The R&D tax credit with a blind eye to earnings –
Why loss-making companies (wrongly) hesitate
Recapitulation
The German R&D tax credit has become much more popular in recent years after a modest response following the introduction of the instrument. This can be seen not only in advertising and studies by various associations, but also in the bare figures of state tax revenues, as shown in the 29th Subsidy Report (see p. 114) of the federal government. In the current year, the shortfall in corporation tax due to the R&D tax credit is likely to exceed the one billion mark for the first time.
| Calendar year |
Σ R&D tax credit called up [€ million] |
|---|---|
| 2021 | 20 |
| 2022 | 155 |
| 2023 | 615 |
| 2024 | 1.100* |
Aspiration and reality
Nevertheless, with a total R&D tax credit of around € 1.8 billion over the period 2021 to 2024, only around a third of the estimate of € 5.6 billion from 2020 will have been achieved for this period.
However, this does not automatically mean that this € 1.8 billion fully reflects the real claims of the companies based on the BSFZ certificates available to them. As ARTTIC has already explained in detail, the expenses of certified projects can still be claimed from the tax office 4 years after the end of the calendar year in which the first expenses were incurred. The big wave of calls will therefore begin this year, provided that companies are aware of the time limit: applications for research allowances for 2020 must be submitted to the tax office this year, otherwise the entitlement will expire!
The quantifiable role of R&D tax credits
But even if the wave comes, the question still arises as to why many companies apparently do not apply for R&D tax credits. Even the expected € 1.1 billion R&D tax credit (which includes claims from several previous years) corresponds to exactly € 4.4 billion in research and development (R&D) costs. If we take the R&D expenditure of German companies in 2021 as a benchmark (€ 75.2 billion), less than 6% of R&D expenditure funded with the R&D tax credit. The question therefore arises: who is not yet applying for the R&D tax credits and why?
The misunderstanding
On a day-to-day basis, ARTTIC often encounters situations where companies have examined the R&D tax credit and come to the conclusion that it is not an option for their company. When asked why, the answer is usually Missing tax liability or a profit carried forward or a loss carried forward, etc.. However, the question of whether or not a company actually is subject to corporate income tax (Körperschaftssteuer) from in course of an assessment for a financial year is completely irrelevant for the crediting of the R&D tax credit! The reason for this arises from the nature of this particular instrument.
The refundable tax credit
According to the OECD definition, the German R&D tax credit is a refundable tax credit. It therefore not only leads to a reduction in the tax burden to the value of € 0, but the difference to the amount of corporation tax assessed is paid out directly. The R&D tax credit is thus in contrast to the non-refundable tax credit, which only reduces the tax burden to the value of € 0 and could never lead to a negative tax burden. The R&D tax credit is therefore also suitable for promoting R&D at companies that have incurred a loss. Young companies or companies in sectors undergoing structural change in particular should therefore urgently apply for the R&D tax credits as long as they are not “companies in difficulty”(REGULATION (EU) No. 651/2014, §2, No. 18).
The disastrous salami tactic
In practice, it is also often the case that companies want to try out the R&D tax credit first, start with just one project and obtain further certificates from the BSFZ bit by bit. This tactic wastes precious time, which can have a negative impact on a company’s liquidity (especially if it is making a loss). For example, the tax office is sometimes only called up for the longest previous financial year or only for years that are identical to the year for which a tax return is submitted. However, the corporate income tax assessment notice for an assessed year must be understood as a measuring probe, as it effectively “checks” which R&D tax credit assessment notices have already been issued: The R&D tax credit for 2023 can already be credited in a tax return for 2022 (see para. 263 in the letter from the DoF dated February 7, 2023)!
ARTTIC’s conclusion
The German R&D tax credit is not only a flexible instrument in terms of content, it is also formally a refundable tax credit that covers all pots. So if you have so far found the R&D tax credit unsuitable from your company’s earnings perspective, we at ARTTIC Innovation will be happy to help you through the entire process, from the question of eligibility to the actual payment.
Dr. Daniel Pawliczek
Funding Consultant at ARTTIC Innovation
If you are interested in ARTTIC’s consulting services, please feel free to make an appointment with our FZulG experts.
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