Frascati Criteria: R&D Funding Eligibility & Tax Incentives

Which projects are eligible for funding under Germany's R&D tax allowance (Forschungszulage)? What criteria must R&D projects meet in order to be eligible for funding?

These are two of the most frequently asked questions by our customers. The so-called Frascati criteria may provide more clarity.

The Frascati Criteria are an internationally approved set of rules which were developed by the OECD (Organisation for Economic Co-operation and Development) to systematically define, measure and classify research and development (R&D). They were first published in 1963 in the Frascati Manual, named after a meeting of OECD experts held in Frascati, Italy.

Since then, the criteria have been revised several times in the light of changing scientific and technological circumstances. The latest edition of the Frascati Manual dates back to 2015 and has expanded the definitions by including new fields of research, such as digital technologies or interdisciplinary approaches.

By applying the Frascati criteria, tax authorities and reviewers can check more efficiently whether a project is eligible for funding. The criteria provide a clear guideline that gives both companies and authorities orientation.

The Frascati criteria are a global framework developed for evaluation and discernment purposes, distinguishing research from other activities. They provide a basis for classification and are applied worldwide, including for statistical surveys, funding programs and tax incentives for research. For instance, statistics on research expenditure or the innovative strength of a country are often based on national standards. Organizations such as the OECD or Eurostat apply the Frascati criteria during their reportings such as the OECD Science, Technology and Industry Scoreboard, thus ensuring international comparability.

Furthermore, countries also make use of the Frascati criteria when evaluating their national innovation systems. For instance, governments can examine which proportion of gross domestic product (GDP) accounts for R&D, or compare the ratio of R&D activities in different industries.

In addition, the Frascati criteria provide a solid foundation for data-based political decisions, by highlighting the sectors which may require additional investment, or to evaluate the effectiveness of existing support measures. Beyond the evaluation opportunities, the criteria also assist with prioritization: funding agencies use the Frascati Criteria to establish focus areas. For example, they can determine whether to place greater emphasis on basic research (e.g., in physics) or application-oriented research (e.g., in medical technology) in terms of funding.

The Frascati Criteria are particularly relevant regarding the application process for the german research tax credit or similar funding programs, since they establish the framework for evaluating eligibility for funding.

In order to avoid a “rude awakening” during the application process by discovering that submitted projects are not eligible for funding, the following section provides a detailed explanation of the key aspects of the Frascati Manual.

Core Elements of the Frascati Criteria

1. Which criteria must R&D fulfill?

According to the Frascati Criteria, R&D activities are systematic efforts aimed at acquiring new knowledge or developing new applications. R&D must meet five key criteria:

●       Novelty: The activities generate new knowledge or insights.

●       Creativity: The work is original and requires innovative approaches.

●       Uncertainty: The outcome of the work is uncertain.

●       Systematic Approach: The research is planned and documented.

●       Reproducibility: The results must be verifiable and replicable.

2. Which activities qualify as R&D?

The Frascati Criteria classify research and development into the following three categories:
●       Basic Research: The primary aim is to generate knowledge without focusing on direct practical applications.
●       Applied Research: This focuses on solving specific practical problems.
●       Experimental Development: This includes activities aimed at creating new products, processes, or services.

3. What does not qualify as R&D?

Not every activity that requires knowledge qualifies as R&D. Activities such as market research, quality assurance, or system maintenance are explicitly excluded, as they lack novelty or  research-oriented nature.

Examples of Non-R&D Activities:

Despite potentially involving expert knowledge or advanced technologies, the following activities are explicitly classified as non-R&D:

●       Routine Testing and Inspection Procedures
○       Examples: Quality controls in production, standardized product tests (e.g., material testing).
○       Rationale: These activities do not generate new knowledge or innovations but ensure adherence to existing standards.

●       Market Research and Consumer Analysis
○       Examples: Customer satisfaction surveys, analysis of market trends or consumer preferences.
○       Rationale: These activities aim to improve understanding of market conditions but do not produce scientific insights or technical innovations.

●       Quality Assurance and Maintenance
○       Examples: Machine calibration, maintenance of laboratory equipment, monitoring of existing production lines.
○       Rationale: These are supportive tasks that sustain existing processes but do not lead to advancements or new applications.

●       Education and Training Activities
○       Examples: Employee training sessions, professional development on new technologies.
○       Rationale: While these activities promote knowledge, they do not contribute to the creation of new knowledge or applications.

