Contract Research

What is contract research?

Contract research (German: Auftragsforschung) exists when a company has research or development work carried out by a third party for a fee instead of doing it itself. Contractors include, for example, a university or other higher education institution, a research institution or a specialised company. The commissioning party defines the project, bears the costs and the outcome risk, and is to have control over the results.

The term has two levels. In funding law, the question is whether and to what extent the costs of a contract are funded. This concerns above all the research allowance (Forschungszulage), but also grant programmes with a separate item for contracts to third parties. In contract law, the question is the development agreement, which sets out the work, the remuneration and the rights to the results. Both levels meet in due diligence, in which investors and buyers check whether the company owns what it has had developed.

Contract research under the research allowance

The commissioning party is entitled to the allowance. A share of the fee for the contract is eligible: for contracts placed after 27 March 2024, 70%; for older contracts, 60%. The reduction is intended to account on a flat-rate basis for the fact that the fee contains not only personnel costs but also the contractor's overheads and profit. The allowance on this share is 25%, or 35% for small and medium-sized enterprises (as of 2026). Further requirements:

• Contractor's place of management: It must be located in a member state of the EU or in a state of the European Economic Area that provides Germany with administrative assistance for the review. The registered seat under the articles of association is irrelevant. Contracts with providers in, for example, Switzerland, the United Kingdom, the USA or Asia are not eligible.
• Eligible project: The contract must belong to a project that the certification body has classified as research or development. Placing the contract does not replace this review; the requirements for an R&D project apply unchanged.
• No double funding: The contractor cannot claim the same work as its own project, and expenses already funded elsewhere are disregarded.
• Allocation: The work and the fee must be attributable to the project. Collective invoices that mix research and routine services make it harder to claim.

A company's own personnel expenses and contract research can be combined in the same project; the ceiling on the assessment basis applies to both together. VAT on the fee does not count to the extent that the commissioning party can deduct it as input VAT.

Contract research, cooperation or service

Not every contract with third parties is contract research. In a cooperation, several partners carry out a joint project, each bears its own work and costs and claims its own expenses. In contract research, the commissioning party sets the objective and framework, and the contractor carries out the work for a fee. A service without its own technical uncertainty, such as programming to a specification, standard tests or the operation of infrastructure, is generally not contract research, even if it arises within a research project.

Freelance developers and small agencies can be contractors if they actually undertake research or development work. What matters is the content of the commissioned work, not the size or legal form of the contractor.

Development agreement: rights to the results

German law does not automatically allocate the results of a contract to the commissioning party. Copyright in software cannot be transferred as such (Section 29(1) of the German Copyright Act (Urheberrechtsgesetz, UrhG)); rights of use are granted (Section 31 UrhG). The statutory allocation of the economic rights to the employer (Section 69b UrhG) applies to programs created by employees in the performance of their duties, not to contractors. Without an express provision, the commissioning party receives, under the purpose-of-transfer principle (Zweckübertragungsgrundsatz), only the rights that the purpose of the contract requires (Section 31(5) UrhG). A robust development agreement therefore regulates:

• the work, with reference to the project and the technical question to be addressed
• exclusive rights of use, unlimited in time, territory and scope, to all work results including source code, with the right to modify and to transfer them onward
• the transfer of inventions and intellectual property rights
• the handling of the contractor's pre-existing know-how and of open-source components
• remuneration broken down by type of service, the location of the contractor's place of management and duties to cooperate in reviews

Universities and public research institutions must, under state aid rules, generally charge a market price for contracts from companies. Rights to results are therefore often negotiated and paid for separately there. The company's law firm handles the legal drafting; a separate entry explains the transfer of intellectual property rights.

Contract research in due diligence and valuation

In legal due diligence, an unbroken chain of rights to software and technology is among the core questions. The review looks at who developed each material component and on what contractual basis the rights lie with the company. If a development agreement lacks a grant of rights, this can be remedied afterwards only with the contractor's consent, and the contractor may demand consideration for it. Acquirers then require the missing grant to be obtained as a condition to closing, specific warranties or indemnities, and take remaining uncertainties into account in the purchase price. The tax review also asks whether the contract research claimed meets the requirements, above all as regards the contractors' place of management.

