Tax Research Funding in Germany

Why tax-based research funding?

Since 2020, the tax research allowance has offered German companies financial incentives to invest in research and development, thereby strengthening their innovative capacity. Specifically, the research allowance can be deducted from tax payments owed. Unlike traditional funding programs, tax-based research funding is not bound by topic, sector, or company size, reaching a wide array of research companies in Germany. Therefore, companies whose projects are not eligible for a traditional funding program can benefit as well.

The application process for the tax research allowance can begin before, during, or after the implementation of the research project, often making it much more flexible than traditional funding programs, which typically require approval before the project starts. The tax research allowance can also serve as a Plan B, although it cannot be simply combined with other funds. It can also be applied for when one does not necessarily want to wait for the approval of traditional funding before starting a project. Moreover, though obtaining the research allowance involves some bureaucratic effort, applying for traditional funding is often significantly more complicated.

How the tax research allowance works

Companies subject to income or corporate tax in Germany and not tax-exempt can apply for the tax research allowance for their R&D projects, regardless of their sector, legal form, or size, thereby receiving a tax credit of up to 2.5 million euros (or 3.5 million euros for SMEs) per year. Projects in basic research, industrial research, and experimental development are eligible for funding. In particular new products' development or significant improvements of existing products, processes, and services are favored. However, tax research allowances are not granted for the mere advancement of existing products and bringing them to market readiness.

The amount of the tax research allowance is determined by the proportionate consideration of eligible expenditures. These include:

• Personnel costs for employees involved in the R&D project,
• A portion of the acquisition and production costs of depreciable movable assets used for the R&D project and purchased after March 28, 2024, equivalent to depreciation, and
• Expenses for commissioned R&D projects, where currently 70 % of the expenses are considered.

The calculated tax base is currently capped at 10 million euros, with a subsidy rate of 25 % (or 35 % for SMEs) being applied.

The application for the tax research allowance must be made in a two-stage process. Although the application process seems very comprehensive at first glance, our experience shows that the responsible authorities generally conduct reviews with a sense of proportion, and therefore the administrative effort is in good relation to the benefit.

Specifically, the application process consists of the following steps:

1. Application for certification of the eligibility of the R&D project at the Research Allowance Certification Office
2. Application for the determination of the research allowance at the responsible tax office

The payment of the tax research allowance is generally made within the income or corporate income tax assessment. The allowance is credited against the tax payment. Even in years with a loss, when no tax is assessed, companies still benefit: In such cases, companies receive the tax research allowance as a tax credit reimbursement.

How we can assist:

• We give advise on how to obtain the maximum funding for your R&D project.
• Our experts assist with identifying suitable funding projects and throughout the entire two-stage application process.
• As tax consultants, we are authorized to handle the application for tax research allowance determination at the responsible tax office on your behalf.
• We work closely with the accounting and HR departments of your company and assist them with any questions regarding documentation obligations and the calculation of eligible costs.
• Moreover, we take over ongoing communication with the tax authorities, represent the research allowance in annual financial statements and tax filings, and support you during subsequent audits, such as those conducted by the tax audit office.

Benefit from the extensive experience of our experts and contact us.