What is the "Forschungszulage"?

Since 1 January 2020, the research tax allowance (steuerliche Forschungszulage) has been available to companies of all sizes in Germany. With this innovation funding instrument, the German government is pursuing the goal of improving the attractiveness of Germany as a business location for new companies and investment decisions and increasing the average investment in research and development from the current 3 percent to 3.5 percent of company turnover by 2025.

Under the Research Allowance Act (Forschungszulagengesetz, FZulG), companies can receive tax breaks of up to 3.5 million euros if they invest in research and development – regardless of whether the company is currently making a profit or a loss. You can find the detailed legal text on the research tax allowance on the website of the Federal Ministry of Finance.

You can get a quick overview of the research tax allowance in our blog article: "Research allowance: first retroactive project funding".

 

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Research allowance: everything you need to know about it now

  1. Who can apply for the research allowance?
  2. Can I apply for a research allowance?
  3. Eligible costs in the research allowance
  4. How do I apply for the research allowance?
  5. Research allowance consulting services
  6. What is the tax office's role in the research allowance?
  7. Tasks and obligations for companies that wish to receive the research allowance
  8. What is the difference between a research allowance and R&D funding?

Who can apply for the research allowance?

Start-ups benefit from the research allowance

Young companies are excluded from applying for many funding programmes. The requirement here is often that they must have completed the start-up phase and already be generating a steady turnover.

However, shortly after the company is founded, things usually have to move quickly. Financing must be secured, new employees hired and the product developed. There is no time to submit a funding application and, above all, to wait for funding approval – this is a prerequisite for starting a project in most "traditional" programmes.

This is different with the research grant programme. This funding programme is also suitable for young start-ups. Firstly, the funding can be applied for subsequently and secondly, it is not a problem if the company has not yet generated any sales. So full speed ahead after the company is founded!

In the case of start-ups, it is also likely that the research allowance will exceed the assessed income or corporation tax. For the company, this means that the excess amount is paid out as an income or corporation tax refund.

 

The research allowance for SMEs

Most funding programmes are aimed at SMEs. So why should a medium-sized company access the research allowance and not choose a classic funding programme, such as the Central Innovation Programme for SMEs (Zentrales Innovationsprogramm Mittelstand, ZIM)?

Many funding programmes are structured in such a way that the project application must first be submitted and then, after a few weeks or even months, the grant notification arrives at the company. For most funding programmes, this is also the time at which the companies are allowed to start the project.

This is not the case with the research allowance – here you are quickly in the development phase. You can apply for the research allowance before and during the project or even afterwards.

 

The research allowance for co-entrepreneurs and sole proprietors

An important basis for calculating the research allowance is the wages for employees subject to wage tax deduction, which the employee receives directly from the employer, as well as the employer's expenses for securing the future in accordance with § 3 No. 62 ESTG.

To ensure that the working hours of sole proprietors can also be taken into account for the research allowance, even though they do not receive a fixed salary, the legislator has also reached into its bag of tricks. The legislator grants a de minimis subsidy for the entrepreneur's own work.

This approach has numerous special features. On the one hand, the entrepreneur can be charged a flat rate of 70 euros (from 28 March 2024, previously 40 euros)  for each hour of work on the project, with a maximum of 40 working hours per week. The subsidy that he receives on this hourly rate is considered De minimis aid (and only this – the subsidy that the company receives on employees subject to wage tax is not de minimis).

If shareholders of an eligible co-entrepreneurship have contractually agreed that one or more shareholders will receive an activity allowance for research and development activities in favoured research and development projects, then this activity allowance is eligible expenditure, provided that it does not exceed EUR 70 per working hour with a maximum of 40 working hours per week.

The prerequisite is that the agreement is effective under civil law, is genuinely intended and actually carried out and is drafted so clearly and unambiguously that it can be distinguished from other activity remuneration in the service of the company. According to the de minimis regulation, the total amount of de minimis aid granted to a single company may not exceed EUR 200,000 over a period of three years.

 

The research allowance for large companies

In contrast to SMEs, large companies often have to contend with the fact that open-technology funding programmes in particular are not open to such companies. For large companies, this means that they usually have to apply for funding announcements. These are associated with many question marks:

  • When will a funding announcement be published on which topic?
  • How many projects will take part in the competition?
  • Will the project even be selected?
  • When will it be possible to start the project?

