Research Allowance

What is the research allowance?

Research allowance (German: Forschungszulage) is the tax incentive for research and development (R&D) under the German Research Allowance Act (Forschungszulagengesetz, FZulG). Companies receive a percentage fixed by law of their eligible expenses for qualifying projects as an allowance, in practice above all a share of the wages of their development staff. The allowance is credited against income tax or corporation tax, that is, deducted from the tax liability; any excess amount is paid out.

The Research Allowance Act has applied since 1 January 2020 to projects started or commissioned after that date. Unlike a grant programme, the allowance is not a selection procedure with a limited budget: anyone who meets the statutory requirements has a legal entitlement, regardless of company size, sector and profit position. For technology companies with start-up losses, it can therefore be shown more reliably in the financial model than a grant on which an authority decides at its discretion. Two bodies are involved: the certification body for the research allowance (Bescheinigungsstelle Forschungszulage, BSFZ), which classifies the project from a technical point of view, and the tax office, which determines the allowance.

Requirements for the research allowance

Entitled to claim are companies subject to tax in Germany with income from a trade or business, self-employment or agriculture and forestry, which includes the typical technology GmbH. Excluded are, among others, corporations exempt from corporation tax, undertakings in difficulty within the meaning of EU state aid law and undertakings that have not complied with a recovery order of the European Commission. The exclusion because of difficulty mainly affects growth companies with high loss carry-forwards; the criteria are explained in the entry on state aid law.

Eligible are projects that can be assigned to one or more of the categories basic research, industrial research and experimental development. Whether there is an R&D project or routine work is decided by the certification. The rate of the allowance is the same for all three categories. A project can be carried out in the company's own operations, in cooperation with other companies or research institutions, or as a commission to third parties. If a product is essentially fixed and further work mainly serves market development, there is no longer any research and development (Section 2(2) FZulG).

Eligible expenses and amount of the research allowance

The assessment base is the amount to which the percentage of the allowance is applied. It consists of the eligible expenses of a financial year for certified projects. These include:

• Own personnel: the wages subject to wage tax withholding of the employees working on the project, including employer contributions to social security, in proportion to the working time spent on the project. The basis is a robust timesheet.
• Own work: for sole proprietors who work on the project themselves, since 2026 EUR 100 per documented working hour (previously EUR 70, until March 2024 EUR 40), for a maximum of 40 hours a week. Partners in a partnership (co-entrepreneurs, Mitunternehmer) can claim a contractually agreed remuneration for their work up to this rate. For shareholder-managing directors of a GmbH, the salary counts as wages.
• Contract research: a share of the fee for the commission, 70% for commissions placed after 27 March 2024 (previously 60%). The contractor must have its place of management in the EU or the EEA; details are explained in the entry on contract research.
• Assets: tax depreciation (Absetzung für Abnutzung) on depreciable movable fixed assets, such as measuring instruments or test benches. They must be necessary for the project, be used exclusively in it and have been acquired or produced after 27 March 2024.
• Flat rate for overheads: for projects started after 31 December 2025, a flat 20% of the other eligible expenses for overheads and other operating costs.

The allowance is 25% of the assessment base. Small and medium-sized enterprises within the EU definition can apply for an increase of ten percentage points to 35% for expenses incurred after 27 March 2024. SME status thus has a direct effect on the amount.

Formula: Research allowance = assessment base (since 2026 a maximum of EUR 12 million) × 25%, for SMEs × 35%

The ceiling of EUR 12 million per financial year applies to expenses from 2026; the allowance is therefore at most EUR 3 million, for SMEs EUR 4.2 million. Previously, EUR 10 million (from 28 March 2024), EUR 4 million (from July 2020) and initially EUR 2 million applied. For affiliated companies, the limit applies to the group as a whole. Because rates and limits have been changed several times, what matters in each case is the date of the expenses or of the commission (status of the information: October 2026).

Applying for the research allowance: certification and application to the tax office

Stage 1: certification by the BSFZ

On application, the certification body determines whether a project qualifies in principle. It examines only the technical classification as research or development, not the amount of the expenses. If the certification classifies the project as eligible, the tax office is bound by this classification. It does, however, check whether the work claimed actually belongs to the certified project. The first certification per financial year is free of charge; fees may apply for further ones.

The core of the electronic application is the project description with the state of the art at the start, the technical objective, the open technical question and the planned approach. By its own account, the certification body decides within three months at most. Anyone who builds the inflow at a particular point in time into the liquidity planning therefore submits the application early.

Stage 2: application to the tax office

After the end of the financial year in which the expenses were incurred, the company applies electronically, via the ELSTER online tax portal, to the competent tax office for the allowance to be determined. This is a separate application alongside the corporation tax or income tax return. The tax office checks the expenses claimed and determines the research allowance by notice. With the next initial assessment of income tax or corporation tax, it is credited against the tax, and any excess amount is refunded. This is why the allowance also works in loss years.

