Claiming Germany’s R&D Tax Credit (Die Steuergutschrift Für Forschung Und Entwicklung)

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R&D Tax Credit

Starting last January 1, 2020, there are now tax credits available for research and development projects. In accordance with the desires of the legislators, all businesses that are engaged in research and development projects will be eligible to receive additional liquidity from the tax credit, regardless of the size of the company, the sector it operates in, the legal form it takes, or its current financial situation. The following paragraphs will provide an overview of the research and development tax credit (Die Steuergutschrift Für Forschung Und Entwicklung) and demonstrate how you can most effectively benefit from it.

Die Steuergutschrift Für Forschung Und Entwicklung: Germany’s R&D Tax Credit

In the same manner as an advance tax payment, the research and development tax credit, which can be worth up to one million euros per fiscal year, will either be credited against the tax that is owed or added to the tax refund in the subsequent tax assessment. This results in additional liquidity, notwithstanding the company’s current financial situation. If all of the criteria for receiving the credit are met, the organization has the legal right to receive the credit. 

R&D projects in the areas of “fundamental research,” “industrial research,” or “experimental development” are examples of the types of endeavors that may be considered for funding. The OECD has a broad definition of research and development (R&D), which is something the German authorities will be used to determine eligibility. In addition to the traditional research and development fields of engineering and the sciences, the OECD provides examples of research and development carried out in the field of social sciences, such as by educational institutions and in the field of information technology. Research and development projects that qualify for funding may be carried out solely by the applicant company or in collaboration with other businesses or research institutions. Only the company that the research was performed for can claim a tax credit for the associated costs of the contract research. 

The total amount of tax credits will be determined by adding together the percentage of the wage costs incurred for R&D personnel working on internal R&D projects (25 percent) and the percentage of the expenses incurred for contract research (60 percent). A centralized authority is required to determine whether or not the projects qualify for the tax credit they are offering. After that, the assessment certificate will be used as a validation of eligibility for the yearly application for such actual tax credits by the local fiscal authorities. The local fiscal authorities will not be able to challenge the assessment certificate. 

You can find additional information regarding the funding of R&D activities of corporations or individual companies in the news article that addresses the legislative proposal for the tax credit (Die Steuergutschrift Für Forschung Und Entwicklung), which has been passed without change. The article is written in German.

The context for the decision to raise the limit on the amount of tax credit that can be claimed 

The maximum amount of research and development (R&D) tax credit that can be claimed annually has been increased from 500,000 EUR to 1,000,000 EUR for each (unaffiliated) company per business year as a result of a recent tax act that was recently introduced in an effort to relieve the consequences of the coronavirus pandemic. This increase is only going to be in effect from July 1, 2020, until June 31, 2026. 

Because of EU state aid legislation, the R&D tax credit act had been initially invoked with a time limitation that would last until June 30, 2020. This time limit may be removed because the European Commission approved the R&D tax credit act on June 26, 2020. 

How Exactly Will It Be Decided Whether Or Not A Certain Project Is Qualified To Receive The R&D Credit? 

Beginning in the late summer of this year, it ought to be possible to submit an electronic application for the evaluation of eligibility for research and development projects that are either proposed or already in progress. In order for taxpayers to be eligible to make an annual claim for R&D tax credits from the local fiscal authorities, such an assessment must have a positive outcome. This requirement must be satisfied before the taxpayers can make their claim. A centralized office that operates under the supervision of the Federal Ministry of Education and Research will be in charge of conducting the evaluations necessary to determine eligibility. It is estimated that approximately three months will pass during the processing time required to determine eligibility. Processing could take longer than usual because of the large number of applications that are anticipated, particularly at the beginning. It is not required that the research and development projects have already gotten off the ground in order to submit a request for an evaluation of eligibility. A favorable evaluation binds the local fiscal authorities to the terms of the agreement. Those, as mentioned earlier, can assist managers in evaluating the potential future R&D program of the company while simultaneously taking into account the potential tax credit.

What Factors Are Taken Into Account When Determining The Tax Credit’s Basis? 

The local fiscal authorities will determine the amount of the research and development tax credit during the course of their annual tax assessment. This evaluation will be based on the previous evaluation of the projects’ eligibility and the annual costs associated with those projects. After that, the amount of the annual tax credit that has been assessed will be applied in the subsequent personal or corporate income tax assessment as a credit against any tax that is owed or as an addition to any tax refund. Recently, the Federal Ministry of Finance has clarified that in order for the costs to be made part of the basis for R&D tax credits, they will need to be determined and documented according to generally accepted accounting guidelines. Even small and medium-sized businesses will be required to adhere to these principles in their entirety. This requires individual records to be kept for the amount of time spent working by each employee, for example. 

What Steps Do I Need To Take In Order To Be Eligible For The R&D Tax Credit? 

The general rule is that you are qualified for the tax credit if your company or permanent establishment is already contributing to the German tax system. To get the most out of the R&D tax credit, you might want to start with a high-level assessment of projects that might be eligible. This could help you avoid overlooking out on a tax credit for current costs and prepare you to apply for an eligibility assessment. In addition, it is suggested that you review the accounting currently being used for projects that may be eligible for R&D tax credits. This will ensure that the basis for the R&D tax credit for this kind of project is delimited, determined, and recorded in a manner acceptable to the relevant fiscal authorities.