With these announcements, it can take several months before a funding decision is made and the company can start the project. For development projects that need to be realised quickly by a large company, there were virtually no funding opportunities. These then had to be financed from current cash flow. The research allowance for large companies now offers new opportunities here. As the research allowance also applies to large companies, they can submit an application – or several – at any time under this open-technology programme. The only limitation here is the maximum of 10 million euros (from 28 March 2024, previously 4 million euros) in eligible expenditure per financial year. However, it should be noted that for affiliated companies within the meaning of Section 15 of the German Stock Corporation Act, the maximum amount applies to the affiliated companies as a whole.

 

Can companies in difficulty apply for the research allowance?

Companies often assume that they are considered to be a company in difficulty if – or shortly before – they find themselves in insolvency proceedings. This is not the case! The exact definition of when a company is a company in difficulty is regulated in Article 2 No. 18 of the GBER ("AGVO").

In the case of limited liability companies (e.g. public limited companies, partnerships limited by shares, limited liability companies), the following applies (with the exception of SMEs that have been in existence for less than three years): More than half of the subscribed share capital has been lost as a result of accumulated losses. This is the case if, after deducting the accumulated losses from the reserves (and all other elements that are generally categorised as the company's own funds), there is a negative cumulative amount that corresponds to more than half of the subscribed share capital. If you are considered to be a company in difficulty, you are unfortunately not entitled to a research allowance. 

 
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Can I apply for a research allowance?

Tax-incentivised research funding is open to all topics. All development projects that can be categorised as basic research, industrial research and experimental development are eligible for funding, not just traditional R&D projects.

2-graphic-can-i-apply-for-research-allowance

 

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Eligible costs in the research allowance

How high are the eligible costs for the research allowance?

When the Research Allowance Act (FZulG) came into force on 1 January 2020, it was still stipulated that a maximum of €2,000,000 in eligible expenses per financial year could be funded, i.e. a maximum grant of €500,000 per financial year.

This assessment basis was significantly increased and expanded as part of the Second Corona Tax Assistance Act, which came into force on 1 July 2020. The assessment basis has risen to 4,000,000 euros and the maximum grant has therefore also doubled to 1,000,000 euros.

The Growth Opportunities Act came into force on 28 March 2024, which contains further improvements to the research tax allowance. The maximum assessment basis was extended to €10,000,000 p.a. The possible annual subsidy thus amounts to €2,500,000, and even €3,500,000 for SMEs. 

An important point is that the assessment basis applies to each beneficiary in the case of cooperation projects.

The de minimis rule for sole proprietors and co-entrepreneurs must also be observed. The statutory limit of 200,000 euros cannot and must not be exceeded within 3 years. It is also important that you keep an eye on other funding programmes. For example, subsidised loans, investment grants, etc. are often included in the de minimis aid.

 

What are eligible costs for the research allowance?

Tax-incentivised research funding is used to subsidise own personnel costs and the costs of contract research. Investments in depreciable, movable assets are also eligible for funding (only for acquisition/production from 28 March 2024). In various "traditional" funding programmes, costs for materials and travel are also funded – unfortunately, these costs cannot be included in the research allowance. The focus here is on personnel costs. The basis for calculating the personnel costs here is the wages and salaries subject to income tax, including the employer's contribution to the employee's future pension scheme, whereby special payments and bonuses can also be taken into account here. You receive a subsidy of 25% on these costs, SMEs even 35% (from 28 March 2024, before that 25%).

However, as sole proprietors do not have a fixed wage – but are also eligible to apply for the research allowance – they can now claim 70 euros (from 28 March 2024, previously 40 euros) for each proven hour of work. This "notional" wage is also subsidised at 25% (35% for SMEs from 28 March 2024). In this case, the subsidy is therefore €17.50 (€24.50 for SMEs) per hour – meaning that the de minimis aid for SMEs would also be €24.50 per hour.

In addition to personnel costs, expenses for contract research is also eligible for funding. As these external development costs usually also include materials, these costs are recognised at 70% (if the contract is awarded from 28 March 2024; previously 60%).

 

An example calculation:

You are a large company and award a research contract worth 100,000 euros to an organisation. This organisation also issues you with an invoice for 100,000 euros. The eligible expenditure is then 70% - i.e. 70,000 euros. You receive a grant of 25% of this assessment basis, i.e. 17,500 euros.

It is important that you can provide evidence of these documents and have documented them – this also includes the hours worked via timesheets or a time recording system.

 

Can I charge personnel costs including social security expenses?

In principle, this programme is based on employees' wages subject to wage tax deduction. In addition, there are the employer's expenses for future security in accordance with §3 No. 62 EstG.