The application is also possible retroactively as long as the assessment period is running. It is generally four years from the end of the year in which the entitlement arose. For expenses of 2022, it ends at the end of 2026. A certification for the project remains a prerequisite. The application by the tax offices is explained in the circular of the German Federal Ministry of Finance (BMF) of 7 February 2023; the Federal Ministry of Finance presented a new version as a draft in October 2025.

The research allowance in funding rounds, due diligence and sale

In a funding round, the research allowance is a source of financing that costs no shares. It lowers the net cost of development and extends the runway, though with a time lag: expenses of one year lead to an inflow at the earliest in the following year.

In due diligence, the allowance forms part of the tax review. Certifications, assessment notices, the allocation of expenses to the projects and the timesheets are requested. Assessments can be changed after a later tax audit; a repayment carries interest. Acquirers generally protect themselves against such repayments for periods before closing through the tax clause of the purchase agreement, under which the seller stands behind these legacy liabilities. In company valuation, a recurring allowance counts only to the extent that it can be expected on a lasting basis and is well documented.

Worked example: calculating the research allowance of a software GmbH

A software GmbH is a small enterprise within the EU definition, and its financial year corresponds to the calendar year. For two certified projects, the following expenses arise in 2025:

• Wages of the employees involved including employer contributions, in proportion to documented hours: EUR 520,000
• Fee to a university institute in Germany under a commission placed in 2025: EUR 150,000, of which 70% = EUR 105,000 is eligible
• Fee to a service provider in Switzerland: EUR 40,000, not eligible, because Switzerland belongs neither to the EU nor to the EEA
• Tax depreciation on a measuring system acquired in 2025 and used only in the project: EUR 15,000
• Assessment base: 520,000 + 105,000 + 15,000 = EUR 640,000
• Research allowance at the SME rate: 35% × EUR 640,000 = EUR 224,000
• Comparison without SME status: 25% × EUR 640,000 = EUR 160,000, i.e. EUR 64,000 less

The GmbH makes a loss in 2025. It can only submit the application in 2026; after the assessment, the EUR 224,000 is refunded in full, so in the financial model it is shown at the earliest in 2026. Measured against all development spending of EUR 725,000 (520,000 + 150,000 + 40,000 + 15,000), the allowance covers around 31%. Commissions count only at 70%, and the commission to Switzerland not at all. For a project started in 2026 with the same expenses, the flat rate would be added: EUR 640,000 × 1.2 = EUR 768,000, of which 35% = EUR 268,800 of allowance.

Distinction: research allowance, grant and innovation loan

• Grant with a grant award notice: is approved at discretion within the available budget funds and generally requires that the project has not yet begun. The research allowance is a legal entitlement and can also be applied for retroactively.
• Innovation loan: a low-interest loan that has to be repaid. The allowance stays with the company as long as its requirements are met.

Common mistakes

• Product development described as research. A project description that sets out functions and customer benefit but names no open technical question does not support a certification.
• Hours not recorded on an ongoing basis. Without contemporaneous records of working time on the project, personnel expenses, usually the largest item, cannot be substantiated in an audit.
• SME rate applied without checking. Anyone who plans for 35% even though a corporate investor or group affiliation removes the status overestimates the allowance by 40%.
• Flat rate applied to older projects. The overhead flat rate of 20% exists only for projects started after 31 December 2025, not for older projects that are still running.
• Inflow planned too early. The application is only possible after the end of the financial year. Liquidity planning that shows the allowance in the year of spending overestimates the actual runway.

Frequently asked questions

Do loss-making companies also receive the research allowance?

Yes. The allowance is credited against the assessed tax, and whatever exceeds the tax is refunded. A company with no tax liability receives the assessed allowance paid out in full.

Does the certification have to be applied for before the project starts?

No. The application to the certification body is also possible during an ongoing project or after one has been completed. Applying early does, however, give planning certainty for budget and liquidity.

Is the research allowance tax-free?

Yes. The tax administration treats it like a refund of corporation tax or income tax, which does not increase taxable income. If a GmbH has booked the allowance as income, this amount is deducted again outside the balance sheet in the corporation tax return (Section 10 no. 2 of the German Corporation Tax Act, KStG).

How is the research allowance booked?

As other operating income, not as a negative tax; this is how the Institute of Public Auditors in Germany (IDW) sees it for annual financial statements under the German Commercial Code (HGB). The claim is capitalised already in the financial statements of the funding year if, by the time they are prepared, a certification is generally available and the application will almost certainly be submitted.

Can the research allowance be combined with grants?

Yes, but not for the same expenses. A project can be financed partly from a grant programme and partly through the allowance, provided each expense is funded only once and the state aid ceilings are observed.

The Roemer Capital view

We treat the research allowance as a building block of the financing strategy that stands alongside equity and debt and costs no shares. In the financial model, we show it only in the year in which it realistically flows in after assessment and crediting, and we show certified, applied-for and assessed amounts separately.

We coordinate the application work with specialised partners and the company's tax adviser. Whether a company is an undertaking in difficulty in the state aid sense and therefore has no entitlement is assessed by the tax adviser; we make sure that this question is clarified before planning. When aligning the projects, our principle is: what is funded is technical novelty, not the commercial risk of a product.