Germany's Federal Ministry of Finance has replaced its 2023 circular on the research allowance, setting out revised rules on eligible costs, assessment base ceilings and allowance rates, along with the two-stage application procedure.
The German Federal Ministry of Finance (BMF) has updated its guidance on Tax Incentives for Research and Development with the publication of BMF Letter of 27 October 2026 on the granting of research allowances under the Act on Tax Incentives for Research and Development (Research Allowance Act – FZulG). The letter updates and replaces the BMF Letter of 7 February 2023. The research allowance encourages corporate research and development (R&D) and is credited against income tax or corporation tax, with any surplus paid out as a refund.
Who can claim
Taxpayers with unlimited or limited tax liability may claim the allowance, provided they are not tax-exempt. This covers corporations, commercial partnerships and entities exercising the option under Section 1a of the Corporate Income Tax Act (KStG). Tax-exempt institutions qualify only where the R&D is allocated to a taxable commercial business activity.
Qualifying projects
A project must fall within basic research, industrial research or experimental development. It must show novelty, scientific or technical uncertainty and systematic, planned implementation. Unsuccessful projects remain eligible. Routine product updates, standard software development, preparation for serial production, market analyses and pure feasibility studies are excluded.
Eligible expenditure
For in-house R&D, eligible expenditure includes the gross wages of employees engaged in the project, together with employer social security contributions. Depreciation on movable fixed assets also qualifies where the assets are necessary for, and used in, the project.
For sole proprietors and managing partners, eligible working time is capped at 40 hours per week. The flat hourly rates are:
- EUR 40 for hours worked before 28 March 2024
- EUR 70 for hours worked between 28 March 2024 and 31 December 2025
- EUR 100 for hours worked after 31 December 2025
For contract research commissioned after 27 March 2024, 70 per cent of the net remuneration qualifies, up from 60 per cent previously. The contractor’s management must be located in Germany, an EU member state or an EEA country. Projects commencing after 31 December 2025 also attract a 20 per cent flat-rate surcharge for indirect and operating costs. Expenditure already funded by other public subsidies cannot be included.
Ceilings and rates
The annual assessment base limit rises to EUR 12 million for expenditure incurred after 31 December 2025, up from EUR 10 million between 28 March 2024 and 31 December 2025. The ceiling applies collectively across affiliated group companies. The standard rate is 25 per cent. Eligible small and medium-sized enterprises receive a bonus of 10 percentage points, giving 35 per cent, for expenditure incurred after 27 March 2024. The maximum allowance is EUR 3 million for large enterprises and EUR 4.2 million for eligible SMEs per financial year, subject to EU state aid limits.
Two-stage procedure
Companies first apply through the web portal of the Certification Body for Research Allowances (BSFZ). Its certificate serves as a basic assessment notice (Grundlagenbescheid) on whether the project qualifies. Companies then apply to the competent tax office through the “Mein ELSTER” portal after the end of the financial year in which the expenditure was incurred. Projects spanning several years require a separate application for each financial year.
Documentation
No supporting documents need to be attached to the application. Full records must nevertheless be kept and produced on request, including contemporaneous time records showing project ID, hours worked, employee name and tasks. Estimates and unverified lump sums are not accepted.
Queries may be addressed to the Public Enquiries Office of the Federal Ministry of Finance.
