Valuable Insights for Smart Innovation Funding

Fundamentals of the R&D Tax Credit

1. What is the R&D Tax Credit?

The R&D tax incentive is a government funding program designed to support innovative research and development (R&D) projects and encourage companies in Germany to increase their investment in innovation. Since January 1, 2020, the R&D Tax Incentive Act (FZulG) has enabled companies of all sizes and industries to receive funding for eligible development projects. The scope of funding extends beyond traditional R&D projects to include digitalization and Industry 4.0 initiatives, such as software or process innovations.

The R&D tax incentive offers a maximum annual funding amount of up to €3 million, effective from January 1, 2026, following the legislative amendment under the federal government’s investment acceleration program. The funding rate is 25% of eligible costs (with an additional 10% for SMEs), particularly for personnel expenses related to R&D activities. For outsourced research, a funding rate of 17.5% applies (plus an additional 7% for SMEs), effective since March 28, 2024.

The R&D tax incentive can be claimed retroactively for up to four years.

2. Who benefits from the R&D Tax Credit?

The R&D tax incentive is available to companies of all sizes, with no minimum or maximum thresholds in terms of revenue, number of employees, or balance sheet total. Both SMEs and large enterprises can benefit. Unlike traditional SME funding programs, which are often limited to companies with up to 250 employees, the R&D tax incentive is accessible to all tax-paying companies in Germany.

However, universities and other research institutions are not eligible to apply directly. The applicant must be the tax-liable company in accordance with German income or corporate tax law.

Companies of any legal form—including sole proprietors and corporations—can benefit from the R&D tax incentive, regardless of their founding date or years in operation.

3. Which projects are eligible for funding?

Eligible R&D projects within the meaning of Section 2 (1) of the R&D Tax Incentive Act (FZulG) are those that can be classified as basic research, industrial research, or experimental development. A project may fall into more than one category. The definitions of the General Block Exemption Regulation (GBER) and the OECD Frascati Manual support this classification.

Eligible projects include in-house R&D, contract research, and collaborative projects, as well as combinations thereof. Projects carried out as commissioned work cannot be classified as in-house R&D, meaning the contractor is not eligible for funding.

The assessment of R&D projects is carried out by the Certification Body for the R&D Tax Incentive (Bescheinigungsstelle Forschungszulage – BSFZ).

4. Which projects do not qualify as R&D?

The following are not considered R&D activities:

• Routine or regular improvements to existing products
• Compliance with regulatory requirements
• Quality control and production manuals
• Market research
• Production ramp-up
• Data collection (unless integral to R&D)
• Standard software development or system support
• Development of management systems
• Sales, support, and customer acquisition
• Feasibility studies that do not qualify as R&D

5. When do R&D projects become eligible for funding?

An R&D project begins with the analysis of external influences and ends when the defined objective is achieved. This includes bringing a product or process to market readiness (§ 2 Abs. 2 FZulG).

6. Which costs can be covered by the R&D Tax Credit?

According to Section 3 of the German R&D Tax Incentive Act (FZulG), the following expenses qualify for funding for both in-house R&D and contract research:

In-house R&D activities

• Salaries and wages subject to wage tax for employees who are directly engaged in eligible R&D activities. This also includes salaries for which no wage tax obligation exists under a double taxation agreement.
• Employer contributions to social security (tax-exempt under Section 3 No. 62 EStG), provided they relate to eligible personnel costs.
• Own work performed by sole proprietors within an eligible R&D project:
  • Up to €70 per hour (increased from €40 as of March 28, 2024)
  • Maximum of 40 hours per week
  • This also applies to partners in partnerships

Contract research

• 70% of eligible contract research costs (previously 60%) can be claimed by the client company
• This results in an effective funding rate of 17.5% (+7% for SMEs)

New from 2026: Flat-rate overhead allowance

A major milestone is the introduction of a flat-rate overhead allowance starting January 1, 2026:

• Companies can claim an additional 20% on top of eligible personnel costs to cover indirect and operating expenses
• This significantly simplifies the process, especially for SMEs, and lowers barriers to entry for smaller projects

Important limitation

• Costs related to R&D services provided as a contractor (i.e., accepted R&D assignments) are not eligible for funding

7. How are working hours of employees, sole proprietors, and partners involved in eligible R&D projects recorded?

Working time should be recorded objectively and documented in a timely manner. Various formats can be used for this purpose, including written records, logs, or electronic systems.

For each activity within an eligible R&D project, time tracking must be clear, consistent, and traceable in order to properly document the work performed. The relevant metric is the number of hours individuals—employees, self-employed persons, or partners—have spent on qualifying R&D activities.

To determine the eligible share of working time, contractual or collectively agreed working hours should be used as a reference. This ensures that the proportion of time attributable to R&D activities is calculated accurately.

