After decades of prodding from regional and global businesses and industry associations, Germany is finally implementing an R&D tax incentive program similar to those offered by most countries that make up the OECD. The German government has been under pressure to introduce an R&D incentive in recent years amid concerns that the country’s businesses aren’t keeping up with digitalization and new technology.
The Research Allowance Act (Forschungszulagengesetz), approved on November 29, 2019, by the German Federal Council (Bundesrat) and due to enter into effect on January 1, 2020, is a tax incentive that hopes to breathe new life into spending on technology among small and medium-sized businesses while strengthening Germany as a business location for companies of all sizes. It was passed in the face of a slowing economy and fears that the country is losing ground in the global race for corporate investment and settlement.
Many U.S. companies already have R&D interests based in Germany thanks to the industry clusters Germany has built utilizing a high-quality workforce. Until now, however, unlike many developed countries, Germany’s tax system has not directly rewarded business investment in R&D. While almost all of the 36 OECD countries have already shifted from directly funding R&D to providing tax incentives, Germany has lagged behind, making it one of just five OECD countries that don’t currently have R&D tax incentives.
Long anticipated, the new incentive would basically come in the form of a cash subsidy of 25% of what a company spends on R&D salaries and wages, up to EUR 500,000 each year. The subsidy itself will not be subject to taxation, and it is refundable if it exceeds the taxpayer’s tax liability. Refundable tax credits are normally only available to small medium enterprises (SMEs), making it an intriguing differentiator for Germany, as does the fact that it permits an ex-post application for funding and improved predictability due to legal entitlement to the R&D tax credit.
Some site selection professionals are concerned that it isn’t a big enough enticement, falling short of tax incentives offered by neighboring countries like France and the UK. However, this new incentive will be made available to a broad range of R&D activities and will complement the highly developed German public grant system that the country currently uses to target specific R&D initiatives. Companies conducting research in Germany may now “stack” the tax incentive with both national and EU R&D grants for greater funding possibilities. Lucrative small and mid-sized business sectors that often lack large R&D budgets (or the resources to take on Germany’s public grant application process) will find this a welcome boon, as will multinationals when seeing the combination of opportunities via the subsidy, advanced public grant system and the wide spectrum of R&D activities covered.
Put simply, the new R&D tax credit is available for personnel expenses and fees for subcontracting related to any activity that relies on a technical discipline to improve a product or process. Funding is open for three types of projects: (1) a company’s own R&D projects, (2) cooperative projects (e.g., with universities) and (3) contract research. Note: only 60% of the amount paid for contract research will be accepted as eligible costs.
Businesses that already have R&D activities in Germany–or are considering establishing R&D in Germany–need to:
Companies will need to apply for a certificate by a certifying body (outside the finance administration) confirming that the conducted activities qualify as R&D based on the EU definition. R&D certificates and research allowance claims can be applied for at almost any time, but it is probably best to do so during the year in real time to avoid a last-minute rush. Following these steps will help you make sure you collect and submit all the information required.
R&D incentive regimes are evolving at a rapid pace around the globe, with many countries acknowledging the importance that tax incentives play in supporting innovation, establishing new industries and growing knowledge economies. Businesses that take advantage of these incentives will be able to reduce the cost of research or drive more innovation at the same cost. Working with an experienced tax, site selection and incentives team to help you maximize your new German tax credit in conjunction with grant programs will provide an advantage by minimizing the time spent on the application process and ensuring funding sources are considered.
In addition to gathering and presenting in this publication information from our own team of site selection and incentives advisors, we partnered with Varsha Ramlal, Funding and Innovation Consultant at The European Funding Alliance.
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