In Germany, the law on tax incentives for research and development allows tax breaks for research expenses. Certification bodies examine the documentation submitted by the company and then grant a Die Steuergutschrift Für Forschung Und Entwicklung certificate. The maximum refund or credit an applicant can receive is €750,000 in 2020 and €1 million from 2021 to 2026.
Eligible companies for Die Steuergutschrift Für Forschung Und Entwicklung
Entities having limited or unlimited tax liabilities can qualify, given that they are not tax-exempt, under the Corporation Tax Act Income Tax Act. They must also meet the other application requirements to be eligible for this incentive. These companies fall under four classifications:
- Sole proprietorships
- Domestic permanent establishments
Note that partnerships can qualify as well, even though their income is subject to a corporation or income tax through their partners.
What are companies ineligible for this tax incentive?
The General Block Exemption excludes particular categories, including those facing financial difficulties from the tax incentives. For this reason, it is important to request an assessment application following the GBER before applying for the tax credits. Moreover, companies must meet the criteria of the GBER during the entire funding period, which means that a continuous examination of the framework conditions and relevant figures is crucial in the application process.
Research and development projects for Die Steuergutschrift Für Forschung Und Entwicklung
According to the GBER, research and development projects are eligible for tax incentives if they fall in any of the categories below:
- Industrial research
- Fundamental research
- Experimental development
However, projects would be ineligible if a product or process already exists and the only objective is market development. The same goes for routine development.
Pay attention to the product description when applying for eligibility. It can be challenging to practice because of the limited text length you can submit. You must be familiar with the formulation to increase the success rate of your research allowance application.
How to apply for Die Steuergutschrift Für Forschung Und Entwicklung research allowance
The application process requires two steps: the first step is focusing on the research and development project, and the second step is claiming incurred the project costs.
Step 1: Technical project application
In this stage, submit the technical project application to the Certification Office for Research Allowance. It is the responsibility of the certification body to verify that this is an R&D project. It is crucial to meet the following research and development requirements:
- The project must revolve around research (gaining new knowledge)
- The project must be creative yet original
- The project must systematically follow a plan
- There must be uncertainties related to the end-result
- The project must be available for transfer and reproduction
Once the certification body confirms that the project is an R&D project, you will have the legal right to the funding. They will then forward the notice directly to your tax office.
Step 2: Claiming the research allowance at the tax office
The first step revolves around proving that your project is an R&D project, but the second step focuses on the project costs. You can claim these project costs yearly. To do this, you must determine and document the expenses.
You will not receive the money immediately. Instead, the tax authorities will consider the documentation for the initial assessment. They will use the amount receivable against the assessed tax. However, if the allowance exceeds the income or corporation tax, it will be released as an income or corporation tax refund.
Granting Die Steuergutschrift Für Forschung Und Entwicklung
Outsourcing is when the company hires an outside contractor to perform work, whereas in-housing (or insourcing) assigns work to existing employees.
The wages of the employees responsible for the research and the tax-free expenses are eligible for tax incentives. Keep these documents, as the certification body will need them for the assessment.
The tax incentive is impossible if the company performs research on behalf of others. But if they satisfy the requirements, the client will receive the research allowance. To conclude, the contractor will also receive incentives if the amount exceeds the income or corporation tax.
To further help you understand, contracts that involve developing products on behalf of a client can result in in-house research by the researching company or the contractor, depending on what the contract entails.
Contract research considers 60% of the compensation paid to the contractor. This is a flat rate equivalent to the share of labor wages. Individual proof of the contractor’s employee expenditures is unnecessary, so it does not qualify for research allowance.
Because of this, contract research can be beneficial for capital-intensive R&D activities. In this case, there is room for optimization because it is irrelevant to obtaining tax incentives.
Ultimately, research allowance is not only available to domestic contractors. Qualifying projects also include contract research where the contractor is in a state that follows the EEA agreement or a member state of the EU.
Make sure that the contracts strictly comply with the requirements. While tax authorities do not touch this, they follow general guidelines on contract research. They were checking the arrangements before the assessment can prevent them from not granting the research allowance.
Regardless of the size, legal form, and industry, any company is eligible for Die Steuergutschrift Für Forschung Und Entwicklung research allowance. It is, however, subject to approval – you must submit your application first. After the end of the fiscal year, you can head to the tax office and file your application for the research incentive, following the prescribed data set.
The application will require a certificate that confirms the eligibility of each R&D project listed within the application. The Research Grants Certification Ordinance will then take care of it from here.
Work with an R&D allowance advisor to check if your company meets the federal government’s innovation test. They will help you identify and document eligible activities in claiming the research allowance you deserve.