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Important aspects of the German Research Allowance Act – Part I: Tax-privileged R&D projects

The Research Allowance Act (Forschungszulagengesetz, FZulG) came into force on 1.1.2020. The objective here is to provide support to companies for their research and development activities (R&D) in order to enhance the attractiveness of Germany as a business location and to spur innovation as well as investment. While here, in Part I, we discuss the definition of tax-privileged R&D projects, in Part II we will be going into the specific terms and conditions of eligibility.

Ways to promote R&D

As regards state support in the area of R&D, a distinction has to be made between direct funding (project grants) and indirect funding (tax incentives). The indirect funding in the form of the FZulG – in contrast to the funding policy to date – will not be linked to a specific project but the aim is rather to provide support irrespective of the corporate purpose, profitability and size of the enterprise. The following section focuses on the R&D projects that are eligible for tax concessions under the FZulG.

Tax-privileged R&D projects

Eligibility criteria

With respect to defining tax-privileged R&D projects, the concepts of the legislators in Germany were guided by the definition of R&D in the “Frascati Manual 2015” from the OECD. Accordingly, the eligibility of R&D activities will basically be determined by the following five (cumulative) criteria. The activities have to be innovative, creative, systematic as well as transferable and/or reproducible while their final outcome essentially has to be fraught with uncertainty in terms of the resource outlay.


(1) Innovative – The R&D activity must result in findings that are new to the business and not already in use in the respective industry. Therefore, the excluded means of gaining knowledge will be activities undertaken to copy, imitate or reverse engineer.

(2) Creative – An R&D project must have as an objective new concepts or ideas that improve on existing knowledge. Routine changes to products and processes are thus not included in R&D, however, new methods developed to perform common tasks are. For example, data processing is not an R&D activity unless it is part of a project to develop new methods for data processing. Each new problem-solving strategy, developed as part of a project, could constitute R&D if the outcome is original and the other criteria are met.

(3) Systematic – The R&D process must run according to a fixed plan and the procedural steps as well as the results must be documented. The purpose and sources of funding should be identified.

(4) Transferable/ reproducible – An R&D project should result in the potential for the transfer of the new knowledge by ensuring its use and allowing others to reproduce the results as part of their own R&D activities. In a business environment, the results will be protected by trade secrecy provisions or other means of intellectual property protection and yet, at the same time, the individual procedural steps and the results should be documented so that they can be used by other researchers in the business.

(5) Uncertain – For R&D in general, there is uncertainty about the costs and time as well as about whether the objectives can be achieved at all. For example, uncertainty plays a major role when making a distinction between R&D prototyping (models used to test technical concepts and technologies where there is a high risk of failure in terms of applicability) and non-R&D prototyping (pilot production facilities used to obtain technical or legal certifications).

Types of research

The FZulG provides for three potential eligible areas of activity:

  • basic research,
  • applied research and
  • experimental development.

Besides in-house research, funding is also available for research that has been commissioned (so-called contract research). In such a case, it is unimportant whether the contractor is based in Germany or the EU/EEA. Collaborations with research and knowledge agencies as well as with other enterprises are possible.

Outlook: We will have to wait and see the extent to which, in practice, difficulties emerge in defining (non-)eligible R&D projects. The above-mentioned Frascati Manual does indeed provide – non-legally binding – guidance for taxpayers, however, there are still uncertainties. That is why, in Part II, we will initially highlight examples of projects that would be eligible for tax concessions and, in addition, go into the details of the eligibility conditions.

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