Research allowance from 2020

Last Friday, November 29, 2019, the Federal Council approved the Research Subsidy Act. This clears the way for tax incentives for R&D activities from January 1, 2020. Through the allowance, companies will benefit with up to 500,000 euros per fiscal year, regardless of their earnings situation. What is important for companies now, we present to you in the following.

The research allowance is intended to provide tax incentives for R&D projects primarily for small and medium-sized companies, although large companies can also benefit from the scheme. Compared to the federal government's draft of April 17, 2019, which we have already here have presented, some important changes have been made in the adopted law.

Companies eligible for allowances

All companies that or their shareholders are liable to tax in Germany and that have not been exempted from tax are generally entitled to allowances. In addition to unlimited tax liability, the adopted law also includes companies with limited tax liability.

Scope of the funded R&D projects

Beneficiary R&D projects must be classifiable as "basic research", "industrial research" or "experimental development". According to the explanatory memorandum to the government draft, the definition of R&D is to be based on characteristics established by the OECD. R&D projects must accordingly:

• Be novel, i.e., generate new knowledge.

• Be creative, i.e., based on non-obvious concepts and hypotheses.

• To be uncertain, i.e., not to imply an outcome that is fixed in advance.

• Be systematic, i.e., follow a plan and be budgeted.

• Achieve reproducible or transferable results.

Projects in which the product or process is already essentially defined and whose activities are primarily aimed at market development or production improvement are explicitly excluded from funding.

Both independent projects and R&D projects carried out in cooperation with others are eligible. R&D projects that are awarded to service providers as contract research are also eligible for subsidies for the client. The preferential treatment of contract research clients represents an important difference compared to the government draft and is intended to promote investments by small and medium-sized enterprises in particular, whose own R&D capacities are limited.

Determination of the allowance amount of up to 500,000 euros

The assessment basis from which the allowance amount is determined is derived from:

• The taxable wages and the future security benefits provided by the employer (e.g. employer contributions to social security) of employees entrusted with R&D activities.

• A lump sum for sole proprietors of 40 euros per hour of work performed in R&D activities (maximum for 40 hours per week).

• An activity remuneration for co-entrepreneurs under the same conditions as for sole proprietors. The prerequisite is that a corresponding activity agreement is concluded and actually implemented.

• 60% of the remuneration paid by the Client to the Contractor for contract research.

The tax base is limited to two million euros per company and fiscal year. In the case of affiliated companies, this limit applies to the entire group of companies. In the case of joint R&D projects of third-party companies, on the other hand, the maximum amount can be utilized by the companies individually.

The allowance is 25% of the assessment basis. Over the entire project term, funding for an R&D project may not exceed fifteen million euros.

Request

The subsidy is intended to act as an "allowance" and lead to a payout regardless of the company's current earnings situation. The allowance can be applied for independently of the tax return after the end of the business year at the responsible tax office. The allowance granted is offset against the next income or corporation tax assessment as an advance tax payment and thus reduces the tax still to be paid or leads to a repayment.

The granting of the allowance by the tax office is linked to a certificate of eligibility of the (planned) R&D project. This certificate can be applied for before, during or after the business year. The tax office to which the application for the allowance is submitted is bound by the findings of the certificate, which gives companies early assurance of the eligibility of their planned R&D projects and allows them to incorporate this into operational decision-making processes.

Current need for action by companies

The research allowance shall apply to R&D projects commenced after the effective date of the Act, at the earliest after the 01.01.2020 begin or be commissioned. We therefore recommend that companies check planned projects for their eligibility for allowances and are always available to answer any questions.