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Germany – draft bill on R&D tax incentive

20 June 2019

A new research and development (R&D) tax incentive shall encourage mainly – but not exclusively - small and medium-sized enterprises (SMEs) to invest in R&D activities in Germany. These shall be supported by a so-called research allowance (“Forschungszulage”) of up to EUR 500,000 per year.

Described in simple terms, 25 % of the wages and salaries of the researching employees will be reimbursed, while it is of no importance if the enterprise generates a positive income or a loss - a clear advantage for start-ups suffering losses when setting up their business.

On 17 June 2019, the Federal Government submitted the draft bill on tax incentives for R&D in Germany (Forschungszulagengesetz - FZulG) to the Federal Parliament (Bundestag). If it passes, it will come into effect after its publication in the Official Gazette.

Enterprises need to be aware that only wages and salaries as from the year 2020 onwards will be taken into account and that the law can be applied only for projects that start after the publication. 

Therefore, it might be worth to stop initiating new R&D projects now and to start them once the law comes into effect.

A first overview:

The main aspects:


Generally, the research allowance is available to all personal income or corporate taxpayers. In other words, corporations, partnerships and individuals can benefit, since there are no restrictions regarding size or business model.


R&D projects are eligible if they belong to one or more of the categories basic research, applied research or experimental development. The annex to the (draft) bill further defines these categories. “Experimental development”, for example, includes further specified work directed at the manufacture of new or improvement of existing products or processes. The development of new products or processes is only included if these fulfill the criteria for identifying R&D activities. The definitions and examples of the OECD Frascati Manual will be applied. In contrast, R&D projects are excluded from the eligible categories if a product or process has already essentially been defined and the primary objective of the activity is market development.


The determination of the research allowance is based on the taxpayer’s personnel expenses subject to wage tax deduction (eligible expenses). To recognize social security contributions the amount of eligible expenses is multiplied by a factor of 1.2. The amount is limited to a maximum of EUR 2 million per year. In case of related entities, this maximum amount applies for the whole group.

Eligible expenses are personnel expenses incurred after 31 December 2019. A formal application is required to receive the research allowance. The allowance amounts to 25 % of the eligible expenses, i.e. a maximum of EUR 500,000 per financial year. The amount of research allowance is not subject to (corporate) income taxation for benefitting taxpayers. The research allowance may be cumulated with other incentives. However, in order to avoid double funding, no other subsidy may be granted on the same eligible expenses.


SMEs often do not maintain their own R&D department and usually commission specialized institutions with R&D activities. According to the regulations in the current draft bill, the research allowance can be granted only to the commissioned contractor. Although the economic risk in case of such a research contract remains with the principal, he cannot benefit from the research allowance.

As this is the main point of criticism of the allowance, the Federal Council (Bundesrat) has appealed to the Government to amend the draft bill accordingly.


The current draft bill provides that the eligible taxpayer may apply for research allowance at his local tax office after the end of the financial year, in which the eligible expenses occurred. The application must be accompanied by a certificate confirming the eligibility of the research project. The certificate must be requested separately from an institution yet to be determined.

Since neither a processing time for the issue of the certificate nor a processing time for the research allowance application itself is provided in the draft bill, taxpayers need to prepay the personnel expenses and it might be that they cannot even plan with the subsequent liquidity equalisation through the research allowance with certainty.


Before its entry into force, the draft bill still needs to be approved by the Federal Parliament and Federal Council.

We will be pleased to support you if you have any further questions.