Internal research and development
If the company uses its own employees, the wages of the employees entrusted with the research, which are subject to wage tax deduction at the beneficiary, as well as the tax-free expenses actually incurred to secure the future of the employees (social security contributions) are eligible for funding. Verifiable documentation must be prepared to provide evidence. If employees are not deployed exclusively for an eligible project, this is associated with administrative effort in view of the allocation then required. In addition to the time sheet provided by the Federal Ministry of Finance, it is also possible to use an ERP system or special software solutions.
In the case of internal research and development, a s ub-area can also be carried out as part of contract research, which increases the funding opportunities for internal research. If the company does not conduct research for itself, but on behalf of a client, funding is ruled out. However, if the conditions are met, the client could benefit from the research allowance, which could also benefit the contractor if the resulting higher funding budget at the client level. The boundary between internal research and contract research is sometimes blurred. For example, contracts in which special products are developed on behalf of a customer can lead to internal research by the researching company or to contract research by the customer, depending on the structure.
Contract research
In the case of contract research, 60% of the remuneration paid to the contractor is taken into account. The percentage represents a flat-rate proportion that is intended to correspond to the proportion of wages paid to the contractor. Itemization of the contractor's personnel expenses is not required - but also not possible - and therefore cannot lead to a reduction, but also cannot be used to increase the percentage. In the case of capital-intensive research and development activities, contract research can therefore be advantageous, as 60% of the remuneration can far exceed the wages actually incurred. As it is irrelevant for the granting of the research allowance whether the contractor is an external company, a public institution such as a university or a company from the same group of companies, there are opportunities for optimization. Cooperation can also be used for optimization. However, all framework parameters should always be taken into account. Examples include the subsequent operational use of the know-how gained, withholding taxes or transfer prices.
Funding for contract research is not limited to domestic contractors. Beneficiary projects also include contract research where the contractor has its management in a member state of the European Union or another state to which the Agreement on the European Economic Area (EEA Agreement; where administrative assistance exists) applies.
Special features for sole proprietorships and partnerships
The law provides for special regulations for sole proprietorships and partners in a co-entrepreneurship. According to these, proven personal contributions by sole proprietors and partners may be eligible for a lump sum (EUR 40 per working hour, maximum 40 working hours per week). This means that entrepreneurs who are not organized as corporations and do not have employees conducting research can also benefit from the allowance. However, the de minimis regulations must be observed here, which may require an examination in individual cases.
Maximum amount of the German R&D Tax Credit
The German R&D Tax Credit amounts to 25% of the assessment basis, which is limited to EUR 4 million, meaning that a maximum of EUR 1,000,000 can be claimed annually. It should be noted that the maximum amount of EUR 500,000 still applies in some cases in 2020. In the case of cooperations, each cooperation partner is entitled to the maximum amount individually. However, "affiliated" companies can only receive the maximum subsidy amount once. Affiliated companies are defined by the controlling influence pursuant to Section 290 (2) to (4) HGB. Companies that are only horizontally linked to each other via asset management company structures (e.g. private equity funds, venture capital funds, business angels), without these companies being able to coordinate with each other, are not to be regarded as affiliated companies.
The R&D Tax Credit is determined in a separate notice and fully offset against the tax assessed in the next first income or corporation tax assessment of a year. If the R&D Tax Credit exceeds the tax assessed, a refund is made so that companies in loss-making phases also receive direct support. Other expenses may also be eligible under other support measures. The law expressly provides for the possibility of cumulation. However, double preferential treatment of the same expenses is excluded. This means that expenses that have been included in the assessment basis for the research allowance must not have been included as part of other funding or grants, which restricts the scope for complementary funding measures for the same project. The funding conditions of the other funding measures must also be checked.
Application for funding
Tax incentives are subject to application. The beneficiary can submit an application for a research allowance to their tax office after the end of the respective financial year in accordance with the officially prescribed data set. Entitled partnerships must submit the application to the tax office, which determines the tax bases separately and uniformly. A certificate confirming the eligibility of each research and development project listed in the application is required for the application to the tax office. Details on this are regulated by the Research Allowance Certification Ordinance (FzulBV) of January 30, 2020. This certificate must be applied for separately in advance. It is therefore also referred to as a two-stage application procedure. The application for certification must include some key data on the applicant company and very brief textual descriptions of the projects and their calculations.
The Federal Ministry of Education and Research has set up a dedicated website for this purpose. The Certification Office for Research Grants (BSFZ) is operated by a consortium consisting of VDI Technologiezentrum GmbH, AIF Projekt GmbH and the German Aerospace Center - DLR Project Management Agency, with locations in Bonn, Berlin, Düsseldorf and Dresden. Information on the application procedure and the official application form are available on the BSFZ website. The certification office checks whether the activities described in the application are a project eligible for funding within the meaning of the Research Grants Act (FZulG). The certificate issued is generally binding for the tax office. Read everything you need to know about the German R&D Tax Credit on our topic page.
Your next steps
Our experts at nxt milestone will be happy to advise you on all aspects of the research allowance. We identify eligible projects and help you to apply for the research allowance. Fill out our questionnaire (LINK) and our experts will contact you immediately to review the project in detail.
