Germany: Guidance on research allowance, granted as R&D tax incentive

The German Federal Ministry of Finance (BMF) issued guidance with regard to grants of a research allowance—a tax incentive for research and development (R&D). 

• Companies of any size and in any sector that are subject to taxation in Germany (whether non-resident or resident companies) can apply for government funding for their research activities.
• Research activities that began after 1 January 2020 are eligible for funding. Projects in the areas of basic research, industrial research or experimental development are given preferential treatment.
• The research allowance is generally based on the salaries of the research staff participating in the R&D project and their share of working hours on the project. A research allowance (which is not subject to tax) is then paid in an amount equal to 25% of this assessment basis, capped at €500,000 per financial year (€1 million per financial year between 1 July 2020 and 30 June 2026). In the case of affiliated companies, the maximum amount is granted only once each financial year.
• The research allowance is granted not only to companies that conduct research themselves, but is also granted to those that contract with a third party to conduct research for them—for example another company, a university or a research institution based in the EU or the EEA.
• Eligible expenses for contract research are those that amount to 60% of the consideration paid to the contractor by the contracting entity. However, in the case of contract research, the contracting entity receives the research allowance, not the company conducting the research. This can have the effect, especially with regard to inbound structures in which a domestic company is contracted by a non-domestic affiliate to conduct R&D activities, that the corporate group does not receive the research allowance.

According to the BMF, the award of contracts between affiliated companies is not necessarily characterised by an affiliated company conducting the R&D activity on the basis of contractual arrangements usually made between third parties. A fee is not typically always agreed for the services rendered. Instead, the research company usually receives a cost reimbursement plus a percentage profit mark-up, irrespective of the success of the R&D activity.

With that in mind, the BMF established various criteria that, if cumulatively fulfilled between affiliated companies, lead to the assumption of contract research. If all criteria are not satisfied, in-house research of the "contracting" company must be assumed. In such inbound structures, the domestic company could itself apply for the research allowance.

A two-stage process applies for the application and granting of the research allowance:

• In order to receive the research allowance, a certificate must first be applied for stating that it is an eligible R&D project.
• An application to determine the research allowance is then submitted the tax office. The research activities and time spent must be documented as evidence. The documentation of contract research is evident from the invoices issued and contracts concerned.

The research allowance is then deducted from the assessed tax as part of the next tax assessment or paid out in the event of a loss.

Read a January/February 2022 report [PDF 270 KB] prepared by the KPMG member firm in Germany