Tax incentive scheme for research and development

The German Federal Cabinet has adopted a draft law on the introduction of a tax incentive scheme for research and development (R&D). There are plans to pass the law before the end of this year so that the provisions can come into force from 2020. The aim of the following report is to give an overview of the planned new regulations.

Incentive in the form of a tax allowance model

The draft law in question provides for incentives granted in the form of a tax allowance oriented towards the remuneration paid out in the R&D division. A supplementary tax law will govern the general conditions here. The research allowance will be paid out in a tax-neutral way – it would not be included under taxable income and nor would it reduce the personnel costs that would be deductible as business expenses either.

All taxpayers with profit income will generally be able to apply for the allowance. Eligibility for the allowance will not be limited on the basis of the size of the entity nor the type of activity carried out within the enterprise. Consequently, companies of all sizes will have access to grants.

Definition of tax-privileged activities

The grants will be restricted to activities in the field of basic research, applied research and experimental development. It will generally be possible to determine tax-privileged activities on the basis of the following criteria.

The R&D project will have to:

• be aimed at acquiring new knowledge (innovative),
• be based on original, non-obvious concepts and hypotheses (creative),
• be indeterminate in terms of the end result (indeterminate),
• follow a plan and be budgeted (systematic), and
• lead to results that will be able to be reproduced (transferable and/or reproducible).

Other eligibility criteria for individual categories have been included in the draft law in the appendix to Section 2 of the Research Allowance Act (Forschungszulagengesetz-Entwurf, FZulG-E) (see Bundesrat document 242/19).

Please note: Activities intended to further develop an existing product or a method that essentially already exists would however not fall under tax-privileged activities.

Assessment base and amount of tax allowance

The starting point would be the sum calculated for personnel expenses that are subject to payroll tax and eligible for a tax allowance in the R&D division for the respective financial year. The maximum amount of expenses eligible for a tax allowance will be limited to € 2,000,000 in the financial year per each eligible enterprise. The draft law provides for a research allowance in the amount of 25% of the assessment base. Therefore, the maximum research allowance that could be determined would, at most, amount to € 500,000 in the financial year for an eligible enterprise. Affiliated companies will be able to make use of the assessment base only once.

Application procedure

The tax allowance will be granted upon application. The basis for the grant will be the existence of one or more tax-privileged projects. The verification check to ensure that the R&D project is eligible for a grant will remain the responsibility of an appropriate agency outside of the fiscal authority that will bindingly determine the necessary requirements for the processing of applications.

Recommendation: The current draft law on tax incentives for R&D is a first step towards research tax incentives in Germany. While the draft law still leaves numerous questions unanswered, nevertheless, it is important for Germany as a business and research location that such arrangements have got off the ground in the first place. Before the legislative procedure is completed – which should still be this year – there will undoubtedly still be some discussion and also one or more adjustments made to the legal text.