German government proposes new R&D tax incentive

By Ninja-Antonia Reggelin

The German finance ministry April 17 published a draft law introducing a new tax incentive for research and development. In contrast to earlier discussions, all companies regardless of size are entitled to the incentive from 2020 on. However, the subsidy is also capped at 500,000 euros per company per year.

Germany is one of the few developed countries which does not provide tax breaks for business investment in research and development. Whereas proponents argue that these incentives could increase R&D spending, opponents fear high bureaucracy and inefficiency leading to windfall effects.

In the draft, the finance ministry justifies the implementation, stating that “[i]n order to strengthen Germany as a business location, in particular, to improve the location’s attractiveness for new settlements and investment decisions, internationally competitive business conditions must continue to be ensured.”

The tax incentive would be introduced as a separate tax law in addition to the income tax and corporation tax law to achieve a better overview of the scheme, a clear distinction from other tax regulations, and easier handling for eligible companies.

According to the draft law, all unlimited and limited taxpayers within the meaning of the Income Tax Act and the Corporation Tax Act are entitled to the incentive.

Beneficiaries are research and development projects that comply with the R&D definitions under the General Block Exemption Regulation of the EU and the so-called Frascati Handbook of the OECD.

R&D costs eligible are payroll tax deducted personnel expenses. Businesses also receive a research allowance of 25 percent on the employee gross plus employer contributions to social insurance.

Activities carried out by partners and shareholders are also eligible in principle.

For individual entrepreneurs, a lump sum of € 30 per hour should be used as an expense for their R & D activities.

Contract research can be funded by the contractor. For each company (group observation) and year, a maximum of 2 million euros in assessment base is eligible, resulting in a maximum annual research allowance of 500,000 euros.

According to the finance ministry, small and medium-sized enterprises would benefit disproportionately from this because a larger share of their research expenditure would be covered by the allowance. The credits could also benefit companies that pay little or no taxes, such as start-ups.

Whether or not R & D taxable activities or activities are available should be confirmed by a certificate from an unspecified authority. With this certificate, the research allowance can be applied for after the end of the respective marketing year at the responsible tax office for the permanent establishment.

The tax allowance would be paid out for the first time in 2021 because the credit cannot be claimed until after the end of the business year. The costs are estimated in the draft for the years 2021 to 2024 with between 1.145 billion euros and 1.34 billion euros annually.

The measure is subject to a state aid approval by the EU Commission and will be reevaluated after four years.

Stakeholders can submit comments on the draft until May 3, 2019. It is reported that a government bill will follow on May 15, 2019. The legislative process is expected to be complete sometime in 2019.


Ninja-Antonia Reggelin

Ninja-Antonia Reggelin

Ninja-Antonia Reggelin is based in Berlin, where she is head of tax policy at a business association.

She previously worked at the OECD, contributing to the project that led to the publication of the BEPS Action Plan. Prior to that, she was with PwC Germany, where she focused on international tax structuring.

Ninja holds a Master’s degree (LL.M.) in International Trade Law from Bond University Australia and a Master’s degree (M.A.) in International Relations from the University of Kent Brussels School of International Studies.

Ninja-Antonia Reggelin

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