The new research allowance in Germany – in competition with the Austrian research tax credit?
Companies carrying out research and development in Austria have the possibility to apply for research funding, namely the so-called research tax credit. In an international comparison, the Austrian research tax credit is a recipe for success and is designed to showcase and enhance the attractiveness of Austria as a research location. The successive increase in the research tax credit from the original level of three percent in 2002 to 14 percent at present has made a massive contribution to this success.
Our German neighbour is now also putting greater emphasis on tax incentives to promote research and development. Effective January 1, 2020, the Research Allowance Act ("Forschungszulagengesetz", in short "FZulG") went into effect in order to offer companies a tax incentive for research and development. The new law aims to strengthen the position of Germany as a research location and stimulate increasing investments in R&D.
German competition for an Austrian success story?
Both the German and Austrian systems feature similar tax-based research promotion instruments. The question is whether the tried and tested Austrian tax credit can compete with the German research allowance, or perhaps even represent a competitive disadvantage on the part of Austria as a research location. At first glance, the German research allowance seems to show striking parallels to the Austrian research tax credit. However, if one examines the two approaches more carefully, there are perceptible differences in the details. The following illustration compares the main features of the Austrian tax credit with the German research allowance, depending on whether the research incentive involves in-house R&D or contract research.
Primary differences in the assessment base and maximum amounts, the applicable rate of the tax credit and corporate group restrictions
One key difference between the two models is the advantage enjoyed by in-house R&D activities within the context of the assessment base. The German research allowance only specifies the inclusion of direct R&D personnel costs. In contrast, Austria not only provides a research tax credit for staff costs, but also allows for direct expenditures (especially R&D investments), financing costs as well as overhead costs to be taken into account within the context of the assessment base, less any tax-exempt subsidies.
Although the German regulations provide for an official rate of 25 percent for the research allowance, which is higher than the current Austrian research tax credit of 14 percent, the broader range of the assessment base in Austria can lead to a higher tax incentive for research than in Germany. In particular, when it comes to capital-intensive R&D projects, the inclusion of investments in the assessment base underlying the Austrian research tax credit comprises a major advantage. In this case, investments serving sustainable R&D purposes can be completely taken into account in the form of acquisition costs encompassed in the assessment base in the year of acquisition.
Another significant advantage of the Austrian research tax credit is that there is no maximum amount stipulated for the assessment base when it comes to in-house R&D activities. The assessment base for the German research allowance is limited to EUR 2 million per financial year and company, in which case only one affiliated company can claim the maximum funding in a given year. Accordingly, within one corporate group, only one company can claim the maximum funding threshold of EUR 500,000 (corresponding to 25 percent of EUR 2 million). It is true that the maximum assessment base for contract research in Austria is only EUR 1 million (Germany: EUR 2 million). However, in Germany only 60 percent of the remuneration paid to contractors can be included. Moreover, there are limitations relating to affiliated companies which are significantly more restrictive than in Austria. In a corporate group, the corresponding structuring of contract orders can lead to a higher overall level of funding from the research tax credit than in Germany. For the most part, the German research allowance tends to fund research carried out by small and medium-sized companies (SMEs), whereas in Austria both SMEs as well as large firms are beneficiaries.
All in all, with respect to in-house R&D, the broader assessment base in Austria as well as the lack of a maximum cap on the assessment base and the lack of restrictions on corporate groups can lead to a higher tax incentive in Austria than in Germany.
To sum up the current situation: we do not predict any major transfer of R&D activities from Austria to Germany as a consequence of the introduction of the research allowance in Germany. Austria as an economic region will maintain its important position as a location for corporate research and development.