Research Allowance for contract research: 70% count, 30% don't
Commission a contractor in the EEA after 27 March 2024 for R&D work, and 70% of the fee counts toward the assessment basis. Before the additional flat rate, this equals 17.5% of the fee, or 24.5% for SMEs. We review the contract and invoice before the application goes out.
- 70% of the fee is eligible, for contracts placed after 27 March 2024
- The contractor must be based in the EEA
- From 2026: an additional 20% overhead flat rate
Written by Max Nodes, Founder and Managing Director · 25 of 25 supported BSFZ applications certified (as of 09/2026) · Last updated: · Law as of:
Research across company boundaries
Figures and details
Example: EUR 500,000 in contract fees, for contracts placed after 27 March 2024. From 2026, the 20% overhead flat rate additionally applies to new projects on the eligible share (§ 3 (3b) FZulG).
Key facts in brief
Contract research (Auftragsforschung) exists when a company (the client) commissions an external contractor in the EEA for R&D work. The client claims 70% of the fee as the assessment basis (Section 3(4) FZulG), for contracts placed after 27 March 2024; before that the rate was 60%. From 2026, a 20% overhead flat rate applies to projects started after 31 December 2025, and it also applies to this 70% share (Section 3(3b) FZulG). Only the client can claim the allowance; the contractor may not additionally claim the same costs as its own R&D.
The essentials of contract research
What is contract research under Section 2(4) FZulG?
Contract research exists when a company (the client) commissions an external contractor for R&D work. Only the client can claim the allowance for it.
The contractor can be a university, a research institute, an engineering firm, or another company. What matters is not the legal form but whether the service has R&D character and the contractor is based in the EEA.
Three categories, three assessment bases
- In-house research: own staff, own resources. Eligible are the employer gross wages of R&D staff, plus the 20% overhead flat rate from 2026.
- Contract research: an external contractor in the EEA carries out the R&D work. 70% of the contract fee counts toward the assessment basis.
- Cooperative research: equal partners research jointly. Each partner claims the allowance only for its own personnel costs; offsetting the partner's costs is excluded.
| Criterion | Contract research | Cooperative research |
|---|---|---|
| Who claims | Only the client | Each partner for its own costs |
| IP rights | With the client | Shared by agreement |
| Eligible costs | 70% of the fee | Own personnel costs |
| EEA requirement | Contractor must be in the EEA | No restriction |
Typical contractors are universities, Fraunhofer Institutes, Helmholtz and Leibniz Centres, and specialised engineering firms. What matters in every case is the R&D character of the service, not the name of the institution.
In practice, many companies combine in-house research and contract research: own staff work on part of the project, and an external institute handles another part. Both assessment bases add up to one total, capped at EUR 12 million per year.
How is the eligible share of contract research calculated?
70% of the fee counts toward the assessment basis, for contracts placed after 27 March 2024; before that it was 60%. The remaining 30% is treated as a flat allowance for the contractor's profit margin and administrative overhead.
The law does not require proof of the contractor's actual cost structure. The 70% flat rate applies regardless of whether a university with low overhead or a commercial institute carries out the work.
From 2026, the 20% overhead flat rate applies to projects started after 31 December 2025, and it also applies to the 70% contract research share (Section 3(3b) FZulG). Many companies overlook this additional benefit.
Worked examples
Contract with an institute in the EEA, large enterprise
Invoice from a Fraunhofer Institute for a new sensor concept, project from 2026.
70% of the invoice counts toward the assessment basis, plus the 20% flat rate.
Same contract, SME status
The same invoice, but the company meets the SME criteria under Annex I GBER.
SMEs receive 35% instead of 25% on the same assessment basis.
Combined with in-house R&D
The company also employs its own R&D staff on the same project.
Personnel costs and contract research add up to one assessment basis, capped at EUR 12 million per year.
Invoice with non-R&D shares
Of a EUR 500,000 invoice, only EUR 400,000 relates to actual R&D work; the rest is project management and travel costs.
