One of Germany’s most undervalued government assistance programs for new businesses is its research and development tax credit, or R&D credit. The vast majority of founders in Germany are entirely unfamiliar with the concept of the R&D tax credit. It is a terrible shame that, as a result of this, they will not receive reimbursement for 25 percent of the money they spent on research and development. In the following paragraphs, we will discuss the specifics of the German tax credit known as the “Die Steuergutschrift für Forschung und Entwicklung,” including what it is, why it’s important for new businesses, and how it operates.
Does the research and development tax credit apply to your new company or startup business? How much can a business claim? Continue reading to find out.
Die Steuergutschrift Für Forschung Und Entwicklung: Understanding the Basics
The German government first implemented a tax incentive program known as Die Steuergutschrift Für Forschung Und Entwicklung in the year 2020 as part of the Forschungszulagengesetz, also known as the German Research Allowance Act. It was established to motivate businesses of all sizes and types to invest money into research and development.
To put it another way, Germany’s R&D tax credit program is open to any and all businesses, and they can claim their R&D expenses if they qualify. In return, they are eligible to receive up to 25 percent tax credit. This tax credit is then applied to offset or counterbalance the corporate taxes that each and every business is obligated to pay at the end of the fiscal year.
One more thing to keep in mind is that the most that a company can claim for its research and development expenses would be €4 million. Because of this, the maximum amount of tax credit that you are eligible for is approximately one million Euros (€) per fiscal year. If you claim €4 million in your qualified R&D expenses, your company could save approximately €1 million annually.
In general, all different kinds of businesses, from sole proprietorships and partnerships to corporations, are eligible to receive tax credits for research and development.
Only those businesses that are exempt from qualifying under the General Block Exemption Regulation (GBER) are excluded. On the other hand, your company should not be concerned because the GBER exemption is typically intended for businesses experiencing financial difficulties.
In addition, all new businesses, whether they are profitable or not, are eligible for the program. It makes no difference at all if your startup isn’t profitable for the time being (since it doesn’t have any corporate tax obligation to offset against the R&D credit), as this is not a requirement for receiving the credit.
Even startups can “carry over” the tax credit that they are eligible to have in the future, even if they are currently operating at a loss. As a result, they will be able to make use of it once they begin to generate a profit, at which point they will be able to appropriately reduce their tax expenditures.
R&D tax credit can be claimed for any expenditure that can be categorized as either fundamental research, industrial research, or experimental development. This also includes the development costs incurred by companies specializing in developing software.
Despite this, there are a few limitations on what can be done. For example, a company is not allowed to claim research and development expenses for projects that are:
- Already established, and their sole purpose is the development of the market (commercialization);
- Routine improvements
Therefore, before you apply for the Die Steuergutschrift Für Forschung Und Entwicklung, you have to properly assess what costs are incurred by your company that can be categorized as R&D but are not solely dealing with commercialization or routine improvements of products and services.
How Much Can Be Claimed?
The different kinds of costs that go into R&D determine how much credit you can get back from the government. You can claim one of the following two categories of R&D expenses under the program:
• 25% for salaries and wages
Particularly for those engaged in research and development, you can deduct employee salaries and wages at a rate of 25%. For instance, if you paid your back-end engineers a total of one million Euros in salaries during a given fiscal year, you are eligible for a tax credit of two hundred and fifty thousand Euros.
• 15% for subcontractors
Any costs that are directly related to R&D that subcontractors incur are eligible for a 15 percent% deduction. For instance, if you pay a third-party engineering and construction company one million Euros in a single fiscal year to develop a component of your company’s system, you may be eligible for a tax credit of one hundred fifty thousand Euros.
You will be able to save a considerable amount of money once you understand how the R&D tax credit for startups in Germany works. If it is utilized appropriately, the Die Steuergutschrift Für Forschung Und Entwicklung (German Tax Credit for Research and Development) can save startup companies in Germany up to 25% of their annual R&D expenses, with a maximum savings of 1 million Euros. As a result, this leads to a lower rate of cash burn and a significantly improved cash runway.
Taking into account the potential benefits of an R&D tax credit should be approached with caution by founders for this very reason.
However, you cannot just assume that all your R&D expenses will qualify for the same program. It would be unwise to be overly optimistic in this regard. If you allow yourself to become overly optimistic, you could find yourself dealing with some unwelcome surprises further down the road.
Claiming the R&D Tax Credit
In most cases, if your business or company is subject to taxation in Germany, it will be eligible for the Die Steuergutschrift Für Forschung Und Entwicklung. To get the most out of Germany’s research and development tax credit, your first step should involve evaluating possible eligible projects at a high level.
We also recommend the evaluation of ongoing accounting of potentially eligible projects. This is done to ensure that the R&D tax credit base for the projects in question is decided upon, established, and documented in a manner acceptable to the governmental authorities.