After years of hesitation, Germany has finally introduced the Die Steuergutschrift Für Forschung Und Entwicklung, or a tax scheme that aims to promote investment in Research and Development (R&D) activities. This tax incentive program is similar to the ones offered in countries belonging to the OECD or Organization for Economic Cooperation and Development.
The German government has implemented this R&D tax break after years (decades, in fact!) of prodding from all sides including regional and global business organizations and industrial associations. The German government has finally given in to the pressure after owing to concerns with the country’s businesses’ ability to compete with digitalization and advancing technologies.
The German Federal Council approved the Research Allowance Act on November 29, 2019. This Act came into force in January 1, 2020 offers companies a tax credit of around 25% of the declared R&D expenditure.
The Tax Credit for Research and Development hopes to stimulate or bring new life to spending on technology by small and medium-sized companies. The Research Allowance Act also allows Germany to establish itself as a business hub for companies of any size and industry. Germany’s R&D tax credit act was passed amidst a slowing economy and fears that the country is losing its ground in the corporate investment and settlement aspects in the world in 2022 into 2023.
Many companies in the United States have already taken interest in R&D based in Germany thanks to the high-quality, established workforce in Germany. Compared to many developed countries, Germany’s tax system doesn’t directly reward entities for their R&D investments. With most of the OECD countries shifting from direct funding for R&D activities to rewarding tax incentives, Germany has fallen behind and felt the pressure of being one of the five out of 36 OECD countries that do not provide R&D tax credits.
But the Tax Credit for Research and Development incentive comes in cash subsidy form amounting to a maximum of 25% of company R&D including wages and salaries. This can add up to 500,000 EUR per year. The subsidy from the R&D activities is not subject to any taxes itself, and they can be refunded to the taxpayer if it goes beyond tax liabilities. Consequently, the refundable tax credits are only awarded to SMEs or small and medium-sized businesses which makes an interesting qualifier for Germany. Another thing that makes the Tax Credit for Research and Development unique from other R&D tax credits is that it allows for ex-post application for funding, and improved predictability due to the legal entitlement to R&D tax credit.
There are some concerns that the tax incentives Germany’s R&D tax credit offers is not big enough to entice businesses compared to its neighboring countries such as the UK and France. The new R&D tax credit, however, will be made accessible to a wider range of activities under R&D and will add to other highly-developed public grant systems in the country that are presently used to target R&D-specific activities.
Organizations and businesses conducting research and development activities in Germany may now use the R&D tax credit with both national and European Union grants for R&D to get better funding opportunities. With this incentive, small and medium-sized businesses that often lack enough R&D budget or the German public grants, will now be able to enjoy this new tax incentive as a welcoming bonus. Multinational companies will also see this abundance of opportunities as an all-in card.
Things to Consider About Germany’s R&D Tax Credit
In simple terms, the Die Steuergutschrift Für Forschung Und Entwicklung is available for expenses related to personnel and fees for subcontracting activities that are related with the technical disciplines in hopes of creating, developing, or improving a product or process. Funding is usually open for three types of R&D projects such as:
.A business’ R&D activities or projects
.Cooperative projects, including those with universities
.Contract researches where only 60% of the costs involving contract research are qualified or acceptable costs
Eligible Taxpayers
Germany’s R&D tax incentive can be granted to all taxpayers in Germany regardless of whether they’re subject to unlimited or limited income taxes, so long as they are not tax-exempt. The Research Allowance Act does not get to pick and choose between entities. They do not discriminate between sole proprietary, partnerships, or corporations. Non-resident taxpayers in Germany qualify for the credit after they present enough proofs of nexus to Germany.
The Die Steuergutschrift Für Forschung Und Entwicklung tax incentive is awarded to companies regardless of their taxable profits. This can mean that taxpayers that are making a profit will be granted a tax credit against their income taxes, and taxpayers that lose profit will be granted a tax credit in cash subsidy form, in practice.
Qualified Research and Development Activities
Activities that may qualify for Germany’s R&D tax credit are classified into three:
.Fundamental research
.Industrial research
.And experimental development
These are all subject to the definitions of the EU regulations.
Qualified R&D activities should have begun after January 1, 2020. Activities that are focused more on market development and improvements of production systems do not qualify for the incentive.
Forms of Conduct for R&D
Qualified R&D activities may be performed either in-house by the taxpayer company/entity itself or done through contract research. Contract research may qualify if the contractor is based in Germany or in another EU or EEA member state.
The new law on Germany’s R&D tax credit provides large tax planning opportunities especially when we talk about cross-border context. In addition, the R&D activities may be done in collaboration with one or more beneficiaries and at least one or more entity for research and propagation of knowledge such as colleges and universities.
Qualified Expenses
Germany’s R&D tax credit assessment base is made up of wages that are subject to wage taxes in the country and expenses for protecting the employee’s future such as statutory pension fund contributions. However, these costs related to the Die Steuergutschrift Für Forschung Und Entwicklung only qualify to the degree the employees have performed the R&D activities for qualified or eligible R&D projects as well.
