The Research and Development Tax Credit: A Comprehensive Guide

The statute on Die Steuergutschrift Für Forschung Und Entwicklung (Research Allowance Act, FZulG) permits tax reductions for research spending. Following an investigation into the applicant’s compliance with the substantive requirements, the certification authority issues a certificate stating that a beneficiary R&D project does exist. For the year 2020, the maximum credit or refund is 750,000 euros, whereas for the years 2021-2026, it is one million euros.

What Are the Possible Advantages That Could Come From Utilizing the R&D Tax Credit?

If a corporation is eligible, claiming research and development tax credits might result in considerable cost savings and these advantages include the following:

• An increase in the flow of cash
• Relief from income taxes for companies that are operating at a loss
• Submit a credit request for open tax years that occur before 2020. If the R&D initiatives have already been planned, then applications for subsequent years might be submitted in advance as well.
• A decrease in the tax rate that you pay

Qualifications To Receive Die Steuergutschrift Für Forschung Und Entwicklung

COMPANIES

Any businesses that are obligated to pay taxes in Germany according to the terms of the Income Tax Act and the Corporation Tax Act, insofar as they create revenue in conformance with Section 2 Paragraph 1 Sentence 1 Number 1 to 3 of the Income Tax Act, are eligible to make a claim. This includes businesses of any size, legal structure, or sector.

In the event of a co-entrepreneurship by the provisions of Section 15 paragraph 1 sentence 1 number 2 of the Income Tax Act, the co-entrepreneurship acts in place of the taxpayer in the capacity of a beneficiary.

Activities Eligible for Die Steuergutschrift Für Forschung Und Entwicklung

• Automation or enhancement of internal production procedures
• Software development of new and enhanced versions
• Integration of modern equipment
• The development of data centers, big data, and data mining instruments
• API integration and other technology
• Innovation in financial technology
• Employing external experts for any of the above activities
• The creation of new or enhanced items
• Creation of prototypes, first products, and models Evaluation of alternative substances Evaluation of alternative substances
• Firmware development
• Creation and enhancement of network hardware as well as software
• The creation of simulators
• Risk management system development

Process of Applying for The Research Allowance

The application consists of two steps. In the initial phase, the research and development project is being prioritized while in the second phase, this consists mostly of claiming the incurred project expenditures.

Phase 1: Technical project proposal

A request for Research Allowance must be made to the Certification Office for Technical Projects. Although it also gets some commercial data and an approximate cost estimate for your project, the certifying body’s primary responsibility is to determine whether yours is a research and development project. To do this, the following conditions must be met:

• It should be novel, thus the initiative must seek to acquire fresh information 
• It should be creative, thus it must be unique
• It should be done systematically, thus it should follow a strategy and adhere to a budget
• It should be uncertain, thus there must be ambiguities regarding the outcome; and
• It should be transferable and/or reproducible, thus there should be opportunities for repeatability.

If the certifying organization verifies that your initiative is a research and development project, you are legally entitled to receive financing. To this end, the certifying organization sends the notification immediately to your tax authority.

Phase 2: Tax authority assessment of the research allowance

While the first step focused on demonstrating that your project is a research and development project, the second phase is concerned with the project’s budget. Annually, the project expenses are claimed against the. To do this, the qualifying expenditures must be established and documented with precision.

The research allowance will not be paid out promptly by the tax authorities but will be credited against the assessed tax in the course of the next initial assessment of income or corporate tax. If the calculated research allowance surpasses the revenue or corporation tax, the excess amount will be returned as a refund of the income or corporate tax.

General Information That You Should Know on Research Allowance

The law that provides tax breaks for companies who engage in research and development (FZulG; BGBl I page 2763) becomes operational on January 1, 2020. The legislation allows for tax benefits for research expenditures by German enterprises that are subject to taxation, regardless of the company’s size, legal structure, or industry. The purpose of the law is to offer incentives for companies to engage in research and development (R&D). The purpose of this effort is to increase Germany’s attractiveness as an investment site and to bolster research endeavors, particularly in businesses of a medium and small scale.

Qualified Research Costs

In General:

• In Germany, taxable income includes wages, salaries, and benefits received upon retirement.
• Work performed by a sole proprietor or independent business at a rate of 40 euros for each verifiable hour of labor (max. 40 hours per week)

Contractor Costs:

• 15% of the total amount spent on qualifying
• Must be a resident in the European Union or the European Economic Area country

Tests For Qualified Research Qualification

Basic Research 

• Work using either theory or experiment
• Without having any direct application or use in the commercial sector

Industrial Research

• Innovative merchandise, procedures, or services
• Improvements of a significant kind made to products, processes, or services
• Components that make up more complicated systems
• Pilot lines to test and validate production processes or technological validation

Experimental Development

Obtaining, combining, designing, and using prior knowledge in the following areas:

• Creation of brand-new or significantly upgraded goods, procedures, or services
• The creation of concepts, in addition to planning and documentation
• Testing, validation, prototyping, and piloting are the steps involved in the validation process.
• Should not be considered to be “basically fixed” in the market.

Does not entail making regular or recurring adjustments to the existing:

• Services, continuous activities, as well as goods, production lines, and manufacturing processes

Criteria to Make the Project Qualify for the R&D Tax Credit

1. It aims to acquire new knowledge

• On the German market, is there a product or method that is analogous to this one?
• Who are your most significant rivals, and how is your offering unique in comparison?

2. The project must be unique

• Innovative merchandise, procedures, or services
• Improvements of a significant kind made to products, processes, or services

3. A plan and a budget must be followed

• What exactly is the purpose of this project?
• To accomplish the desired result of the project, what actions/tasks and procedures were carried out?
• Do you have official budgets for the project that you are working on?

4. The result must have calculable risks

• In what ways can the endeavor be fraught with scientific and/or technological dangers?
• What obstacles can prevent the project from being successful?
• Which trials were conducted, and which other options were taken into consideration?

5. The possibilities of reproducibility (i.e., transferable and/or reproducible) are present

• When may the possible commercialization or introduction to the market be anticipated?