Expenses for future security include health, pension, long-term care and unemployment insurance. Another interesting aspect of the research allowance is that not only the contractually agreed fixed wages can be settled here, but also bonus payments that are, for example, performance-related. This is not possible with most other funding programmes.

 

When can flat-rate costs be recognised in the research allowance?

Not really at all. All costs that are claimed in the research allowance must be documented. In the case of external costs, this is done via invoices and payment receipts and in the case of own employees via salary slips and payments.

The legislator has only made one exception here. To ensure that the working hours of sole proprietors can also be counted towards the research allowance, even though they do not receive a fixed salary, they can claim a lump sum of 70 euros (from 28 March 2024, before that 40 euros) for each hour of development work, even in addition to permanent employment. With the restriction that a maximum of 40 working hours per week can be claimed.

The following regulation applies to co-entrepreneurships (as of 28 March 2024):

  • If partners of an eligible co-entrepreneurship have contractually agreed that one or more partners will receive an activity allowance for research and development activities in favoured research and development projects, then this activity allowance is an eligible expense, provided it does not exceed EUR 70 per working hour with a maximum of 40 working hours per week.
  • The prerequisite is that the agreement is effective under civil law, is genuinely intended and actually carried out and is drafted so clearly and unambiguously that it can be distinguished from other activity remuneration in the service of the company.
  • The subsidy that the co-entrepreneur / individual entrepreneur receives on this hourly rate is considered de minimis aid (and only this - the subsidy that the company receives on employees subject to wage tax is not de minimis).

 

Can I have external costs (external development services) subsidised?

Research and development contracts awarded to external partners are eligible for funding. It should be noted that these costs can only be subsidised if the contractor is based in the European Union or the European Economic Area.

Contractors can be research organisations or qualified companies. It is important that the client describes the research and development project so precisely that it can also be assessed by the certification body.

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How do I apply for the research allowance?

The application process for the research allowance

The application is a two-stage process. The first stage focuses on the research and development project. The second stage is mainly concerned with claiming the project costs incurred.

 

Stage 1: technical project application

A technical project application must essentially be submitted to the Research Grant Certification Centre. Although this also contains some commercial data and a rough cost calculation for your project, the main task of the Certification Centre is to check whether your project is a research and development project. The following points must be fulfilled:

  • The project must be aimed at gaining new knowledge (novel).
  • It must be original (creative).
  • It must follow a plan and be budgetable (systematic).
  • There must be uncertainties with regard to the final result (uncertain).
  • There must be possibilities of reproducibility (transferable and/or reproducible).

If the certifying body confirms that your project is a research and development project, you are legally entitled to this funding. The certification centre will also forward the notification directly to your tax office.

 

Stage 2: determining the research allowance at the tax office

If the first stage was about proving that your project is a research and development project, the second stage focuses on the project costs. The project costs are claimed annually with the tax return, also retroactively, to the tax office. To do this, the eligible costs must be precisely determined and documented.

The research allowance is then not paid out immediately by the tax authorities, but is taken into account as part of the next initial assessment of income or corporation tax by offsetting it against the tax assessed.

If the assessed research allowance exceeds the income or corporation tax, the excess amount is paid out as an income or corporation tax refund.

 

4-graphic-research-allowance-application-process-two-stages

 

What criteria must my projects fulfil?

The programme ranges from basic research (experimental or theoretical work to acquire new knowledge) to experimental development (with the aim of developing new and improved products, processes or services). The programme is also completely open to all topics, so you can apply for and submit projects ranging from agriculture to space technology.

The certification centre examines and evaluates the following three aspects:

  1. Even if you do not have to submit a detailed timetable with concrete personnel planning as part of the certification, the project must still be planned. The project must therefore contain clearly defined tasks with clearly defined objectives. This also means that you must work with a work plan, resource planning and milestones.
  2. Funding is also only possible if the implementation is associated with technical risks. There must be challenges that could jeopardise the implementation of the project and lead to failure.
  3. Your development work must be aimed at gaining new knowledge and skills or utilising existing scientific, technical, economic or other relevant knowledge and skills in a new way. If this is the case, then you also fulfil the criterion of novelty.

The Frascati Manual on the Measurement of Scientific, Technological and Innovation Activities also provides good guidance in this regard.

 

How extensive is the application process?

Firstly, you need to enter some commercial data about your company to apply for the certificate. However, the main focus of the certificate is the technical project part. There are essentially four questions that you should answer. You have between 500 and 1,500 characters to answer each question. In total, there are only 4,000 characters.

