Germany’s R&D tax credit or is among the most under-appreciated government benefit programs for German startups. As a matter of fact, most German founders have actually not heard of the R&D tax credit before. This is so unfortunate because they are missing out on 25% of their research and development costs paid back. In this article, we’ll be discussing what exactly Die Steuergutschrift Für Forschung Und Entwicklung is for businesses in Germany, why it matters for startups and how it works.
Does your startup business or company qualify for the R&D tax credit? How much can you claim? Read on to find out.
Understanding Germany’s R&D Tax Credit?
Introduced in the 2020 by the Forschungszulagengesetz or German Research Allowance Act, the Die Steuergutschrift Für Forschung Und Entwicklung is a tax incentive program by the government. It was created to encourage companies of all types and sizes to invest in research and development.
To put it simply, any business can qualify and claim R&D expenses under Germany’s R&D tax credit program. In return, they can receive up to 25% of tax credit. This tax credit is then used to offset or counterbalance corporate taxes any business is required to pay at the end of the financial year.
Another thing to note is that the maximum amount that a company can claim is €4 million R&D costs. This means, therefore, that the maximum tax credit you can get is around €1 million per financial year. That can give you around €1 million in savings every year, if you claim €4 million in qualifying R&D expenses.
Does Your Startup Qualify?
In general, all types of businesses can qualify for R&D tax credits, starting from sole proprietorships, partnerships to corporations.
Only companies that fall under the General Block Exemption (GBER) regulation do not qualify. However, since the GBER exemption usually targets businesses going through financial problems, your business shouldn’t be worried.
In addition, all startups, profitable and loss-making businesses, all qualify. It certainly doesn’t matter if your startup isn’t profitable for now (therefore it doesn’t have any corporate tax liability to offset against the R&D credit).
Loss-making businesses, even startups, can carry over the tax credit they’re eligible to have in the future. Hence, they can use it when they become profitable and then they can reduce their tax expenditures appropriately.
What is a qualifying R&D?
Any expenditure that falls either under industrial research, fundamental research, or experimental development can qualify for Die Steuergutschrift Für Forschung Und Entwicklung. This also includes, for example, development expenses for software development businesses.
And yet, there are a couple of restrictions. For instance, a business cannot claim R&D expenss for projects that are:
- Already recognized and their only objective is market development (commercialization)
- Considered as a routine development (for example, regular improvements)
Thus, before you apply for Die Steuergutschrift Für Forschung Und Entwicklung, you need to evaluate what costs are incurred by your business that can be categorized as research and development yet aren’t purely concerned with commercialization or routine improvements of products and services.
How Much Can You Claim?
How much you can claim for your R&D tax credits depend on the type of expenses. There are two types of R&D expenses that you can claim under the program:
-
Salary and Wages: 25% rate
You can claim employee salary and wages (including social benefit costs), particularly those involved in research and development, at a 25% rate. For example, if you spend €1 million in salaries in a financial year for your back-end engineers, you can get €250,000 in tax credit back.
-
Subcontractors: 15% Rate
Any R&D related expenses by subcontractors can be claimed at 15% rate. For example, if you spend €1 million in a financial year to a third-party engineering consultancy company to develop a part of your company’s system, you can be granted €150,000 in tax credit back.
All R&D expenses that qualify can be added and claimed at the proper rate, at a maximum of €1,000,000 total credit every financial year.
What Does this Mean for you Runway?
When you have an understanding of how Germany’s R&D tax credit works for startups, you’ll be able to save a significant amount of money. When used correctly, the Die Steuergutschrift Für Forschung Und Entwicklung can save startups in Germany up until 25% from their research and development expenses ever year, capped at €1 million. This results to less cash burn and improve cash runway significantly.
This is the reason why founders should be wary of taking in potential R&D tax credit benefit estimates.
However, it’s not wise to be too optimistic: you can’t fairly assume that all your R&D expenses qualify under the same program. If you get too optimistic, you might deal with some unwelcome surprises down the road.
So, with regards to predicting tax credits in general, be sure you ask your accountant whether you qualify so you can avoid any mistakes.
What Do You do to Claim the R&D Tax Credit?
If your business or company is paying taxes in Germany, it would normally qualify or be eligible to Die Steuergutschrift Für Forschung Und Entwicklung. To get the most benefit out of Germany’s R&D tax credit, your first step should involve a high-level assessment of possible eligible projects at first to avoid missing out on a tax credit for ongoing expenses and also to prepare for the application for an eligibility assessment.
We also recommend the assessment of ongoing accounting of potentially eligible projects, so that the R&D tax credit base for the said projects is decided, established, and recorded in a manner that is acceptable to the fiscal authorities.
Conclusion
If you’re doing business or running a company that conducts research and development in Germany, it would be at your best interest to take advantage of their Die Steuergutschrift Für Forschung Und Entwicklung tax incentive program. With this you’ll be able to get significant cash deductions for your efforts to perform research on innovative products and processes. It pays to educate yourself on how this works so you can save your company a lot of money!