For documentation purposes, companies may use the official sample timesheet provided by the German Federal Ministry of Finance. However, the use of this template is optional.

8. Is the R&D Tax Credit treated as taxable income?

No, the R&D tax incentive is not subject to taxation.

9. Can the R&D Tax Credit be combined with direct grants for research & development?

Expenses are excluded from the R&D tax incentive if they are or have been supported by other funding or state aid. In such cases, applicants may need to choose between grants and the R&D tax incentive.

10. What is the success rate?

According to a study by ZEW – Leibniz Centre for European Economic Research, the approval rate for applications is 74%. The success rate we have achieved for our clients is significantly above this average.

Step 1: Certification

1. What information must be provided in the application?

All R&D projects of a given fiscal year for which the company intends to claim the R&D tax incentive must be listed in the application. Companies are required to provide a clear, comprehensive, and well-substantiated description of each project. This should include details on the project timeline, personnel involved, and financial scope.

In addition, companies must indicate whether the R&D project is carried out in-house, as contract research, or as part of a collaboration. The application must also include the company’s tax number, the responsible tax office, and information on affiliated companies in accordance with Section 15 of the German Stock Corporation Act (§ 15 AktG).

2. What does the certification body (Bescheinigungsstelle Forschungszulage) review?

The Certification Body for the R&D Tax Incentive (BSFZ) assesses whether a project qualifies as an R&D project within the meaning of Section 2 (1)–(3) of the R&D Tax Incentive Act (FZulG). In doing so, it applies standardized evaluation criteria. These are based on the European Commission’s framework for State aid for research, development and innovation (2014/C 198/01), as the R&D Tax Incentive Act falls under the General Block Exemption Regulation (GBER).

Eligible R&D projects must be assigned to one of the following three categories:

• Basic research
• Industrial research
• Experimental development

To ensure an objective assessment, the Commission relies on its established administrative practice as well as the examples and guidance provided in the OECD Frascati Manual.

3. What criteria must R&D projects meet to receive a positive certification?

• Novel: The project must aim to generate new knowledge.
• Uncertain: There must be uncertainties regarding the outcome and/or in terms of costs or time required.
• Systematic: The project must follow a structured plan and be budgetable

4. How does the certification process under section 6 of the R&D Tax Incentive Act work (§ 6 FZulG)?

For R&D projects for which the R&D tax incentive is to be claimed, an application for certification pursuant to Section 6 of the R&D Tax Incentive Act (FZulG) must be submitted to the BSFZ. The application can be filed after the end of the fiscal year, before the project begins, or during the course of the R&D project.

The BSFZ solely certifies whether the R&D activities described in the application are eligible under the FZulG. The extent to which the related expenses are taken into account when determining the tax incentive is decided by the competent tax office.

Step 2: Application Process

1. How can the R&D Tax Credit be applied for?

The application and granting process consists of two steps:

• Step 1: Application for Certification

Whether the R&D tax incentive is granted depends on whether the project meets the criteria of an eligible R&D project in accordance with Section 2 of the R&D Tax Incentive Act (FZulG). This is assessed by the Certification Body for the R&D Tax Incentive (BSFZ) as part of a technical evaluation process.

If the project qualifies, the BSFZ issues a certification confirming its eligibility (see Section 6 FZulG).

• Step 2: Application for the R&D Tax Credit

The R&D tax incentive is then applied for once per fiscal year, covering all eligible projects, with the competent tax office of the applicant (see Section 5 (1) FZulG).

2. At what point in time can the R&D Tax Credit be applied for? Should the application be submitted before or after the completion of the R&D project?

The application and granting of the R&D tax incentive are based on the respective fiscal year. If eligible expenses for qualifying R&D projects are incurred during a fiscal year, the tax incentive can be applied for once after the end of that year for the relevant period.

For R&D projects spanning multiple years, however, the tax incentive must be applied for separately for each individual fiscal year with the competent tax office.

The application for certification pursuant to Section 3 (2) of the R&D Tax Incentive Certification Ordinance (FZulBV) may be submitted before or during the execution of a project. It is also possible to apply after the end of the respective fiscal year.

3. Where can the R&D Tax Credit be applied for?

The application must be submitted by the taxpayer to the tax office responsible for the applicant’s income taxation.

4. How is the R&D Tax Credit applied for in the case of partnerships?

In the case of partnerships, the application for the separate and uniform determination of income must be submitted to the competent tax office. It is important to ensure that the tax office is responsible for this specific procedure.

5. How is the application for the R&D Tax Credit submitted?

The R&D tax incentive can be applied for electronically via the application form in “Mein ELSTER.” The application submitted to the tax office must be distinguished from the application to the BSFZ and the certification process.

