Nov 04, 2024
How is the Research Tax Credit Disbursed?
The research tax credit provides an attractive way for companies to support their innovation projects. But how exactly is this benefit disbursed?
In most cases, companies do not receive a direct payment. Instead, the tax credit is applied as part of the tax return process—specifically offset against the assessed income or corporate tax. This means the research tax credit acts as a tax reduction, lowering the overall tax burden.
But what happens if the credit exceeds the tax amount owed? In such cases, the excess amount is refunded as a tax reimbursement. This ensures companies can fully benefit from the research tax credit, even if their tax liability is lower.
It’s important to note, however, that companies wishing to claim the credit must not be classified as “companies in difficulty.”
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Jul 17, 2025
Forschungszulage application rejected? What to do next?
In Germany, Forschungszulage (Research Allowance) is the program dedicated to providing financial support for companies that focus on innovation, research, and development. Companies across industries and various sizes can claim Research Allowance based on the eligible expenditures of their qualified R&D projects. The Research Allowance is usually given to the companies in the form of a tax credit and if a certain company's tax liability is less than the research grant, the amount would be issued as a cash refund to them. The Research Allowance application process consists of two steps, first obtaining a BSFZ certificate that confirms the project is eligible for research allowance and second, sending an application to the Tax Office seeking the actual financial support.What happens if the application gets rejected? This question often gets a lot of attention from the companies applying for the allowance from the initial stage and even after the submission of the application. The rejection might be from the BSFZ (Bescheinigungsstelle Forschungszulage) or in the second stage from the Tax Office (Finanzamt). The important point the applicant needs to understand is that the rejection is not ultimate. Here, the rejection could be reversed or pave the road for a well-prepared reapplication. When an applicant receives feedback from the BSFZ or Tax office, the first thing they should do is to understand the feedback and analyse it carefully to confirm whether it was an application rejection or they are asking for further information about the project before proceeding to the next stage. Here's the comprehensive information about reasons for rejection, corrective steps, and strategic elements to acquire the approval for the application.Reasons for the rejection of the Forschungszulage applicationThe rejections do not always come from a point of the R&D projects being completely unworthy to get the allowance but due to the lack of compliance with the predefined criteria such as the Frascati Criteria or any specific BSFZ guidelines.The main causes for the rejection of Forschungszulage application include:Absence of technological uncertainty:The project should aim at achieving unexpected outcomes which aren't obvious to the existing knowledge and it should have an element of uncertainty as defined under Frascati Criteria which is a core factor that distinguishes a research project from others.Ambiguous project documentation:BSFZ gives a lot of weightage to the precise and transparent project documentation. If the documents required for Forschungszulage application are unclear or inconsistent, it can result in application rejection or follow-up queries from the BSFZ office.Missing information:Along with the need for clear documentation, BSFZ also considers some mandatory points to be present in it. Information about project timelines, personnel costs, clear breakdown of work packages, and project milestones are some of the examples of areas which need top-level clarity. This information needs to be definitive and justifiable with valid evidence and failure to adhere to this, the application may lead to disqualification even for an excellent research project.Unqualified research activities:There is a pre-set eligibility for the projects to apply for research allowance. The research projects should fall under the category of either basic research, industrial research or experimental development. When there is a misalignment with the eligible activities and project types, it results in rejection. The projects or activities such as test marketing, market research, UI/UX activities, or integration of known technology are not eligible to claim research allowance.Vague terminologies:The project description needs to be drafted with clear terminologies that express the research nature of the project and give clarity to its details. Adding vague terms or wordings may not be successful since it does not demonstrate the core values of the R&D project.What is the next step if a Forschungszulage application is rejected? Following the rejection of an application, there are two options the applicant can pursue.Filing an appealThe appeal could be filed within one month after receiving the rejection and it should be done if the applicant company finds that the application was wrongfully rejected due to a misunderstanding or incorrect assessment. The focus on appeal should be mainly on providing additional explanation and evidence supporting the claim and not on questioning the rejection.The applicant should analyse and adhere to the following factors in this process:Examining why the application was rejected and its rationale point by point.Compare the application against the statutory standards to understand where the information provided is vague and insufficient.File a well-structured appeal addressing the issue and submitting any additional evidence supporting the claim. Resubmitting an improved applicationIf the application is rejected in terms of any structural shortfalls without enough required information, then it is effective to submit a revised application instead of appealing. The revised application needs to be well prepared ensuring all the crucial elements are mentioned accurately in project documentation. Merely adding more details to existing ones would not be successful. Elements to be considered while reapplying:Rewriting the project descriptionProvide accurate and transparent details supporting the claimConfirming the alignment of the project with BSFZ guidelines and Frascati Criteria.Note: When an appeal is filed, the BSFZ office might take 6 months to a year to review the appeal and make a decision. However, in the case of reapplication, BSFZ has an approval deadline of 3 months, which can be a tremendous advantage for applicants.Measures to avoid application rejectionThe rejection of the application majorly indicates deficient application process and not the flawed research project. The following depicts measures to strengthen the application:Evaluation of the project:One of the effective measures to ensure the successful application is to have the project evaluated by an external advisor with expertise in Forschungszulage. This audit helps to uncover the eligibility of the projects and defines the eligible expenses to claim the research allowance.Accurate internal documentation:Documenting each aspect of the project holds a key value if the company is seeking research allowance. Accurate records of timesheets, human resources, work packages, costs incurred, milestones, and prototypes are very useful during the application process as it serves as a clear reference to build the project description and also works as the supporting evidence to the claims. Providing clear information:For the explanations, it is important to use clear scientific terms that show the quality of the research projects. It is an ideal practice to refrain from using ambiguous terms and buzzwords in the project description.Proactive planning:Planning ahead by considering the Forschungszulage (research allowance) as a funding strategy, and ensuring the alignment of the documentation, financial planning, and other relevant internal processes of the project can help the company to submit an error free and successful application.How can innoscripta help you?innoscripta provides a one-stop solution involving an excellent R&D management software platform that manages each aspect in the process of applying for research allowance and the advisors who guide you through each and every step in the process strategically. The software platform offers the end-to-end solution from documenting the multiple research activities including time tracking and the costs incurred until the application submission and archiving all the documents for any future requirements including the tax audit. The top-tier software tool combined with expert advisors at innoscripta enables the company to strategically plan and successfully apply for research allowance.Connect with innoscripta to evaluate your research projects and determine their eligibility for research allowance.
