German R&D Tax Credit to Become a Success Story in the Machinery Industry
ResearchTax Incentives for R&D Strengthen Market-Oriented Research and Competitiveness
Since its introduction in 2020, the government tax credit is increasingly establishing itself as an important tool for research funding in the German machinery industry. A growing number of companies are utilising the ‘research allowance’, appreciating its improved financing options, streamlined access to state funding for research and development (R&D), and flexibility in the use of funds. Unsurprisingly, there is room for improvement in administrative processes. The planned adjustments in the Growth Opportunities Act can significantly enhance the effectiveness of the instrument. These are the findings of a study conducted by ZEW Mannheim and the German Machinery and Equipment Manufacturing Industry Association (VDMA), in which 300 companies of the industry were surveyed about the R&D tax credit.
“The tax credit motivates many companies in the machinery industry to engage in additional R&D activities, strengthens market-oriented research, and contributes to enhancing competitiveness,” explains Dr. Christian Rammer, author of the study and deputy head of ZEW’s “Economics of Innovation and Industrial Dynamics” Unit. “The results show that the tax credit is an important instrument for securing growth even in economically challenging times. The tax credit has the potential to further increase R&D spending in Germany and thus make an important contribution to achieving the government’s target of 3.5 per cent of gross domestic product.”
Tax credit gaining momentum
Between spring 2021 and January 2024, nearly 1,600 companies in the machinery industry submitted over 4,500 proposals for the R&D tax credit. This accounts for 17 per cent of all proposals submitted in Germany, making the machinery industry the sector with most applications. The number of applicants increased by almost 60 per cent in 2023 alone. This means that approximately 40 per cent of all eligible companies in the sector have already applied for the tax credit. A further 20 per cent of the companies plan to submit an application in 2024. “The new instrument is becoming a success story in the machinery industry,” says Hartmut Rauen, deputy managing director of the VDMA. “As a fast, topic-independent, simple, and reliable tool, it provides convincing arguments for its use.”
High approval rate; tax administration should not be a hindrance
The approval rate for the tax credit is much higher than for R&D project funding, providing greater predictability for companies. In 2023, nearly nine out of ten proposals in the machinery industry were approved or at least partially approved. Two-thirds of the surveyed companies have already received notices for the tax credit from the tax authorities. In almost all cases, the claimed costs were exempted from tax. By the end of January 2024, the approved funding volume for the machinery industry amounted to around 130 million euros. The tax grant has thus entered a phase where it is having a direct impact on companies’ R&D activities. However, about every second company faced inquiries or requests for additional documents from the tax authorities. Therefore, efforts should be made to streamline and reduce bureaucracy in tax administration. Dr. Ralph Wiechers, chief economist and head of the Tax Department of the VDMA, warns: “A major strength of the tax credit is its lean bureaucratic process. Ultimately, however, it will be up to the tax administration to ensure that the legislator’s plan succeeds in practice.”
Growth Opportunities Act facilitates more R&D
Currently, companies receive a tax credit of 25 per cent on eligible expenditures for R&D up to four million euros per year, resulting in a maximum allowance of one million euros. To enhance the impact of the tax credit, the German Bundestag has approved several amendments to the Growth Opportunities Act. By raising the ceiling to ten million euros per year, significantly more R&D expenditures could be mobilised. “This finally closes the gap in innovation funding, even for larger medium-sized companies,” says Rauen. “Namely for that third of our value chain that is too large for SME funding programmes and too small for many federal and EU consortium projects.” Many companies could then claim their entire eligible R&D expenses. If the measures proposed in the Growth Opportunities Act were implemented, the funding amount from the tax credit in the machinery industry could potentially increase by around 60 per cent compared to the current regulation, reaching nearly 1.3 billion euros. “Given widespread political reservations about a much-needed reform of corporate taxation, the planned expansion of the tax credit would be a ray of hope! Because it targets a crucial lever for future growth – innovation,” adds Dr. Wiechers.
About the tax credit
The German Act on Tax Incentives for R&D came into force on 1 January 2020. The aim of the tax credit is to make Germany more attractive as a location for innovation and investment, and to provide incentives to boost R&D activities in companies. Through the innovation programme, companies have the opportunity to receive up to one million euros in tax benefits for research and development. Both expenses for R&D projects and cooperative projects are eligible for funding. The subject of the project is completely open. Eligible R&D projects include basic research, industrial research, and experimental development. In order to receive the tax credit, it is irrelevant whether the R&D project has not yet started, has already been completed or is still in progress. Additionally, contract research, meaning research contracts with external contractors or service providers, is eligible for funding under the research allowance.
