Input tax deduction for research institutions also for basic research

• Newly formulated regulation in section 2.10 UStAE offers input tax potential for numerous universities
• Due to legal uncertainties, the regulation is not yet frequently implemented in practice.
• At the level of the individual higher education institution, opportunities and risks can be determined and weighed with legal certainty

The regulations on entrepreneurial status and input tax deduction for research institutions were supplemented in the letter of the Federal Ministry of Finance (BMF) of 27 January 2023 in the VAT Application Decree in section 2.10, paragraph 10. In doing so, the BMF - surprisingly for many - broke with the previous legal practice of the tax authorities on the scope of the entrepreneurial area of a research institution. 

Until the new regulation, the entrepreneurial area of a research institution consisted, in the view of the tax authorities, of in-house research, contract research and technology transfer, insofar as the intention was to use the research results to generate income in the long term. Now, basic research can also be attributed to the entrepreneurial sphere for the purposes of input tax deduction if it serves to increase the entrepreneurial sales activity and strengthen the market position due to a factual connection. The BMF letter does not place high demands on this connection if basic research and business sales activities are in one organisational unit. 

As research institutions, many universities should be able to benefit from the extended possibility of input tax deduction in the area of basic research, especially since the new regulation is applicable to all cases that are still open. Thus, an input tax deduction - made possible by the new administrative view - may even result for assessment periods for which VAT returns have already been submitted.

In the practical implementation of the new regulation, which is favourable from a tax point of view, many universities have so far been reluctant. This is mainly due to three aspects that are perceived as obstacles or risks. These are

• Possible implications under state aid law due to the expansion of the university's economic activities,
• possible claims for repayment by the funding agencies or funding cuts by them if an input tax deduction is claimed from the area of basic research, and
• possible tax risks and additional burdens from tax audits and special VAT audits, which could be ordered after extending the input tax deduction to the area of basic research.

Due to the requirements for the organisational location of basic research and the necessity that this serves the entrepreneurial sales activity, an assessment under tax law must be made in each case on the basis of the specific features of the individual university. In a first step, an estimate of the economic volume of the possible input tax deduction from basic research must be made as a starting point for further steps. 

A subsequent detailed tax analysis of the input tax deduction from the area of basic research primarily serves as documentation and assertion vis-à-vis the tax authorities. It should adequately map any countervailing tax risks of the university and take them into account in the process. In addition, it can serve as a basis for further discussion with the funding bodies and for clarifying possible legal issues in the context of state aid law.