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The Tax Credit For Research and Development: Germany’s Tax Credit for R&D

In the current economic climate brought about by the global coronavirus pandemic, many countries around the world are looking for ways to support struggling businesses and revive their economy. In Germany, the Die Steuergutschrift Für Forschung Und Entwicklung or Research and Development tax incentives prove to be quite useful in maintaining their attractiveness to international investors. This tax incentive also helps strengthen the competitiveness of both small and large-scale businesses. 

A tax Incentive to Boos the Country’s Economic Recovery

In June 12, 2020, the German government approved a fiscal package recovery plan amounting to a whopping 130 billion euros. Almost half of this amount (around 60 billion euro), will be allocatd to education, research and innovation. According to Germany’s research minister Anja Karliczek, the economic stimulus package will allow businesses to fight back against the negative economic impact of the Covid-19 pandemic. This also hopes to reposition Germany’s competitiveness in the global scale. 

Germany’s R&D tax relief program took effect on January 1, 2020, in hopes of stimulating increased R&D spending by business enterprises on technological development. The government hopes to encourage German companies to develop new technologies and strengthen the country’s global position in terms of innovation.

A New R&D Tax Program Offered in 2020

Despite the fact that it was only established recently, Germany’s Die Steuergutschrift Für Forschung Und Entwicklung has undergone quite a lot of significant improvements. 

Under the Forschungzulagengesetzou scheme, companies or individuals subject to income or corporate tax in the country, may apply for subsidies amounting up to 25% of their research and development activities. The tax incentive, which was initially capped at 500,000 euros per year, has been doubled up to 1 million euros per year, for companies of all sizes. Another upside to this tax incentive is that it will also be reimbursable, which will definitely produce positive results for innovative companies in the coming years. 

As with any OECD countries, Germany’s Die Steuergutschrift Für Forschung Und Entwicklung tax relief system uses the Frascati Manual to define eligible activities. 

What is the Frascati Manual? It is defined as a document which lays the methodology for collecting statistics related to research and development. The Frascati Manual is an essential tool used by statisticians and science and innovation policy makers in OECD countries. 

The following activities fall within the scope of German R&D indirect aid:

  • Basic research
  • Applied research
  • Experimental development

Qualified expenses include salaries of employees working on research and development projects and the costs of subcontracting related to any R&D activity performed in a Member State of the European Union or within the EU Economic Area. 

Companies and businesses applying for the R&D tax incentive need to apply in two stages:

  1. Obtaining a technical R&D certification from a certifying body proving that the R&D project is eligible. 
  2. Submit this electronically to the tax center

Keeping Germany’s Competitive Edge

The disastrous impact of the Covid-19 pandemic has led to countries setting up recovery plans meant to stimulate or revive their economies and increase their attractiveness to foreign investors. 

The German government announced on June 4, 2020 that they would allocate a significant amount of their recovery plan to education, research and education. This decision to increase the amount of qualified expenses for the “FZulG” scheme up to 1 million euros, has been quite beneficial to many large and mid-sized companies in the country. 

But Germany’s recovery plan does not end there. 

Anja Karliczek, Germany’s Research Minister, also announced that they would allocate 13 billion euros to support green hydrogen, future technologies, quantum technologies and artificial intelligence, which are highly regarded as necessary to modernization.

Additional funding will also be provided to the “research and production of vaccines” as well as medical products and for the “digitalization of the health system”.

Germany joins other OECD countries, such as Spain, France and the United Kingdom, in providing generous support to innovation.

Does Your Business or Company Qualify for the R&D Tax Credit?

Pretty much all types of businesses qualify for the Die Steuergutschrift Für Forschung Und. From sole proprietorships to partnerships, to huge corporations. 

The only companies that do not qualify for the credit are those that fall under the General Block Exemption (GBER) regulation. But since the GBER exemption focuses only on businesses in financial difficulty, you shouldn’t worry at all.

In addition, all startups, profitable and loss-making businesses qualify for the credit as well. It’s not important whether your startup is not profitable yet (thus it doesn’t have any corporate tax liability to offset against the R&D tax credit). 

Rather, loss-making businesses (especially startups) can carry forward the tax credit they are entitled to in the future. In this situation, they can decide to use it when they become profitable, reducing their tax expenses accordingly. 

What is Qualifying R&D?

Qualifying R&D refers to any expense that falls under the categories of industrial research, fundamental research or experimental development. You can claim any business expenses under any of these categories. This includes, for example, development expenses for software businesses. 

However, there are a couple of exceptions. For example, a business does not qualify for the R&D credit for projects which are:

  • Already established and their only objective involves market development (or commercialization). 
  • Considered as routine development (for example, regular improvements)

This is why before you apply for the R&D credit, you must evaluate the costs incurred by your business and whether they fall under research and development and aren’t purely related to commercialization or regular upgrades of your product (s) and service (s). 

How Much Are Can You Claim?

How much you can claim from the R&D credit depends on the type of expenses you incur. There are two types of R&D expenditures that can be claimed under the Die Steuergutschrift Für Forschung Und.

  • Salary and Wages –salary and wages (plus social benefits expenses) of employees and personnel involved in the R&D activity can be claimed at around 25% rate. This means that if you spend 1 million euros in salaries in a fiscal year for your back-end engineers, you’re entitled to around 250,000 euros back in tax credit.
  • Subcontractors –any expenses by subcontractors related to R&D can be claimed at around 15% rate. For example, if you spend 1 million euros in a fiscal year for a third-party engineering company to develop your company’s proprietary fulfillment tracking system you can get back around 150,000 euros in tax credit. 

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