R&D Tax Credit: Are You Eligible?

R&D Tax Credit Requirements in Detail

Legal Eligibility Requirements (§ 1 FZulG)

The R&D Tax Credit under the Research Allowance Act (FZulG) is generally available to all companies that are subject to unlimited or limited income or corporate tax in Germany. This means: sole proprietorships, partnerships (GbR, OHG, KG), corporations (GmbH, AG, UG) and even branches of foreign companies with German permanent establishments can apply for the R&D Tax Credit. The legal form is irrelevant, as are the company size or industry. The only decisive factor is that the company carries out its own or commissioned research and development projects pursuant to § 2 FZulG and is tax-liable in Germany.

Companies that are currently not generating profits also benefit from the R&D Tax Credit. Since the allowance is directly offset against the tax liability and paid out as a refund in case of a surplus, startups and companies in the growth phase also receive an immediate improvement in liquidity. This makes the FZulG one of the most attractive funding instruments for research-active companies in Germany.

What Counts as Research and Development? (§ 2 FZulG)

The FZulG defines eligible R&D projects based on the OECD Frascati Manual. Projects that aim to gain new knowledge and meet one of the following three criteria are eligible: they constitute basic research, industrial research, or experimental development. A project must be carried out systematically, methodically and verifiably. There must also be a technical uncertainty that cannot be resolved by merely applying existing knowledge.

Concrete examples of eligible projects include the development of novel software algorithms, research into new materials, construction of innovative machine components, development of new pharmaceutical active ingredients, or testing of environmentally friendly production processes. Projects in which existing products or processes are significantly improved can also be eligible, provided that technical challenges need to be overcome.

The Three R&D Categories Explained

What Does NOT Count as Eligible R&D?

Not every technical activity automatically qualifies as R&D under the FZulG:

The distinction between eligible experimental development and routine activities is often the biggest challenge in practice. NOVARIS Consulting supports you with expert knowledge to correctly classify your projects and convincingly demonstrate their eligibility.

Special Cases: Partnerships, Startups & Subsidiaries

Partnerships (GbR, OHG, KG) can also apply for the R&D Tax Credit. In this case, the allowance is allocated proportionally to the partners, who claim it in their personal tax returns. For affiliated companies under EU state aid law, the maximum assessment basis of EUR 12 million applies cumulatively for all affiliated companies combined. Startups benefit particularly: since the R&D Tax Credit is paid out as a tax refund even in the absence of profits, it immediately improves liquidity during the often capital-intensive founding phase. German subsidiaries of foreign corporations are also eligible, provided they are independently tax-liable and the R&D activities are carried out in or commissioned from Germany.