Germany’s R&D Tax Credits: The Tax Credit For Research and Development
Germany is one of the last OECD countries that has given in and introduced tax incentives to stimulate the economy through research and development (R&D) activities. This article will discuss the different ways the R&D tax credit or Die Steuergutschrift Für Forschung Und Entwicklung benefits innovative companies operating within Germany.
Introducing R&D Tax Incentives in Germany
Right after the Covid-19 pandemic struck worldwide, the German government adopted a new law called the Research Tax Allowance, through which R&D activities are tax-privileged. On April 2021, the application process for the research allowance was finally completed. Company size and sector doesn’t matter so long as the projects involve R&D activities. This new research allowance has resulted to changes in the financing strategies for innovations, especially in international companies.
R&D tax credit is basically available for personnel expenses and fees for subcontracting related to any activity that depends on a technical discipline to improve a product, system, or process.
Germany’s new R&D Tax Credit at a Glance
- Qualified Taxpayers –all taxpayers in Germany that are subject to limited or unlimited income taxation qualify for the allowance so long as they are not tax exempt. The bill, however, does not differentiate between partnerships, corporations, or sole proprietorships. Non-resident taxpayers or those that are not considered German residents but pay taxes can only qualify if they have enough nexus to Germany, e.g. a non-resident company that is permanently established in the country. The allowance is given regardless of the company’s profit situation. Realistically speaking, this means that profit-making taxpayers will be given a tax credit against their personal or corporate income tax. Loss-making taxpayers, on the other hand, will be given the allowance in full.
- Qualified R&D Activities –R&D activities that qualify for the tax credits include fundamental research, industrial research, and experimental development within the bounds of EU regulations. These activities must have been done after January 1st, 2020. Activities that focus only on market development or to improve production systems do not qualify.
- Form of Conduct of R&D –qualified R&D activities may be performed in-house by the taxpayer/s themselves, and/or through contract research. Contract research can be funded if the contractor (affiliated company or third-party) is based in Germany or in any other member state of the EU/EEA. Regarding contract research, the new law is poorly drafted and, therefore, presents numerous major tax planning opportunities, especially in a cross-border context. In addition, R&D activities can also be done by a collaboration between one or more beneficiaries and at least one more company or institution for research and propagation of knowledge.
- Qualified Expenses –the assessment base includes the wages that are subject to Germany’s wage tax and expense to secure the employee’s future (such as contributions to statutory pension funds). But these expenses only qualify to the extent the employees are involved and given control over the research and development activities in qualified R&D projects. For contract research, the assessment base includes 60% of the renumeration paid by the taxpayer to the contractor. Qualified expenses are limited to 2 million euros per company (group-wide limitation) and fiscal year.
- Allowance Amount – the tax credit for research and development amounts to 25% of the eligible expenses. The total amount of research allowances and other state assistance granted for the R&D project may not go beyond 15 million euros per company (on individual basis) and for each R&D project over time.
- Application –the research allowance application is done in two stages: first the taxpayer sends a technical request for the release of an R&D certificate proving that the R&D project is qualified. Next is the application of the research allowance itself. It must be submitted electronically to the local tax office. Note that this application must be supported by the documentation of qualified activities and expenses.
- Mode of Payment –the research allowance will be decided upon by an assessment notice. It will be fully credited against the income tax determined in the tax assessment after submitting the application. In a loss-making situation, the research allowance will be completely paid out.
The secret to a successful application is that the company understand and allocates the expenses applicable to any product, or process improvement.
How to Plan Your Next R&D Tax Credit Claim
It’s possible to apply for the tax credit for research and development certificates and research allowance claims any time, but it is highly recommended that you do so during the year in real-time to avoid a last-minute rush. You can work with tax experts so you can get the most out of your research allowance while reducing the time you need to spend applying for it.
Below is a breakdown of the application steps for the R&D tax credits. Make sure you collect and submit all the necessary documents and information.
- Review—this involves reviewing ongoing projects, current processes, project lists and tracking systems to make sure you completely understand your organization and its internal processes. You must present your technical and financial leads involving the tax credit for research and development and reviewing your current processes, tools and etc. From here, you evaluate which potential R&D projects and narrow down the list to the ones that are likely to qualify as R&D projects and activities.
- Gather –next you gather information for the technical request for the issuance of the R&D certificate during the year. Your tax experts should work with you in collecting all the necessary information to support your request from a technical point-of-view.
- Collect financial information –after that you collect all the financial information you need to support your research allowance claim, together with your financial leads. You collect costing information based on the qualified R&D activities and projects in itemized documentation showing eligible expenses on a project-to-project basis.
- Prepare and Submit –once you have all the documents you need; you prepare and submit the technical request and research allowance claim in German after the information for both has been compiled and reviewed.
- Assist –lastly, you provide assistance in any tax audit and appeal proceedings if your technical request for the R&D certificate and research allowance claim is challenged by the authorities.