Only the R&D share of the invoice enters the 70% rule; insist on separate invoice line items.
The 70% rule also applies to partial services: if an invoice mixes R&D and non-R&D work, the R&D share is filtered out first, and only then does the 70% rate apply.
Universities and Fraunhofer Institutes meet the EEA requirement automatically and usually already provide itemised proof of performance, which makes documentation easier.
Request separate invoice line items for R&D and non-R&D services from your contractor; without a breakdown, the tax office cannot apply the rule.
Which 5 requirements must contract research meet?
All five criteria must be met at the same time. If one is missing, the BSFZ does not recognise the service as the client's contract research.
The basis is Section 2(4) FZulG and the BMF circular of 7 February 2023 (paragraphs 64 to 66).
If one criterion is missing, the arrangement does not count as contract research under the FZulG.
- Routine services, testing, quality control, market research and pure consulting do not count as R&D, even in a scientific setting.
- Framework contracts without a specific R&D reference, or pure service contracts, do not satisfy the contract requirement.
If the intellectual property remains with the contractor, the BSFZ usually classifies the service as a mere service provision, not as contract research.
What must the contract research agreement regulate?
The contract determines eligibility. Four clauses secure contract research: subject, IP rights, documentation, billing.
The contract must clearly state the R&D character: which technical risk is addressed, which findings are sought, and which methodology is used. A generic "development service" without these details is not enough for the BSFZ.
| Clause | Example text |
|---|---|
| Subject | "The contractor provides research and development services in the field of [research area], aimed at resolving the following technical risk: [description]." |
| IP rights | "All research results, including inventions and know-how, become the property of the client." |
| Documentation | "The contractor prepares a quarterly research report on progress and next steps." |
| Billing | "Invoices separately state R&D services and other services." |
Lump-sum fees are permitted but make the breakdown harder. Hourly or milestone-based billing shows the R&D share directly and is preferable.
Agree on regular interim reports that document the progress of the R&D work; they serve as evidence for the BSFZ and the tax office. For mixed contracts covering R&D and routine services, separate invoice line items or separate contracts secure the later breakdown.
Which 5 mistakes cost the funding for contract research?
Five mistakes most often cost the funding in practice, fully or in part.
- Contractor based outside the EEA: the most common mistake, often with long-standing partners in the UK, the USA, China or India. These costs are not eligible regardless of the quality of the research.
- Contract without identifiable R&D reference: wording such as "consulting services" or "technical services" without a specific research reference is not enough.
- Routine services declared as contract research: standard tests, quality checks or design work without innovative character are regularly rejected.
- Double application by client and contractor: tax authorities regularly pick this up during audits and reclaim it, with interest.
- Invoices not itemised: without separating R&D from non-R&D services, the tax office cannot correctly apply the 70% rule and cuts the funding.
These mistakes usually only surface during a tax audit, when a correction is no longer possible. Reviewing the contract before the first invoice prevents that.
Which questions come up most often about contract research?
Have your contract research agreement reviewed before the invoice arrives
In the first consultation we review the contract, the contractor's location and the invoicing, and calculate the assessment basis from personnel costs and contract research together. No result, no invoice.
Book a first consultationRead on
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- How to Apply for the Research AllowanceThe BSFZ application and research allowance application (ELSTER) step by step.
- Personnel Costs & R&D Tax CreditClaiming employer gross wages correctly, the second pillar of the assessment basis.
- Own ContributionsEUR 100 per hour for sole proprietors and co-entrepreneurs.
- R&D Tax Credit CalculatorCalculate the assessment basis and allowance from your figures.
- Apply RetroactivelyWhich years are still open and how to use the deadline.
Max Nodes
Founder and Managing Director of NOVARIS Consulting. Specialised in the German R&D tax credit (FZulG) since 2021; 25 of 25 accompanied BSFZ applications approved (as of 09/2026). Max Nodes