What sounds very pleasant at first proves to be very difficult to implement. With these few characters, an outsider must be convinced that the project is a research or development project. Every sign and every word must be carefully considered. Blaise Pascal recognised this challenge as early as 1656, which is why he wrote "I am writing you a long letter because I have no time to write a short one".

 

 

 

brauche-ich-einen-steuerberater-fuer-die-forschungszulage

 

 

Background

Do I need a tax consultant to apply for the research allowance?

As the funding programme is called "tax research allowance", many people think directly of the tax consultant. However, the research allowance is also an R&D project subsidy (research and development) in which specific R&D projects must be presented.

>> Read blog article

  
 
 

Does the research allowance only apply to completed projects?

No, one of the most important requirements is that the project was not started before 1 January 2020. The research allowance or certificate can be applied for completed, ongoing, cancelled and even for projects that have not yet started.

However, it is also important to note that the certificate for the research allowance can be applied for subsequently - but you must also observe deadlines here. The application for the research allowance can be submitted within four years of the end of the year in which it was created. (Example: Project year 2020 must be applied for at the tax office in 2024!)
 

Can a research grant application contain several projects?

There is no quantitative limit on the number of R&D projects eligible for the research allowance. However, there is a financial limit on the assessment basis. Until 30 June 2020, this maximum amount was 2 million euros. With the second Corona Tax Assistance Act, the maximum amount was increased to 4 million euros. As part of the Growth Opportunities Act, an assessment basis of EUR 10 million has applied since 28 March 2024.

For affiliated companies within the meaning of § 15 of the German Stock Corporation Act (AktG), the maximum amount applies to the affiliated companies as a whole. It can therefore only be utilised once per financial year for all affiliated companies.

You can also apply for several R&D projects at the same time with one certification application.

 

What is the task of the Research Allowance Certification Centre?

The Certification Centre checks whether the projects submitted are R&D projects and whether the requirements of the Research Allowance Act (FZulG) § 2 paragraphs 1 to 3 are met.

If all criteria are met, the certification centre will confirm that your project is a research and development project. Unlike most funding programmes, however, the certifying body does not monitor the project throughout the entire implementation period. It fulfils its role when it issues the certificate. The respective tax office will then check whether the expenses were actually incurred by the company.

 

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Research allowance consulting services

What should I be aware of when seeking advice on the research allowance?

Write a convincing text: 

Writing a technical proposal with a maximum of 4,000 characters sounds very simple and straightforward at first. However, with these 4,000 characters you have to convince an external reviewer that your project fulfils all the requirements of the programme and that he can approve the certificate.

It is crucial that every word is right and that the necessary information is conveyed in these few words. The consultant must understand your project and present it in 4,000 characters in such a way that an external third party can also understand it.

 

Pay attention to formalities:

However, it is also important that the counsellor knows the formal regulations:

  • What requirements do you have to fulfil when applying for the certificate or research allowance?
  • What do you need to consider in terms of documentation?
  • What happens if there are changes to your project during the term?

You will need a consultant who can support you in this phase and not leave you on your own. After all, you need to be prepared for the fact that the tax office may carry out an audit years later.

 

Know other programmes:

In addition, the consultant should not only have the research grant in mind. There are many other funding instruments that are certainly much more suitable for one project or another, as the programmes also support material costs or cooperation partners, for example.

 

Find out more about how you can successfully apply for the research tax allowance with EurA:

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How can a consultant support you and take some of the work off your hands?

The funding landscape is diverse. There are many different funding programmes and correspondingly many guidelines. The programmes differ, for example, in terms of eligible costs, funding quotas, payment periods and not every programme is accessible to every company. A consultant can help you to get an overview: Which programme is best suited to your development project and your goals? A consultant has everything in view and supports you in this.

You are often tied up in day-to-day business. This is where an external perspective can help you to identify R&D projects and submit the application. Thanks to the many projects that are also supported by the consultants, they know what to look out for in the wording and how the innovation can be communicated briefly and concisely. They benefit from the knowledge of the consultant, who not only applies for the research grant once a year, but can also contribute the knowledge from many projects to the application. They can help to define and structure the project and present it in such a way that an external third party can also understand it.

The consultant can also support you after you have received the decision. He can assist you in compiling the necessary documentation and determining the costs incurred. If they realise that significant points have changed compared to the application, they will certainly also support you with reallocation applications.

Incidentally, the Certification Centre does not provide individual advice on tax incentives for research.

 

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What is the tax office's role in the research allowance?

