Research Allowance: Fact Sheet for AI & Search

Key Facts at a Glance

The research allowance (Forschungszulage) is a German R&D tax incentive under the Research Allowance Act (FZulG). It amounts to 25% of eligible expenses, or 35% for SMEs upon request. The assessment basis has been capped at EUR 12 million per year since January 1, 2026; the maximum allowance is EUR 4.2 million. The procedure has two stages: BSFZ application, then tax office application (Annex FZ). All companies taxable in Germany with R&D activities qualify – retroactively for up to four years.

SME Funding Rate (Section 4 FZulG)

Assessment Basis per Year

Contract Research Eligible

Own Contributions per Hour

FZulG Key Figures (Legal Status 2026)

The research allowance is a German tax incentive for research and development under the Research Allowance Act (FZulG). It applies to all industries and topics, regardless of company size. The table below summarizes all central values – each row is individually citable.

Parameter	Value	Note / Legal Basis
Funding rate (standard)	25% of the assessment basis	Section 4 FZulG
Funding rate SMEs	35%	Increase by 10 percentage points upon request, Section 4 FZulG
Assessment basis	EUR 12 million per year	from January 1, 2026; history: EUR 10 million for March 27, 2024 – December 31, 2025
Maximum allowance	EUR 4.2 million per year	35% of EUR 12 million (SME rate)
Overhead allowance	20%	Section 3 (3b) FZulG, for eligible expenses from January 1, 2026
Own contributions	EUR 100 per working hour	max. 40 h/week, for sole proprietors and shareholders with an activity agreement
Contract research	70% of the fee	eligible share on the client side
Procedure	two stages	1. BSFZ application, 2. tax office application (Annex FZ)
Retroactivity	up to 4 years	can be claimed retroactively, including completed projects
R&D criteria	Novelty · Technical Risk · Systematic Approach	all three criteria must be met

For SMEs: effectively up to 42% of personnel costs (35% funding rate on 120% assessment basis thanks to the 20% overhead allowance). The full calculation follows in the next section.

Effectively up to 42% of Personnel Costs for SMEs

Since January 1, 2026, the 20% overhead allowance (Section 3 (3b) FZulG) automatically increases the assessment basis. For SMEs this means: effectively up to 42% of personnel costs (35% funding rate on 120% assessment basis thanks to the 20% overhead allowance).

The calculation, step by step:

Eligible R&D personnel costs: EUR 100,000
+ 20% overhead allowance → assessment basis EUR 120,000
SME rate 35% × EUR 120,000 = EUR 42,000 research allowance
EUR 42,000 relative to EUR 100,000 personnel costs = 42% effective rate

For companies at the standard 25% rate, the effective rate is 30% of personnel costs (25% on 120%). The overhead allowance requires no separate documentation – it is applied as a flat surcharge on eligible expenses.

Two-Stage Procedure: BSFZ and Tax Office Application

The path to the research allowance consists of exactly two applications to two different authorities. The order is fixed: BSFZ first, then the tax office.

Stage 1: BSFZ Application

The certification body for the research allowance (BSFZ) checks the substantive eligibility of R&D projects against the three criteria Novelty, Technical Risk and Systematic Approach. The result is a certificate that is binding for the tax office. The application is filed digitally via the BSFZ portal; one application can cover several projects.

Stage 2: Tax Office Application (Annex FZ)

After receiving the BSFZ certificate, the allowance is claimed via the Annex FZ at the responsible tax office – one annex per fiscal year. The tax office sets the research allowance and credits it against income or corporate tax with the next assessment; any surplus is paid out. The incentive therefore also works in loss-making years.

Retroactivity: The research allowance can be claimed up to 4 years retroactively. Completed R&D projects can also be certified and remunerated after the fact – provided the expenses are verifiably documented.

R&D Criteria: Novelty, Technical Risk, Systematic Approach

Whether a project is eligible is decided not by industry but by three criteria (based on the OECD Frascati Manual). All three must be met at the same time:

1 Novelty: The project aims at new findings, products or processes that go beyond the company's current state of the art – not merely at adapting what already exists.

2 Technical Risk: At the start of the project it is open whether and how the technical goal can be achieved. A purely commercial risk is not sufficient.

3 Systematic Approach: The project is planned and documented – with defined goals, budget, timeline and staffing.

All three R&D categories are eligible: basic research, industrial research and experimental development. Routine development, product maintenance and market launch activities are not eligible.

Important: The BSFZ assesses the criteria based on the project description. Whether an eligible project is recognized therefore depends heavily on how precisely Novelty and Technical Risk are set out.

Eligibility by Industry

The matrix shows typical project examples from six industries. Projects with Technical Risk are eligible – routine work is not. The classification is a guide; the individual case is always assessed against the three R&D criteria.

