On 29 November 2019, the Bundesrat gave its consent to a law regulating tax incentives for research and development (Forschungszulagengesetz (FZulG) – research incentives act), on the basis of which annual funding of research and development activities in the amount of up to EUR 500,000 is available from 2020 onwards. The purpose of the act is to strengthen Germany's position as a place to do business.
In the case of companies using their own research staff, 25% of wages and salaries, together with tax-exempt social insurance contributions, will be offset against the annual tax demand, and any remaining overhangs will be refunded. The refund enables companies to profit from the concession even during loss phases, making the incentive scheme attractive to new companies with start-up losses as well.
This also applies to commissioned research, which was excluded from the original bill. The concession, which accrues to the client and not to the contractor, works out as 15% of the consideration paid to the contractor. The concession rate continues to be 25% in this case too, but it applies to only 60% of the fee.
Further details on the key points:
Potential beneficiaries include entities with limited or unlimited tax liability within the meaning of the German income and corporation tax act except where they are tax exempt and provided they fulfil other conditions. Entrepreneurs and partnerships are also entitled to benefit from the provisions of the new act.
"Affiliated" companies within the meaning of the German stock corporation act may only be granted the maximum tax concession once, whereas companies in contractual cooperation are each separately entitled to it.
Research and development projects
To be eligible for tax concessions, research and development projects must be assignable to one or more than one of the following categories: fundamental research, industrial research or experimental development.
The development of new products or techniques is only classified as experimental development if it satisfies specific criteria. Projects do not qualify for a tax concession if the product or technique has already, in essence, been established and the only priority, i.e. the primary objective, is how it will perform on the market.
Beneficiary research and development projects will be determined in accordance with the criteria for general block exemption (AGVO) (Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty on the Functioning of the European Union; Official journal L 187 of 26 June 2014 p.1).
It remains to be seen how this classification procedure will work in practice. It is, however, evident that at least the coalition parliamentary parties expect there to be classification difficulties because, during the consultations on the bill, they called on the government to ensure that the bill provided for external experts is only to be involved in the procedure in exceptional cases.
Exclusion of specific companies
The AGVO excludes companies facing difficulties from eligibility for the research incentives. This exclusion covers both the period of implementation of beneficiary research and development projects and the time when the research incentives are applied for. It is therefore necessary to clarify whether a company may be excluded under AGVO terms before an application is filed.
Where the research is done by the beneficiary company's own staff, the wages of the research personnel that are subject to the deduction of employee income tax will be eligible for the tax incentives, as also will be the tax-exempt costs actually incurred with a view to safeguarding the employees' future (social insurance contributions).
Evidence thereof must be provided in the form of verifiable documentation. This is likely to involve administrative work and effort when, particularly in the case of small and medium-sized companies, the wages of employees whose services are not used exclusively for the eligible research project need to be split.
In the case of commissioned research, the subsidy applies to 60% of the fee paid to the contractor. The percentage rate produces an across-the-board share which is to be applied to the relevant wages paid by the contractor. It is not necessary to provide itemised evidence of the contractor’s personnel costs, nor can such evidence be used to justify an increase in the percentage.
The tax incentives provided for commissioned research are not confined to orders placed with domestic contractors. Classification as a beneficiary project is also possible for commissioned research where the contractor is resident in a member state of the European Union or in any other state to which the terms of the agreement on the European Economic Area (EEA Agreement) apply.
Special provisions for entrepreneurs and partnerships
The act contains special provisions governing sole entrepreneurs and partners in a partnership. It provides for verified own research by sole entrepreneurs and partners to be eligible for tax concessions at a flat rate (EUR 40 per hour of work and a maximum of 40 working hours per week). This enables entrepreneurs who are not organised as a corporation to profit from the tax concessions as well.
Maximum amount and research incentive
The research incentive is set at 25% of the assessment basis, which is limited to an amount of EUR 2,000,000. This means that a maximum of EUR 500,000 may be drawn on per year.
The incentive amount is formally stated in a separate notice of assessment and credited in full against the assessed tax amount at the next assessment of income and corporation tax. If the incentive amount is higher than the assessed tax amount, the difference is refunded, which makes it possible for companies to receive payment at a rate of 100% during loss phases.
Excess expenditure can in certain cases be given preferential treatment in the form of other support measures. The act expressly provides for the possibility of combining various forms of aid. However, the expenditure which has been incorporated into the assessment basis of the research incentive may not be included within the scope of other funding or grants. This serves to exclude any double preferential treatment of the same expenditure.
The tax concessions are dependent on application. The beneficiary may file an application for a research incentive in accordance with the officially prescribed data set after the end of the particular financial year.
One of the documents accompanying the application has to be a certificate confirming the eligibility for a tax concession of every research and development project listed in the application. Details are regulated by the Research Incentive Certification Ordinance (Forschungszulagen-Bescheinigungsverordnung - FzulBV) of 30 January 2020.
This certificate must be applied for separately at an office which has yet to be designated by the Federal Ministry of Education and Research.
Coming into force and scope of application
The act came into force on 1 January 2020.
Preferential treatment is given only to projects on which work is started after 01 January 2020 or which are commissioned after this date.