As the certifying authority is "only" responsible for checking that the R&D criteria have been met and leaves the process when the certificate is issued, the tax office must take over the further project management.

The tax office is therefore responsible for determining the eligible costs and finalising the amount of the research allowance. The tax office will determine the research allowance in a research allowance notice. This means that the tax office can and will also request further evidence from the companies, such as time sheets and reports. The tax office will also carry out audits at the companies.

 

Payment of the research allowance: When will I receive my funding?

You will not receive a direct payment of the research allowance when you receive the certificate. You can always claim this retrospectively for a financial year. This means that you determine the exact costs incurred and apply to the tax office via the ELSTER portal.

With "traditional" project funding, it is usual for the funding to be paid out in a 3-month cycle. This is not the case with research funding. In this case, the funding is offset against the next initial assessment of income or corporation tax by the tax office. This means that processing by the tax office is only carried out as soon as a tax return has been submitted by your company.

If the research allowance exceeds the assessed income or corporation tax, the excess amount is paid out as an income or corporation tax refund. For co-entrepreneurships, the special feature is that the research allowance to be credited is determined separately and uniformly by the tax assessment office.

 

Changes in the development project: What happens now?

If there are significant changes in the direction of the project compared to the approved project, a new certificate should be applied for. Reference must then also be made to the already approved project.

The situation is similar for development contracts. If there are changes in the project or if additional projects are added, then an "application for an increase" must also be submitted for the project.

If the changes are rather insignificant, e.g. you need more hours than originally applied for, then these actual values can also be settled with the tax office.

 

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Tasks and obligations for companies that wish to receive the research allowance

Are there reporting obligations in the research allowance programme?

You may be familiar with this from the various funding programmes that have been on the market for years. As a rule, you must submit reports on the current project status and progress to the project management organisation every 6 months or 12 months for these projects. There is no such obligation to submit reports for tax-incentivised research funding.

However, in the case of research grants, projects must follow a plan, be budgetable and be reproducible. In order to prove this, we believe that a brief documentation of the activities and results carried out in the project year is necessary. In addition, it should also be documented what the main tasks of the billed employees were.

 

 

 

Forschungszulage-welche-Dokumentationen-sind-zu-erstellen

 

 

Background

What documentation is required?

In the case of traditional project funding, the funding recipients generally have to prepare interim and final reports and inform the project organiser about the work carried out. 

>> Read blog article

  
 
 

Can an audit by the tax office take place?

Yes, the audit will most likely take place. It is therefore all the more important that the activities are properly documented and that you can still provide information on the project years later. We therefore recommend good project documentation. This way, you will still be able to answer questions from the tax office if key project members are no longer available.

This is another reason why we provide you with precise documentation on the funds applied for. The ELSTER portal requires very little data for the research grant application. If it comes a few years later, you can use our documentation to see exactly how the retrieved values are made up.

 

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What is the difference between a research allowance and R&D funding?

Traditional R&D funding has a different structure, which usually requires a significantly longer lead time. With most funding programmes, you can only start once you have received the grant notification. This can take a few weeks, but usually a few months.

Nevertheless, these programmes also have their raison d'être. In order to receive funding, you must structure your project in great detail in advance, analyse risks and opportunities, consider market access and structure it in such a way that the project sponsor can also understand it. In many programmes, you are also in competition with other project ideas, so a funding decision also represents a certain seal of excellence.

What is important with these classic funding programmes is that other costs, such as material costs, are also funded. You also receive an overhead surcharge of up to 120% on your personnel costs, which then also covers your other costs. In most cases, the funding rate is significantly higher than the 25% of the research allowance (or 35% for SMEs). However, the funding from these programmes is extraordinary income, which must then be taxed.

Two major advantages of classic project funding are:

  1. As the funds are paid out in 3-month cycles, they are significantly more cash-flow friendly.
  2. In the case of collaborations with research institutions, these are usually funded directly. This significantly reduces your costs.

When is which programme suitable? A calculation example.

As already described, the funding landscape is very diverse. Some of the programmes differ considerably in terms of their structure and eligible costs. Below you will find a brief example calculation:

8-graphic-research-allowance-or-r&d-funding-calculation-example

 

Are cooperation partners eligible for the research allowance?

Research institutions are not directly eligible to apply for the research allowance. You can involve them via research contracts. However, this means that you have to bear these costs and only receive a proportionate share of the funding. In many R&D funding programmes, research institutions themselves are eligible to apply and even receive a 100% subsidy. This gives you even more options for implementation.

Co-operations with other companies are possible with research allowance. However, each company must then apply for funding itself.

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