Subject to the approval of the German Bundesrat (upper house), the Research Allowance Act (Forschungszulagengesetz – FZulG) will enter into force on 1 January 2020. The bill conforms with the requirements of EU state aid law.
Put simply, the new R&D tax credit or research allowance is available for personnel expenses and fees for subcontracting related to any activity that relies on a technical discipline to improve a product or process.
The new R&D tax credit at a glance
- Eligible taxpayers: All taxpayers that are subject to unlimited or limited income taxation in Germany are eligible for the allowance if they are not tax-exempt. The bill does not differentiate between sole proprietors, corporations and partnerships. Non-resident taxpayers can be eligible if they have a sufficient nexus to Germany, e.g. a non-resident company with a permanent establishment in Germany. The allowance is granted irrespective of the company’s profit situation. In practice, this means that profit-making taxpayers will receive a tax credit against their personal or corporate income tax, and loss-making taxpayers will receive the allowance in full.
- Eligible R&D activities: Eligible R&D activities include (i) fundamental research, (ii) industrial research, and (iii) experimental development within the meaning of EU regulations. These activities must have started after 1 January 2020. Activities aiming at market development or to improve production systems are not eligible.
- Form of conduct of R&D: Eligible R&D activities may be carried out (i) in-house by the taxpayer itself, and/or (ii) by means of contract research. Contract research can be funded if the contractor (third party or affiliated company) is based in Germany or in any other EU/EEA member state. As regards contract research, the new law is poorly drafted law and, thus, offers enormous tax planning opportunities, particularly in a cross-border context. Furthermore, R&D activities can also be performed by a cooperation between one or more beneficiaries and at least one other company or an institution for research and dissemination of knowledge (e.g. a university).
- Eligible expenses: The assessment base includes (i) the wages that are subject to German wage tax and (ii) expenses for securing the employees’ future (e.g. contributions to statutory pension funds). However, these expenses are eligible only to the extent the employees are entrusted with research and development activities in eligible R&D projects. For contract research, the assessment base includes 60% of the remuneration paid by the taxpayer to the contractor. The eligible expenses are limited to EUR 2 million per company (group-wide limitation) and fiscal year.
- Allowance amount: The research allowance amounts to 25% of the eligible expenses. The total amount of research allowances and other state aid granted for an R&D project may not exceed EUR 15 million per company (on an individual basis) and per R&D project over time.
- Application: The research allowance application has two stages. First, the taxpayer must make a technical request for the issuance of a R&D certificate showing that the R&D project is eligible. Second, the application for the research allowance itself must be submitted electronically to the local tax office. This application must be supported by documentation of the eligible activities and expenses.
- Method of payment: The research allowance will be set by an assessment notice. It will be credited in full against the income tax determined in the tax assessment following the application. In a loss-making situation, the research allowance will be fully paid out.
The key to a successful application is understanding and allocating the expenses that apply to any product or process improvement.
Planning your next R&D tax credit claim
R&D certificates and research allowance claims can be applied for at almost any time, but we recommend doing so during the year in real time to avoid a last-minute rush. We can work with you to maximize your research allowance while minimizing the time you need to spend applying for it. We will break down your application into steps to make sure you collect and submit all the information required.
- Step one: Review ongoing projects, existing processes, organisational tools, project lists and tracking systems to ensure that we have a solid understanding of your organisation and internal processes. This involves a presentation to your technical and finance leads on the German research allowance legislation as well as reviewing your existing processes, tools and so on. From this, we assess potential R&D projects to narrow the list to those that are likely to qualify as eligible R&D projects and activities. Moreover, we can assist you in setting up tax-efficient contract research structures to maximize your research allowance.
- Step two: Gather information for the technical request for the issuance of the R&D certificate during the year. We work with you to gather the information necessary to support your request from a technical perspective. Based on discussions with your technical leads, we collect the information required to prepare the technical request for each R&D project.
- Step three: Collect the financial information necessary to support your research allowance claim, in collaboration with your financial leads. We compile costing information based on the eligible R&D activities and projects in itemised documentation to demonstrate eligible expenses on a project-by-project basis.
- Step four: Prepare and submit the technical request and the research allowance claim in German once the information for both has been compiled and reviewed. Here, you will benefit from our excellent standing with the German authorities.
- Step five: Assist in any tax audit and appeal proceedings if the authorities challenge the technical request for the R&D certificate and/or the research allowance claim. At this stage we can draw on our in-depth experience in settling tax disputes.
Please feel free to contact us for help with getting started on claiming your research allowance.