The Impact of The Research and Development Tax Credit for German Taxpayers

If you are planning to finance or currently funding, or you already have a financed product or an initiative on software development, Germany may offer you 500,000 EUR if it started after 2019 or is going to start after 2019.

R&D tax credits

The Research Allowance Act, also known as Die Steuergutschrift Für Forschung Und Entwicklung, is responsible for the creation of the new incentive, which is generally equivalent to 25 percent of the total amount an entity spends on R&D salaries, wages, and eligible contract research expenses, with a yearly cap of EUR 500,000. The German Federal Council gave its stamp of approval to the measure on November 29th, 2019.

In the event that the taxpayer’s liability is less than the new incentive, Germany will either compensate or refund the difference in amount. This is why it is vital to clarify that enterprises who are losing money can already benefit from the new incentive, irrespective of the size of their organization. In general, only small and medium-sized entities or SMEs can get refundable tax credits.

This new incentive, in conjunction with Germany’s well-established public grant system for specific R&D programs and other EU financing, makes Germany a more competitive site for R&D investment.

Eligible Taxpayers on Die Steuergutschrift Für Forschung Und Entwicklung

Qualified businesses are those that are not excluded from paying income tax in Germany and must pay either the unlimited or limited rate. Non-resident taxpayers who have a substantial connection to Germany are eligible for the credit. A non-resident firm with an established office in Germany, for instance, is also eligible for the credit.

How can taxpayers apply

First, taxpayers must submit a technical application for the issuance of an R&D certificate demonstrating that the R&D project fits the standards, and then they must submit an electronic application to the local tax office for the incentive. If several certificates are requested throughout a fiscal year, extra costs may be imposed. The initial request for a certificate is, however, free of charge, and the application must be supported by evidence of the activities and expenses eligible for consideration.

Die Steuergutschrift Für Forschung Und Entwicklung: What Qualifies

On Projects

Research and development projects are qualified if they are conducted by a German-based entity either alone, in collaboration with other German-based institutions, like universities, or with third-party or affiliated contractors established in Germany or any other EU/EEA member state. Regarding contract research, the new rule presents huge options for tax planning, especially in a cross-border environment.

In addition, R&D activities can also be conducted through a partnership between one or more grantees and at least one other firm or institution for research and knowledge dissemination like a university.

On Activities

Activities that began after 2019 and qualify as (1) fundamental research, (2) industrial research, or (3) experimental development under EU legislation are eligible. Activities only connected to market acceptability or manufacturing system enhancements are ineligible.

Die Steuergutschrift Für Forschung Und Entwicklung: Qualified Expenses

For expenses to be eligible to claim R&D tax credits, these R&D projects and activities must either be salaries that are subject to German wage tax or expenses that will safeguard their future, such as their ability to contribute to statutory pension funds, for and to the extent employees perform eligible research and development activities, and given that the taxpayer will offer the tax authority assistance on the expenditures in the form of verifiable documentation that shows an allocation of employees’ wages among eligible activities, or payments for qualified R&D projects and activities There is no requirement for itemized proof of a contractor’s staff expenditures.

Eligible costs are restricted at EUR 2 million. The incentive is equivalent to 25% of qualified costs, therefore the annual maximum reward is €500,000. The legislation also restricts the total amount of research allowances as well as other forms of state aid awarded for an R&D project to 15 million Euros per firm (individually) and per R&D project over time.

In some instances, eligible costs over the cap may receive preferential treatment in the form of supplementary assistance measures. The statute specifically permits the combination of several sources of assistance. To prevent double-dipping, eligible costs included in the R&D incentive cannot be incorporated into other financing or award programs.

Research and development

Payment Procedure for Die Steuergutschrift Für Forschung Und Entwicklung

The incentive amount is declared explicitly in a separate notice of assessment and is applied in full from the assessed tax amount at the next income and corporate tax assessment. If the incentive amount exceeds the levied tax amount, the balance is repaid, allowing loss organizations to earn a full refund.

Key Dates & Deadlines When Claiming Die Steuergutschrift Für Forschung Und Entwicklung

Expenses eligible for reimbursement must be incurred following December 31, 2019, so after the conclusion of the fiscal year in which the costs were incurred, entities must apply for the tax credit. The application and submission deadlines have not yet been specified.

Next Actions to Undertake When Planning to Claim Die Steuergutschrift Für Forschung Und Entwicklung

If you believe you may qualify, you should:

  1. Examine your present initiatives to decide which, if any, qualify for funding.
  2. Collect all the necessary information and paperwork if you think you may qualify for the tax credit and then submit the technical request for the R&D certificate.
  3. See to it that relevant eligible costs are identified, and if your eligible costs exceed EUR 2,000,000, you must then choose the ones you can document most efficiently, such as bigger eligible projects, and examine whether the excess is suitable for grant money or other EU incentives.
  4. For acceptable costs, collect project-specific financial documentation to justify them.
  5. Obtain R&D certifications. If the unreleased filing instructions permit and you are able, try applying for projects as they are beginning to prevent last-minute difficulties on your or the tax authority’s end. The desired application language is German.
  6. Consider establishing and executing rules and processes for the identification and documentation of future projects and costs. Boost your ROI on future claims if your financial, accounting or documentation processes can be used to assist with this.
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