Jun 30, 2025
Contract Research under the German Research Allowance (Forschungszulage)
The Research Allowance is a top funding initiative by the German government providing monetary support to companies investing in and performing R&D projects. The objective of this programme is to encourage innovation and the eligible research projects that match pre-defined criteria can obtain financial support from the government in terms of tax reduction or cash refunds.The Research Allowance has a wider eligibility criteria where companies across industries including corporations, SMEs, partnerships, sole proprietorship and early-stage start-ups can benefit. The eligibility of the project to receive research allowance is decided based on the defined criteria namely, Frascati Criteria, that include elements such as newness, uncertainty in expected outcomes and structured methodology. The expenditures incurred for the purpose of salaries or wages, materials and consumables used directly in the research, depreciation of movable fixed assets and contract research (up to 70% of the total value) are categorized as the expenses based on which the allowance will be issued, and costs for routine software updates, market research and test marketing are in the list of excluded expenses.A two-step application process is followed for the research allowance, the first step is to obtain a BSFZ certificate that implies the particular project is eligible to receive funding and the second step is the application is to be sent to the tax office seeking the financial support. It calls for carefully drafting the application at each stage with all needed information and proofs to avoid rejections or delay in approvals. The applicant needs to produce documentation, particularly including a project description with proof of innovation and uncertainty in the expected results, details of timesheets and payroll, details of contract research, depreciation details of movable fixed assets used for the research purpose, and details of other funding received if any.Out of these expenses, contract research catches attention regarding its definition, how it is funded, the eligible amount, and the criteria for the application. Contract research means a research project in which the principal researcher outsources the research activity to the third party research institution. The third party research institution could be an academic institution, research institution or another company. In the year 2025, as per the recent update, up to 70% of the total expenses are allowed to claim the research allowance. The research allowance application is to be submitted by the commissioning party and not the contractor as the former is entitled to receive the financial support.Contract Research vs In house ResearchWhat is Contract Research?Contract Research takes place when the R&D project is outsourced to a third party, for example, a research institution, university or private organisation. In the case of contract research, the company (not the service provider) is eligible to apply for the research allowance.Eligibility criteria:The official contract between the parties is mandatoryThe contractor is not eligible to claim the research allowance, the commissioning party alone can apply.The contract research should meet the pre-defined criteria of an R&D project.Note: The application for the research allowance must always be submitted by the client (commissioning party) – not by the commissioned research institution (contractor). Only the client is entitled to apply for and claim state funding for the costs incurred in the context of contract research.Funding details for Contract Research as per new updates:70% of the total contract value is eligible (previously it was 60%)17.5% is the effective funding rate; it is 24.5% in the case of SMEsSample Calculations:1. Calculating the eligible amount to claim the research allowanceTotal cost - 10,000,000Percentage of eligible expenditure - 70%Eligible expenditure = 10,000,000 x 70% = 7,000,0002. Calculating the research allowance for companies with standard rate of 25%7,000,000 x 25% = 1,750,0003. Calculating the research allowance for SMEs with the rate of 35%7,000,000 x 35% = 2,450,000The effective funding rate will be 17.5% for the companies and 24.5% will be for the SMEs.The effective funding rate is derived as the following,4. For the companies with standard rate:Eligible amount x Subsidy rate/Total expenses7,000,000 x 25% / 10,000,000 = 17.5%5. For the companies with SMEs rate: 7,000,000 x 35% / 10,000,000 = 24.5%What is In-House Research?The R&D activities conducted using their own resources throughout the project are termed as internal research or in-house research. Here, 100% of the expenditure is considered while applying for the research funding and 25% is the standard funding rate, and for SMEs, it is 35%.Sample Calculations:1. Calculating the eligible amount to claim the research allowanceTotal cost - 10,000,000Percentage of eligible expenditure - 100%Eligible expenditure = 10,000,000 x 100% = 10,000,0002. Calculating the research allowance for companies with standard rate of 25%10,000,000 x 25% = 2,500,0003. Calculating the research allowance for SMEs with the rate of 35%10,000,000 x 35% = 3,500,000Overview of key differencesElementsContract ResearchIn-House ResearchEligibility70% of the total eligible R&D costs100% of the total value of the total R&D costsEffective funding rate17.5% for other companies and 24.5% for SMEs25% standard rate and 35% for SMEsIdeal forCompanies without the R&D teamCompanies with an expert R&D teamFunding received byCommissioning party (not the contractor who works on the project)The same organisationConclusionContract research is an option taken by the companies venturing into an R&D project but do not have a strong internal R&D team. The research project should meet all the pre-defined criteria to be eligible for the financial support from the government in the form of research allowance. The application process to obtain research allowance remains the same as for in-house research in the case of contract research, first to apply for the BSFZ certificate and upon receiving the certificate one should proceed to apply to the tax office seeking the monetary benefits in terms of tax reduction or cash refund.