●       Acquisition of Know-How or Technologies
○       Examples: Purchasing patents, licenses, or existing technologies.
○     Rationale: The act of acquisition itself is not R&D unless the acquired technology is further developed or used in a way that creates new insights or applications.

●       Technical Support and Consulting
○       Examples: Technical assistance in implementing existing technologies or systems.
○       Rationale: Such services rely on existing knowledge and are not primarily aimed at research objectives.

Many national and European funding programs, such as Horizon Europe, evaluate applications based on the Frascati criteria. Applicants must demonstrate that their projects meet the criteria for R&D, with a focus on novelty, creativity and uncertainty.

Why are these activities not considered R&D?

For an activity to be classified as R&D, it must meet all five central criteria of the Frascati definition: novelty, creativity, uncertainty, systematic approach, and reproducibility. The examples mentioned above typically fail to meet one or more of these criteria:

●       No Novelty: Routine tasks and standardized processes do not generate new knowledge or technological advancements.
●       No Creativity: These activities follow predefined procedures and do not require original or innovative approaches.
●       No Uncertainty: The outcome is predictable, as established methods are used.
●       No Systematic Research: The activities are often not planned or structured as research projects.
●       No Reproducibility: Routine or maintenance tasks are not designed to produce documentable scientific findings.

Why is clear differentiation important?

The definition and promotion of R&D are closely tied to the limited resources of companies, funding programs, and tax authorities. A precise differentiation helps prevent misuse and misclassification, ensuring that routine tasks are not mistakenly declared as research. Additionally, clear boundaries ensure the effectiveness of funding by directing resources exclusively towards innovative and research-intensive projects. Another significant benefit is that clear differentiation supports the creation of comparable statistical data, which can be applied in terms of national and international analyses.

What is the importance of the Frascati Criteria for companies?

The differentiation between R&D and non-R&D activities has direct implications for companies aiming to apply for funding or benefit from tax incentives, such as the German R&D tax allowance:

●       Documentation: Companies are required to document their R&D activities in detail and in compliance with GOBD (Generally Accepted Principles for Keeping and Storing Accounting Records in Germany) in order to demonstrate that these activities meet the Frascati criteria.

●       Evaluation Process: Funding bodies and tax authorities are responsible for assessing whether the proposed projects include eligible R&D activities or if parts of them should be classified as non-R&D.

●       Strategic Planning: Companies can utilize the criteria to optimize their research strategies and focus specifically on activities that qualify for funding.

Opportunities and challenges during application processes

One significant advantage of the Frascati criteria is the aspect of standardization: universal definitions facilitate the comparability on a national and international level. By simultaneously offering flexibility, the criteria can be adapted to new scientific and technological developments. In terms of decision-making, the Firscati criteria also offer substantial benefits regarding their practical applicability. The criteria can be drawn upon as a solid basis for decision-making in terms of funding programs and tax incentives.

However, some of these benefits also provide sources of error.

For instance, one difficulty accounts for the given flexibility, since in some cases there is scope for interpretation. Despite the clear definitions, the criteria can be interpreted differently, particularly in the case of complex projects. In addition, borderline cases can occur. Some activities, such as software development, lie at the conceptual intersection of the subject areas ‘R&D’ and ‘routine work’ and are marked by ambiguity. Another aspect is bureaucracy: companies often have to submit extensive documentation in order to meet the R&D criteria, which can be a hurdle for small and medium-sized enterprises (SMEs) in particular.

Frascati criteria and the future of research policy

In an increasingly knowledge-based economy, the Frascati criteria certainly play a crucial role. Not only do they promote the transparency and comparability of R&D data, but also the efficient use of funding.

However, with the growing importance of interdisciplinary research and disruptive technologies, their continuous development and refinement may be regarded as imperative. Areas such as artificial intelligence, climate research and biotechnology impose new demands on the definition and evaluation of R&D.

Conclusion

The Frascati criteria are more than just a theoretical concept - they are a practical tool that forms the basis for numerous decisions with regards to research and innovation. Whether in the allocation of funding, the compilation of statistics or the granting of tax incentives - their significance can hardly be overestimated.

It may be viewed as essential for companies and research institutions to know and apply the Frascati criteria in order to benefit from the various funding opportunities and to simultaneously contribute to the further development of science and technology.