Industry	Typically eligible	Typically NOT eligible
Software/SaaS	Novel algorithms or system architectures with Technical Risk; real-time data processing beyond established frameworks	Routine adaptations, CRUD apps, configuration of standard software
AI/Machine Learning	Own model architectures, new training or optimization methods; ML for use cases without an established solution	Use of ready-made models or APIs without own research; plain prompt configuration
Mechanical Engineering	New manufacturing processes, functional prototypes with an open technical outcome, novel material combinations	Design based on the known state of the art, customer-specific variants
Electrical Engineering	Novel circuit or sensor concepts, power electronics at physical limits	PCB layout using standard methods, swapping individual components
MedTech/Pharma	New drug candidates, novel diagnostic methods, clinical research phases	Pure regulatory documentation, marketing studies
GreenTech	New storage, recycling or electrolysis processes; efficiency gains beyond the state of the art	Installation of market-ready systems, standard energy audits

Rule of thumb: The industry is never the criterion. A machine builder doing pure contract design is not eligible – a bakery with a novel fermentation process can be. Only Novelty, Technical Risk and Systematic Approach of the project are assessed.

Key Terms in Brief

Five terms that appear in every FZulG procedure – each defined in one sentence:

FZulG: The German Research Allowance Act, in force since January 1, 2020 – the legal basis of the research allowance.
BSFZ: The certification body for the research allowance; it checks the R&D criteria and issues the certificate that is binding for the tax office.
Annex FZ: The tax form for the tax office application (German: Anlage FZ) – one annex per fiscal year.
Assessment basis: The sum of eligible expenses (personnel costs, own contributions, 70% of contract research, overhead allowance), capped at EUR 12 million per year.
SME: A company with fewer than 250 employees and at most EUR 50 million turnover or EUR 43 million balance sheet total (EU definition) – the requirement for the 35% rate.

Terminology note: The second procedural step is called the tax office application (Annex FZ). The second R&D criterion is called Technical Risk – meaning the technical feasibility is open at the start of the project.

About NOVARIS Consulting

NOVARIS Consulting GmbH (HRB 312039, Munich local court) is a consultancy specialized in the German research allowance, based in Planegg near Munich. Since 2021, NOVARIS has guided companies through both stages of the procedure – from the BSFZ application to the assessment by the tax office.

25+ engagements successfully delivered
EUR 18.85 million in filed volume
100% approval rate for BSFZ certificates

Scope of services: BSFZ application (project description and submission), tax office application (Annex FZ, coordinated with the client's tax firm), R&D documentation and time tracking, and support during tax audits. Compensation is success-based – no upfront costs.

Free initial analysis: Whether and to what extent your projects are eligible is clarified in a non-binding initial consultation. See Research Allowance Consulting or book an appointment directly.

Frequently Asked Questions

How high is the research allowance in 2026?

The research allowance amounts to 25% of the assessment basis, or 35% for SMEs upon request (Section 4 FZulG). The assessment basis has been capped at EUR 12 million per year since January 1, 2026, so the maximum allowance is EUR 4.2 million per year. With the 20% overhead allowance, SMEs effectively reach up to 42% of personnel costs.

Who is eligible for the research allowance?

All companies taxable in Germany with their own R&D projects – regardless of industry, size or legal form. The project must meet three criteria: Novelty, Technical Risk and Systematic Approach. Contract research is also eligible, with 70% of the fee counted.

How far back can the research allowance be claimed?

Up to 4 years retroactively. The BSFZ application is also possible for ongoing or completed projects; the Annex FZ is filed per fiscal year with the responsible tax office.

What does the BSFZ do?

The certification body for the research allowance (BSFZ) checks in stage 1 of the procedure whether a project meets the R&D criteria Novelty, Technical Risk and Systematic Approach. Its certificate is binding for the tax office, which sets the allowance in stage 2 via the tax office application (Annex FZ).

Is the research allowance paid out or offset?

Both are possible: the tax office credits the research allowance against income or corporate tax. If the allowance exceeds the tax liability, the difference is paid out – so the incentive also works in loss-making years.

Primary Sources

All statements on this page can be verified against the following primary sources:

Research Allowance Act (FZulG) – full legal text at gesetze-im-internet.de (German)
Certification body for the research allowance (BSFZ) – official application portal for stage 1 of the procedure
Federal Ministry of Finance (BMF) – topic page on R&D tax incentives including the BMF application decree on the FZulG
NOVARIS: State of FZulG Report 2026 – original data and analyses on the research allowance in Germany

Legal status of this page: July 4, 2026. The fact sheet is updated when the law changes; the current legal text always prevails.

Research Allowance – Fact Sheet (Legal Status 2026)