In return, they can receive up to 25% of this amount as a tax credit. Tax credits help companies offset corporate taxes they need to pay at the end of the fiscal year.

The maximum amount that a business can claim under this tax incentive is €4 million. This means that the maximum tax credit a business is eligible for per fiscal year is €1 million. This translates to €1 million in potential savings every year if they claim €4 million in qualifying research and development expenses.

Investing in Research and Development

Research and development involve activities that an individual or company chooses to do in hopes of achieving the desired result of discovering or creating something new—a product, process, or service.

When we talk about research, we refer to it as any new science or way of thinking that leads to a new product or improves features of an existing product. Research can be narrowed down into either basic research or applied research. Basic research seeks to explore scientific principles from an academic point of view, whereas applied research seeks to use basic research in a real-world setting.

The development part of R&D refers to the actual application of the new science or way of thinking in order to create new or better products or services.

Die Steuergutschrift Für Forschung Und Entwicklung

International companies that conduct R&D activities in Germany set the stage for international high-tech products made in the country.  Both the public and private sectors have made a huge commitment to spend around 3% of the national GDP per year on R&D activity. This will be increased to 3.5% by 2025.

Germany’s federal government encourages research through its so-called “High-tech Strategy.” This strategy outlines areas of particular significance owing to their contribution to providing solutions to global challenges. They also grant support to important technologies that act as drivers of innovation.

The lead markets and priorities/key technologies are as follows:

  • Climate/energy
  • Mobility
  • Health and nutrition
  • Communication
  • Security
  • Innovative services
  • Biotechnology
  • Information and Communication Technology
  • Nanotechnology
  • Microsystems technology
  • Production technology
  • Materials technology
  • Optical technology

Calls for project proposal submissions indicate the type of support (in the form of subsidies) that will be provided. By doing this, billions of euros can flow annually into projects that are focused on research and development for innovative products, services, and systems—all done within Germany.

Subsidies for All Types of Technology

Germany’s Die Steuergutschrift Für Forschung Und Entwicklung provides subsidy programs for all types of technology. These programs are mostly aimed at small and medium-sized enterprises (SMEs). The “Central Innovation Program for SMEs” (ZIM) is the most popular of these programs; it aims to encourage innovation and competitiveness among SMEs.

Additional Subsidies for Research and Development

Germany’s federal government is not the only institution providing support in the form of R&D subsidies. The German state government also provides innovative R&D programs through their business development banks, which are usually open to all types of technology.

One great alternative to R&D subsidies is special credit programs that encourage the development of innovative projects. The KfW, Germany’s federal government-owned development bank, and Germany’s state development banks offer a plethora of programs for this purpose. One advantage of such programs is that they can be accessed by all types of technology and usually cover higher R&D costs.

How Do You Know if Your Business Qualifies?

In general, all types of businesses qualify for Germany’s R&D tax incentive, ranging from sole proprietorships to partnerships and corporations.

The only companies that do not qualify for this are those that fall under the General Block Exemption (GBER) regulation. However, the GBER exemption usually targets businesses going through financial difficulty, so if your business is doing good, there shouldn’t be any problem with qualifying for the tax incentive.

All startups, profitable and loss-making businesses also qualify for the tax credit. This simply means that even if your startup or business isn’t profitable yet (and does not have any corporate tax liability to offset against the credit), you can still qualify.

Loss-making businesses, even startups, can carry forward the tax credit they can receive in the future. This way they can use it when they become profitable and eventually reduce their tax expenses.

What is Qualifying R&D for Die Steuergutschrift Für Forschung Und Entwicklung?

Businesses can claim any expenses that are classified under industrial research, fundamental research, or experimental development. An example would be development costs for software businesses.

However, there are a few conditions. Businesses cannot claim R&D expenses for projects that are:

  • Considered routine development (for example, regular improvements)
  • Already established and focuses on market development (commercialization)

This means that before you apply for the R&D tax credit, you need to evaluate under which category the R&D costs your business incurs fall. You need to make sure they are not purely related to routine improvements of products and services and commercialization.

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