How the government’s draft of the Growth Opportunities Act refines the research allowance
Government draft of the Growth Opportunities Act
The government draft of the submitted Growth Opportunities Act has once again undergone a significant redesign compared to the draft bill (§ 33 from p. 71). The revision regarding the Research Grants Act rewards small and medium-sized enterprises (SMEs) for a high R&D rate, contains a tangible surprise and features a welcome dovetailing with other parts of the Growth Opportunities Act at a crucial point.
The most significant changes to the FZulG
In descending order of relevance, these four changes are included in the government draft compared to the draft bill:
- Increase in the subsidy rate for personnel costs for SMEs from 25% to 35
- Retroactive application of the increased subsidy rate for SMEs (since, in contrast to the adjustment of the assessment threshold, no cut-off date is specified)
- Consideration of accelerated depreciation in the pro rata calculation of the acquisition and production costs of depreciable, movable fixed assets
- Increase of the hourly rate for sole proprietors from €40 to €70
The SME bonus for the research allowance
The federal government has made a decisive improvement, especially with the first differentiated funding rate for SMEs, which ARTTIC has urged for the FZulG in its current form (How can the research allowance get better?). With the significant increase of 10 percentage points, regardless of whether it is basic research, industrial research or experimental development, the research allowance is seriously competing with other funding instruments, especially for experimental development. Especially for experimental development, the funding rate is often only 25%. In addition, the research allowance continues to offer the streamlined application procedure and documentation.
What is an SME and what changes to the application?
According to Annex 1 of the German Block Exemption Regulation (AGVO), an SME is defined as a company with fewer than 250 employees and either less than €50 million in sales or €43 million in total assets. Logically, the application for the increased quota is not made in the application for certification pursuant to Section 6 of the FZulG, but in the application for determination pursuant to Section 5 of the FZulG. A company is likely to be granted the increased quota even if it was still an SME in the year assessed but is no longer an SME in the year of application. In any case, an SME-specific indication in item 1 of the ELSTER application for research allowance is to be assumed.
How much R&D costs must an SME incur in order to receive a €1 million research allowance?
The unrestricted change in the funding quota for SMEs changes the situation considerably; not to the advantage of some, especially those companies that have already claimed the research allowance for past fiscal years. These had to incur €4 million in costs in order to receive €1 million in research grants. SMEs that waited now only have to prove eligible annual R&D costs of around €2.9 million to receive the same amount of research allowance. For the three calendar years that have already passed since the research allowance came into effect, the difference already adds up noticeably. Without the increased quota, a company had to submit €12 million in costs to receive a €3 million research allowance; from now on, only about €8.6 million in costs are sufficient for the same return. This is subject to the proviso that it remains with the increase in the funding rate without a cut-off date.
Dovetailing of research allowance and super depreciation
The inclusion of acquisition and production costs of depreciable, movable fixed assets in the assessment basis for the research allowance was already a welcome innovation in the draft bill (new Section 3a FzulG). In this context, the reduction in value during the project period is used to determine the eligible amount. The government draft now explicitly takes into account the increased special depreciation under Section 7g (5) of the German Income Tax Act, which is now 50% instead of 20%. A special depreciation allowance sensibly placed in the project period can therefore substantially increase the amount of eligible costs. For example, an SME injection molding company can directly depreciate the thermal test stand purchased at the beginning of a relatively short, one-year R&D project at a cost of €1 million in the first (and only) year of the project at 50% and thus include €0.5 million of costs in the tax base (from 2024). This alone immediately generates €175,000 in research grants if the project is positively certified.
ARTTIC’s conclusion
The amendment to the FZulG has benefited considerably from the further deliberations on the Growth Opportunities Act in the cabinet! SMEs will finally be placed in a better position than large companies, which will significantly increase the cost/benefit ratio for them. The anticipated retroactive application of this increase is particularly significant for all companies for which the research allowance has yet to be determined. These can now expect a strengthening of their other income by 40% compared to their original planning. With inclusion of the special deprication allowance in the FZulG a good opportunity was utilized for the Growth Opportunity Act to measure up to its name.
Dr. Daniel Pawliczek
Funding Consultant at ARTTIC Innovation
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