Since the year 2020, businesses located in Germany, including those, not German-owned, have been eligible for a yearly tax incentive for research and development. Since the law (Die Steuergutschrift Für Forschung Und Entwicklung or Germany’s R&D Tax Credit) was passed, it has granted qualified companies up to EUR 1,000,000 in research allowance.
Suppose a company uses its own research staff and undertakes its own research. In that case, the company can take a credit against its annual tax obligation of up to 25 percent of the salaries and wages paid to its researchers. This credit includes tax-free contributions to social security. After that, a refund is issued for the remaining surplus. As a result of the fact that businesses can benefit from the financial aid with the reimbursement even when they are operating at a loss, the research allowance is interesting for startups that are operating at a loss at first.
The same principle applies to research conducted under contract. The client is eligible to receive at least 15 percent of the remuneration paid to the contractor; the contractor does not have this privilege. While the research allowance in Germany is also equal to 25 percent of the total remuneration, only 60 percent of the total compensation is taken into account.
Below are explanations of additional details regarding Die Steuergutschrift Für Forschung:
Companies with limited or unlimited tax liability are eligible under the Income Tax Act and the Corporation Tax Act, provided they are not exempt from paying taxes and meet all the other requirements for applying.
These can be either sole proprietorships or corporations, and they can also be permanent domestic establishments. Even if a partnership’s income is only subject to corporate or individual taxation through the partners in the partnership, the partnership can still qualify.
Qualified R&D Projects
If a research and development project can be proven if that fall into at least one of the following three categories—industrial research, fundamental research, or experimental development—it may be eligible for a tax exemption. The General Block Exemption or GBER criteria were used as the basis for the delimitation.
According to these criteria, a project is ineligible if, for example, a product or a process is already well-established and the company only focuses on the market or commercial development. The same rule applies to developments that are considered routine – funding is also considered invalid in this case. The submissions of applications relating to such projects are routinely turned down.
Because of this, when filling out the application to be eligible for the program, it is essential to pay attention to the detailed description of the project. Due to the restrictions placed on the amount of text that can be submitted, putting this into practice can be quite difficult. Having sufficient experience in the formulation process can be helpful and can significantly increase the likelihood of an application being successful.
Wages paid to employees who carry out in-house research are eligible for tax credits under the German Research and Development Tax Credit program (Die Steuergutschrift für Forschung und Entwicklung). The beneficiary is still responsible for withholding their fair share of taxes from their wages. It is also subject to tax-deductible expenses or social security contributions made for the employee’s benefit and incurred on their behalf.
You will need to prepare documentation that can be checked for accuracy to provide proof. Suppose a company does not assign employees exclusively to a project eligible for funding through the Die Steuergutschrift Für Forschung Und Entwicklung. In that case, this necessitates additional administrative work on the part of the division that is responsible for the matter. Recording can be done through various mediums, including the timesheet supplied by the Federal Ministry of Finance, as well as through an ERP system or a specialized software solution.
If an organization doesn’t conduct research for its benefit but rather for the benefit of others, the company won’t be eligible for funding. But if the business meets the requirements, the client may be eligible for the research allowance. If the total funding budget at the client’s level ends up being higher as a result of this, the contractor is the one who benefits.
There are some situations where it is not always easy to tell whether or not an organization conducts its research in-house. For instance, contracts that require the development of specialized products on behalf of a customer can result in the research company conducting its internal research. Depending on how the contract was written, it may also result in the client conducting contract research in certain circumstances.
In the case of research conducted under contract, sixty percent of the total compensation paid to the contractor is taken into account. The percentage refers to a fixed-rate share corresponding to the proportion of the contractor’s labor wages that goes toward employee compensation. There is no requirement that the contractor provides individual proof of the costs associated with their personnel. This cannot be used to bring about a decrease, nor can it be utilized to increase the percentage.
Because the R&D tax credit incentive in Germany is capped at 4 million Euro and accounts for a total of 25 percent of the assessment basis, businesses are only permitted to claim a maximum of one million Euro each year.
The maximum amount of funding that can be awarded to “Affiliated” companies can only be granted to them once. On the other hand, companies that are contractually obligated to cooperate with one another can receive it independently. According to Section 290 Par. 2-4 of the German Commercial Code, or HGB, affiliated companies refer to those businesses that have a controlling influence in the context of this discussion.
A separate assessment determines the tax credit for R&D, which is completely credited against the tax determined during the subsequent first income or corporate tax assessment of each year. A refund is required if the research incentive is higher than the assessed tax. In this manner, businesses operating at a loss can receive direct support.
Applying for Funding
The R&D tax credit in Germany is subject to application. In accordance with the officially required data set, the person, entity, or company eligible for the tax credit may apply for it to the responsible tax office toward the end of the fiscal year. The tax office responsible for the independent and identical determination of tax bases, must receive an application from qualified partnerships before the application can be processed.
When you apply to the tax office, you will need to provide evidence in the form of a certificate that verifies the legitimacy of each R&D project listed on the application.