In this article, we provided a definition of R&D projects that would be tax-privileged under the Research Allowance Act (Forschungszulagengesetz, FZulG). In the following, Part II, we list positive and negative examples of such projects. Furthermore, we examine the individual eligibility conditions.
Examples of tax-privileged R&D projects
An official agency will determine whether or not an R&D project is eligible for tax privileges and will confirm this by means of a certificate. Such decisions will thus be subject to case-by-case assessments at all times.
The following examples can be cited of potential R&D projects from the services sector:
- development of new programming languages, operating systems and application software;
- elaboration of significant enhancements for operating systems and application programs;
- creation of new/more efficient algorithms based on new technologies;
- mathematical research related to financial risk analysis;
- development of new data collection methods/tools.
In distinction to the above, there now follow examples of projects that basically do not constitute R&D:
- patent applications, licensing and market research;
- projects where a product or a method essentially already exists and it is merely a question of market development;
- development of application software and information systems for companies involving the use of established methods and already existing software tools;
- addition of user-specific functions to existing application programs (especially, basic functions in the area of data entry);
- web development involving the use of existing tools.
Expenses eligible for tax concessions
Expenses that are eligible for tax concessions include, in particular, the remuneration that is subject to payroll tax of those employees who perform the tax-privileged R&D activities. The respective verified own research activities of a sole proprietor or a partner in a partnership shall be allocated to the expenses eligible for tax concessions up to an amount of € 1,600 per week (max. 40 hours/week multiplied by € 40/hour). In order to be able to provide proof of the work that has been performed, regular records have to be maintained that document precisely and promptly the (total) hours worked.
In the case of contract research, 60% of the remuneration paid by the ordering party to the contractor would be regarded as expenses that are eligible for tax concessions. Other expenses, in particular those claimed under other funding programmes or state aid shall not be eligible for tax concessions.
An overview of other funding modalities
(1) Non-exempt taxable persons within the meaning of the German Income Tax Act as well as the German Corporation Tax Act are entitled to the tax benefits insofar as they generate profit income and fulfil the other requirements of the FZulG.
(2) The assessment base for the eligible expenses incurred in a financial year is limited to a maximum of € 2 m.
(3) The level of support has been fixed at 25% of the assessment base, thus a maximum of € 500,000 in each financial year.
(4) Application procedure – The application for a research allowance has to be made using an officially prescribed set of data via an officially designated interface at the competent local tax office; in terms of timing, the application shall be filed after the end of the financial year in which the expenses eligible for a tax concession arose.
(5) Assessment and payment – It is envisaged that, within the scope of the next tax assessment, the research allowance will be offset against the income tax or corporation tax that has been determined. The research allowance will be paid out if it exceeds the income tax or corporation tax that has been determined.
(6) Restrictions – Only those R&D projects will be eligible for tax concessions where the work commenced after 1.1.2020, or for which a contract was awarded after 1.1.2020; the tax concession will generally be possible in addition to other funding programmes or state aid at an overall maximum of € 15 m per year and per project.
(7) Tax treatment – The research allowance is tax-exempt and is not subject to the exemption-with-progression rule; eligible R&D expenses will be tax deductible.
Conclusion and Outlook: The fact that Germany is now also providing tax incentives for research is to be welcomed. The extent to which taxable persons will be able to avail themselves of the research allowance will always arise as a result of case-by-case assessments. Making the final assessment will be the function of the agency, still to be designated, that will be responsible for issuing the above-mentioned certificates. Further information is available, in particular, on the website of the Federal Ministry of Education and Research. Recently, this Ministry together with the Federal Ministry of Finance published a set of FAQs, however, these contained little news with respect to the question of when an R&D project would be deemed to be eligible for tax concessions.