6. Is the application for the R&D Tax Credit submitted together with the tax return?

The application for the R&D tax incentive can be submitted independently of the tax return. Furthermore, it is not required to file a tax return for the fiscal year to which the application relates.

7. How far back can the R&D Tax Credit be claimed retroactively?

Within four years after the end of the calendar year in which eligible expenses for qualifying R&D projects were incurred.

8. Which documents are required for the application? Do they need to be submitted together with the application?

For the application to the tax office, only the BSFZ certification must initially be provided in addition to the application form. This certification confirms, in accordance with Section 6 of the R&D Tax Incentive Act (FZulG), that the R&D project is eligible for funding and may cover multiple projects. The Certification Body (BSFZ) submits the certificate directly to the tax office, so it does not need to be attached to the application.

Whether and which additional documents are required for the approval of the R&D tax incentive is determined by the tax office.

Preparing your application:

• Record employees’ working hours spent on R&D activities—especially if they are involved in multiple projects or functions
• Document the type of activity and the employee’s assignment to the eligible R&D project to accurately determine personnel-related costs
• Prepare a progress report for each R&D project at the end of every fiscal year

9. How must Section 5(5) No. 2 of the R&D Tax Incentice Act (§ 5 Abs. 2 FZulG) be completed? How should R&D projects and the associated expenses be described to ensure proper assessment?

As the Certification Body for the R&D Tax Incentive (BSFZ) has already assessed whether a project qualifies as an eligible R&D project, the tax office does not reassess its eligibility, as it relies on the BSFZ certification.

However, for the purpose of applying for the R&D tax incentive, it is necessary to describe the eligible R&D projects and the associated expenses in sufficient detail. This enables the tax office to clearly allocate the projects and verify that the relevant requirements have been met.

10. What has changed with the new application form as of January 2024?

The specific changes introduced with the new application form are explained in detail in our blog article.

While the updates improve transparency and accuracy in the application process, they may also make the process more complex for companies:

• More detailed content requirements: The structure of the project description and the associated guiding questions have been significantly revised. The character limit of 4,000 remains unchanged.
• Mandatory work plan: A work plan is now required in all cases, providing a clear overview of the R&D content and project structure. It can be created directly in the portal or uploaded as an attachment.
• Simplified reporting of financial and personnel data: Cost recording has been partially automated, making data entry more efficient.
• Revised layout: The form has been redesigned to be more intuitive and user-friendly.

11. What happens to applications that have already been submitted?

Applications that have already been submitted will be reviewed and processed without changes. Resubmission due to the new application form is not required.

12. What happens to applications that have not yet been submitted?

If an application draft has already been created in the BSFZ portal, it could be submitted using the old application form until February 29, 2024. After this date, it is no longer possible to submit applications using the old form.

However, existing drafts can still be downloaded to prevent any loss of data.

Your Added Value

1. How we create added value for you

A deep understanding of your business, a consistently structured approach, and the expertise to apply the legal definition of R&D to your specific context—these are the principles on which we create real, measurable value for you, step by step.

2. What sets Busuttil & Company’s consulting approach apart?

With a multidisciplinary team of experts from scientific and engineering backgrounds, Busuttil & Company’s methodology is built on deep experience and guided by two core principles: maximizing your funding potential while minimizing the risk of rejection by the Certification Body (BSFZ) or challenges during a tax audit. Learn more here.

3. Why should you choose an external advisor for the R&D Tax Credit?

Busuttil & Company combines extensive expertise with many years of experience to support you throughout the application process:

• You can rely on our knowledge and experience—we understand the entire process in detail
• We develop a clear and compelling project work plan for you
• We ensure accurate and efficient documentation of financial and personnel costs
• We guide you step by step through the entire application process

With our support, you gain not only professional expertise but also the confidence that your application process will run smoothly, remain fully compliant, and achieve the best possible outcome.

For a deeper dive into the key reasons why working with an external advisor pays off, explore our blog article.

R&D Tax Credit for Start-ups

 1. Are start-ups also eligible for the R&D Tax Credit?

Yes, in principle, start-ups are also eligible to apply for the R&D tax incentive.

Recent regulatory changes—introduced on June 25, 2021, and further clarified in the Federal Ministry of Finance (BMF) guidance of February 7, 2023—have revised the definition of affiliated companies (e.g., start-ups with business angels or strategic investors). As a result, access to the R&D tax incentive has become significantly simpler and more attractive for start-ups.

As a tax-based funding instrument, the R&D tax incentive can also be paid out if it exceeds the assessed tax liability—an option that is particularly valuable for early-stage companies.

2. Are there specific national or regional programs for start-ups?

On our blog, we have compiled an exclusive selection of regional funding programs for start-ups across Germany.