Companies in Germany (even non-German ones) have been eligible for an annual research and development tax incentive since 2020. The Die Steuergutschrift Für Forschung Und Entwicklung has been granting companies up to EUR 1,000,000 in research allowance since then.
If a company utilizes its own research staff and conducts its own research, up to 25% of their salaries and wages, including tax-free social security contributions, are credit against their annual tax liability. The remaining surplus is then reimbursed. Companies can benefit from the subsidy with the reimbursement, even in loss-making phases, therefore making the research allowance interesting for startups with initial losses.
The same thing applies to contract research. The client, not the contractor, is eligible to at least 15% of the renumeration paid to the contractor. While the research allowance also amounts to 25% here in Germany, only 60% of the renumeration is considered.
Further information on Die Steuergutschrift Für Forschung Und Entwicklung are explained below:
Eligible Companies
Companies with limited or unlimited tax liability qualify within the definition of the Income Tax Act and the Corporation Tax Act, so long as they’re not tax exempt and fulfill the other application requirements.
These include corporations, sole proprietorships and/or domestic permanent establishments. Partnerships also qualify, even if their income is only subject to corporation or income tax through their partners.
Research and Development Projects
R&D projects qualify for tax exceptions so long as they fall in one or more of the categories of industrial research, fundamental research, or experimental development. The delimitation is based on the criteria of the General Block Exemption (GBER).
However, a project becomes ineligible according to these criteria if, for instance, a product or process is already well-established and the company is only focused on market development. The same rule applies to routine developments—funding is considered void in this case, too. Applications concerning such projects are rejected regularly.
For this reason, with regards to the application for eligibility, one should pay attention to the exact project description. This can be quite challenging to put into practice, due to the limited text length that can be submitted. Having enough experience in the formulation can help and can significantly increase the possibility of a successful application.
Granting
In-House Research
Eligibility for Die Steuergutschrift Für Forschung Und Entwicklung tax incentives include the wages of employees that perform the research. The wages remain subject to wage tax deduction by the beneficiary. It is also subject to tax-free expenses or social security contributions that were incurred for the benefit of the employee.
To provide proof, you need to prepare verifiable documentation. If a company doesn’t assign employees exclusively for a project that qualifies for Die Steuergutschrift Für Forschung Und Entwicklung funding, this involves administrative effort on account of the appropriate division. Apart from the time sheet provided by the Federal Ministry of Finance, it is also possible to record through an ERP system or specialized software solutions.
It is not possible to be granted funding if the company doesn’t conduct research for itself but on behalf of others. But if the company is able to meet requirements, the client could benefit from the research allowance. This, in turn, benefits the contractor if the resulting funding budget at the client’s level is higher.
In some cases, the division as to whether or not in-house research is present isn’t always clear. For instance, contracts where special products are developed on behalf of a client can result to in-house research by the researching company. In some cases, it can also result to contract research by the client, depending on how the contract was designed.
Contract Research
When it comes to contract research,60% of the renumeration paid to the contractor is taken into consideration. The percentage pertains to a flat-rate share that corresponds to the share of labor wages at the contractor. There is no need to provide individual proof of the contractor’s personnel expenses. This cannot lead to a reduction, but also can’t be used to increase the percentage.
Special Features for Entrepreneurs and Partnerships
The law has special provisions and regulations for individual entrepreneurs and partners in a partnership. In this situation, proven personal contributions made by sole entrepreneurs and partners may qualify for a financing at a flat rate of EUR 40 per working hour.
This only means that entrepreneurs that are not labelled as a corporation and do not have research employees can also benefit from Die Steuergutschrift Für Forschung Und Entwicklung.
Maximum Amount and Research Allowance
Germany’s R&D tax credit incentive is at a total of 25% of the assessment basis, capped at 4 million Euro, so companies can claim a maximum of 1,000,000 Euro annually. Remember that in 2020, the maximum amount of 500,000 Euro is still applicable in some cases.
“Affiliated” companies are only allowed to receive the maximum amount of funding once. Contractually cooperating companies, on the other hand, can each receive it separately. In this context, affiliated companies refers to those with controlling influence following Section 290 Par. 2 to 4 of the German Commercial Code or HGB.
The R&D tax incentive is determined via a separate assessment and is credited fully against the tax assessed in the next first income or corporate tax assessment of a year. A refund is needed if the research incentive goes beyond the assessed tax. In this way, companies are being supported directly in loss-making stages.
How to Apply for Funding
The German R&D tax credit is subject to application. Towards the end of the respective fiscal year, the entitled person, entity, or company can submit an application for the tax credit to the responsible tax office, in compliance with the officially prescribed data set. Qualified partnerships must send their application to the tax office, that handles the separate and identical determination of bases of taxation.
You need to have a certificate confirming the legitimacy of each research and development project listed in the application when you apply to the tax office. Details are determined by the Research Grants Certification Ordinance (FzulBV) as of January 30, 2020.
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