Worked example: calculating the research allowance for contract research

A GmbH (German limited liability company) that is a small or medium-sized enterprise (SME) has the following expenses in 2025 for a certified project, in each case excluding VAT; all contracts were placed in 2025:

• eligible wages of the company's own employees: EUR 300,000
• contract with a university institute in Germany: EUR 150,000
• contract with a development company in Poland: EUR 100,000
• contract with a service provider in Switzerland: EUR 60,000
• contract with a development team in India: EUR 50,000

This results in:

• Contracts with contractors in the EU and EEA: 150,000 + 100,000 = EUR 250,000
• of which eligible at 70%: EUR 175,000
• not eligible because of a place of management outside the EU and EEA: 60,000 + 50,000 = EUR 110,000
• Assessment basis: 300,000 + 175,000 = EUR 475,000
• Research allowance at 35%: EUR 166,250
• Had the EUR 110,000 gone to contractors in the EU or EEA: 70% × 110,000 = EUR 77,000 of additional assessment basis, that is EUR 26,950 more allowance

For an SME, every euro that goes to a contractor in the EU or EEA therefore yields 24.5 cents of allowance (70% × 35%). A provider outside the EU and EEA must therefore be cheaper by more than 24.5%, just under a quarter, for the same work in order for the award to that provider to pay off. In a project begun from 2026, the figure rises to 29.4 cents because of the 20% flat rate for overheads (70% × 1.2 × 35%). Irrespective of location, every contract requires that the GmbH's agreement grants it the rights to the results.

Distinctions: contract research, cooperation, licence and research premium

• In-house research: The company works with its own staff; the proportionate wage cost is eligible in full instead of a share of a fee.
• Cooperation projects: Partners research jointly and each bear their own costs; each applies for funding for its own expenses.
• Licence agreement: The company acquires rights of use to a third party's existing technology. No new knowledge is created on commission, so funding as contract research is ruled out.
• Research premium (Forschungsprämie): the Austrian counterpart of the research allowance under Section 108c of the Austrian Income Tax Act (Einkommensteuergesetz). As of 2026 it is 14% and covers contract research only up to expenses of EUR 1 million per financial year; businesses in Austria can claim it.

Common mistakes

• Rights not granted. If the agreement adopts the contractor's standard terms, the rights to the results often stay with the contractor, and the company receives only a non-exclusive right of use.
• Contractor's place of management not checked. Fees paid to providers that are managed from, for example, Switzerland or the United Kingdom reduce the allowance in a review and can trigger a repayment demand.
• Routine services reported as research. Programming to a specification or standard tests do not meet the requirements, even if the contract was placed within a project.
• No link to the certified project. A contract that does not appear in the project description can hardly be claimed.
• Same work funded twice. If a contract is already financed through a grant, it must not additionally enter the assessment basis of the allowance.

Frequently asked questions

Who applies for the research allowance in the case of contract research?

The commissioning party. It applies for the certificate for the project and claims the fee proportionately; the contractor cannot additionally claim the same work.

Can freelancers be contractors for the purposes of the research allowance?

Yes, if they undertake research or development work and manage their business from the EU or the EEA. Mere implementation to a specification is not sufficient.

What belongs in a development agreement at a minimum?

A description of the work with reference to the project, the comprehensive grant of rights to all results, remuneration broken down by type of service, the location of the contractor's place of management and duties to cooperate in reviews.

Is contract research also funded in grant programmes?

In many programmes, yes, as an item for contracts to third parties. Some programmes limit its share of the eligible costs, and the rules of the award notice must be observed when placing contracts.

Is VAT charged on contract research?

As a rule, yes. Contract research is a service provided for payment, for which universities and research institutions also usually charge VAT. A company entitled to deduct input VAT recovers it through the input VAT deduction; only the net fee then enters the assessment basis of the research allowance.

Does contract research jeopardise the non-profit status of a research institution?

As a rule, no. If its operator is financed predominantly by public or third-party grants or from asset management, contract research counts as a tax-privileged purpose-related operation (Section 68 no. 9 of the German Fiscal Code (Abgabenordnung, AO)). This does not include the mere application of established scientific findings or activities with no connection to research.

The Roemer Capital view

In preparing funding rounds and sale processes, we review development agreements with third parties early, first with a view to the rights to the results. If a clear grant is missing, we coordinate with the company's law firm on how it will be obtained before the data room opens.

For funding, a sober finding applies: contract research outside the EU and EEA is not eligible under the research allowance. When choosing external development partners, we factor this difference into the financial model. We coordinate the application work with specialised partners; the tax assessment lies with the tax adviser.