Since the beginning of 2020, a new instrument for promoting research in Germany has been available in the form of the tax research allowance, with which companies can receive an allowance of up to 500,000 euros per year for their research expenses. The tax research allowance is particularly interesting due to its relatively easy access. This is particularly true compared to established mechanisms in research funding, such as the project-based funding mechanisms ZIM and INNO-KOM. This design makes the tax-based research allowance particularly interesting for small companies as well as for research projects and research institutions that do not qualify for other funding. Under certain circumstances, it is also possible to combine the tax research allowance with project-based funding mechanisms.
Legal basis: German Research Grant Act (FZulG)
The legal basis for the tax-based research allowance is the “Law on the Tax-Based Promotion of Research and Development”, which came into force on 01.01.2020.
The research allowance law is available here.
In addition, Section 14 FZulG contains a number of ordinance authorizations on various issues concerning the practical implementation of the Research Allowance Act, in particular on the application procedure and the assessment of research projects.
Who can be funded by the tax research allowance
The German tax research allowance is primarily aimed at small and medium-sized enterprises, but is not limited to them. In principle, the funding opportunity is also open to large companies. The tax research allowance does not differentiate according to the legal form of the company. In principle, therefore, even research projects by individual companies are eligible for funding, as Section 3 (3) Sentence 1 FZulG explicitly clarifies. In this context, the research allowance is likely to be of particular interest to service providers in the engineering sector with a very small structure. Furthermore, there are no restrictions in terms of industry or the company’s region.
Eligible research projects
According to Section 2 (1) FZulG, research and development projects are eligible if they are basic research, industrial research or experimental developments. Allocation to more than one category is not detrimental. The aim of the project must be to solve a precisely defined, indivisible task of an economic, scientific or technical nature, with clearly defined objectives. Projects that aim to improve an existing product or process, especially to improve sales opportunities, are excluded from funding.
Type of research and amount of funding
In addition to expenses for in-house research, expenses for contract research by third parties are also eligible for funding.
Combination of the research allowance with other subsidies and allowances for research projects
Another economically interesting aspect is that, under certain conditions, the research allowance can be combined with other grants and allowances for research projects (for example, those from project-based funding mechanisms). According to Section 5 (1) FZulG, the research allowance can be granted in addition to other subsidies or state aid for the beneficiary research and development project. This is restricted by Section 5(2) FZulG, according to which eligible expenses may not be included in the assessment basis for the research allowance if they were or are funded under other funding or state aid. This also applies if the other funding comes from Union funds.
As a result, such research expenses that are not part of the assessment basis for allowances and subsidies of another governmental research funding can therefore be included for the tax research allowance without further ado.
Use of the research allowance by non-profit research institutions
Research institutions with a non-profit legal form are not excluded from the tax research allowance, but the research allowance is less attractive for them.
Research institutions with a non-profit legal form are not excluded from the research allowance in principle. However, according to Section 1 (1) of the FZulG, only companies that are taxable within the meaning of the Income Tax Act and the Corporation Tax Act are eligible for the research allowance, insofar as they generate income according to Section 2 (1) sentence 1 numbers 1 to 3 of the Income Tax Act and are not exempt from taxation. In the case of research institutions with recognized non-profit status, such a tax exemption will regularly exist for activities in the non-material sphere and in special-purpose operations. Research expenses incurred in these areas are not eligible for the tax research allowance. The situation is different if expenses for research projects are to be allocated to the economic business operation and the taxation thresholds are exceeded there.