Research Allowance Act: Funding, Application, Benefits

The Research Allowance Act (FZulG) has reshaped the funding landscape for research and development in Germany since 1 January 2020. As a technology-neutral and sector-agnostic tax incentive, it enables companies of any size and legal form to reduce their R&D investment directly through the tax system. Unlike traditional project-based grants, this support is processed automatically via the tax return and provides predictable, reliable funding for innovative companies.

What is the Research Allowance Act?

The Research Allowance Act establishes a legal framework for tax-based support of research and development in Germany. It grants all tax-liable companies a research allowance on their eligible R&D expenditure. The law covers three core areas of research: basic research, industrial research, and experimental development.
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The incentive is provided as a direct tax reduction or refund and therefore applies regardless of a company’s current profitability. Even companies operating at a loss receive the full refund of the calculated research allowance. This structure makes the FZulG particularly attractive for start-ups and growing technology companies, which often need years before turning a profit.

Legal basis and structure of the law

The FZulG consists of eight sections that regulate the key aspects of tax-based R&D support. It is integrated into the German Income Tax Act and the German Corporate Income Tax Act, which allows the research allowance to function as an independent funding instrument alongside existing tax provisions.
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Section 1 FZulG defines eligibility for all tax-liable companies with a registered office or permanent establishment in Germany. Section 2 FZulG specifies eligible R&D activities and is aligned with the internationally recognised definitions of the OECD Frascati Manual. Sections 3 and 4 regulate the calculation method and maximum limits, while Section 5 FZulG describes the application procedure.
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Of particular practical relevance is the distinction from other funding instruments set out in Section 7 FZulG. In principle, the research allowance can be combined with other forms of public funding, but total funding is capped at 15 million euros per project. This rule prevents overfunding and ensures compliance with EU state aid requirements.

Tax-based R&D incentives: benefits and mechanism

Tax-based R&D support under the FZulG works fundamentally differently from project-based grant programmes. Instead of requiring prior approval and monitored use of funds, the incentive is claimed retroactively through the tax return. Companies can claim their actual R&D expenditure and receive 25 percent as a tax refund or tax reduction.
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The key advantage is predictability and reduced bureaucracy. While traditional funding programmes often involve months-long application processes and extensive reporting obligations, the research allowance is an automated process. Companies only need to document their R&D activities and submit an application for certification to the Research Allowance Certification Office (BSFZ).
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The tax design makes the incentive particularly protective of liquidity. In years with low profits or losses, companies receive the full research allowance as a direct payout. In profitable years, the tax burden is reduced accordingly. This flexibility supports companies optimally across all development stages.

Research allowance: calculation and funding amount

The research allowance is calculated based on annual eligible R&D expenditure. The funding rate is generally 25 percent, but for small and medium-sized enterprises (SMEs) it can be increased by ten percentage points to 35 percent. This increase has applied since March 2024 and specifically strengthens the innovative capacity of the SME sector.
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Eligible expenditure primarily includes personnel costs for R&D employees, capped at a maximum of 4 million euros per year (10 million euros for non-SMEs). In addition, 60 percent of the costs for contracted external research can be recognised, plus a 20 percent flat-rate surcharge on that amount. Depreciation on movable tangible fixed assets is also eligible if the assets are used exclusively for R&D.
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A practical example: an SME with 500,000 euros in annual personnel costs for R&D activities receives a research allowance of 175,000 euros at a 35 percent rate. A larger company with 2 million euros in R&D personnel costs receives 500,000 euros at a 25 percent rate. These substantial amounts can sustainably strengthen innovation projects or make them possible in the first place.

Growth Opportunities Act: current status and impact

The Growth Opportunities Act has further strengthened tax-based R&D support in Germany. One of the most important improvements is the already mentioned increase in the funding rate for SMEs to 35 percent, which has applied since March 2024. This change makes the research allowance even more attractive for small and medium-sized companies.
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In addition, since 2025 the law allows an early reduction of tax prepayments based on expected research allowances. This rule significantly improves companies’ liquidity, as they no longer have to wait until filing the tax return in the following year to benefit from the incentive.
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Current developments show a positive trend in application statistics. The BSFZ reports steadily increasing numbers of applications, demonstrating growing acceptance of tax-based R&D support in the German economy. Particularly encouraging is the high share of SMEs among applicants, which underlines the policy objective of strengthening the SME sector.

Application procedure and certification body

The application process for the research allowance is divided into two stages. First, an application for certification of eligible R&D activities must be submitted to the Research Allowance Certification Office (BSFZ). This certification is a prerequisite for later claiming the research allowance from the tax office.
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The BSFZ assesses only the technical eligibility of the described R&D activities. It evaluates whether the activities meet the legal definitions of basic research, industrial research, or experimental development. The tax law review and final assessment of the research allowance are then carried out by the competent tax office.
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For companies, it is important to prepare applications carefully. A precise description of the R&D activities, a clear distinction from routine tasks, and a plausible cost plan significantly increase the chances of approval. Experienced consulting firms such as Felsaris provide support in meeting both the technical and formal requirements effectively.

Common mistakes when applying

A frequent mistake is an insufficient distinction between eligible R&D activities and ineligible routine or production activities. Many companies overestimate the R&D content of their work or do not document the innovation aspects sufficiently. This leads to reductions or rejections by the BSFZ.
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Incorrect allocation of costs is also problematic. Personnel costs are only eligible if employees are directly involved in R&D activities. Administrative, sales, or management tasks are generally not eligible, even if they are related to an innovation project. Accurate time tracking and activity documentation are therefore essential.
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Many companies also fail to consider the cumulation rules with other funding instruments. If other public grants or subsidies are already received for the same project, this can affect the amount of the research allowance. Early coordination with tax advisers or funding experts helps prevent such issues.

Options for combining with other funding programmes

The Research Allowance Act allows combination with other funding programmes, but within clear limits. Total funding for a project must not exceed 15 million euros. For this calculation, all public grants, loans with reduced interest rates, and the research allowance are aggregated.
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The combination with the ZIM programme (Central Innovation Programme for SMEs) is particularly attractive. While ZIM can provide up to 360,000 euros as a direct grant, the research allowance can additionally cushion the costs that are not covered. A company can therefore benefit both from project-based ZIM funding and from the general tax-based R&D incentive.
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Combination with EU programmes such as Horizon Europe or regional funding programmes is also possible. However, it must be ensured that EU state aid rules are complied with. Combined funding must not exceed the permitted aid intensities, which range between 25 and 100 percent depending on company size and the type of research.

Documentation and evidence of R&D activities

Proper documentation of R&D activities is crucial for the success of a research allowance application. Companies must be able to demonstrate that their activities constitute research and development within the meaning of the law. This includes a clear description of the scientific and technical objectives, the methods used, and the expected results.
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It is particularly important to distinguish the project from existing technologies and solutions. The BSFZ examines whether there is a genuine technological risk and whether new knowledge is generated. Routine improvements, quality assurance, or the mere application of known methods are not eligible. Detailed project planning with clearly defined milestones and research objectives significantly strengthens the argumentation.
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Cost documentation requires precise allocation of expenses to R&D activities. Personnel costs must be supported by time recording systems, and external services by relevant contracts and invoices. Clean bookkeeping and regular internal controls prevent later issues during reviews by the tax authorities.

Practical tips for a successful application

Successful applications stand out through a clear structure and precise technical reasoning. Start with an understandable summary of the research project and clearly highlight the technical challenges. Avoid overly general descriptions and focus on the specific innovation aspects.
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Cost planning should be realistic and transparent. Take into account the maximum limits for different cost categories and plan for a reasonable time buffer. Planning that is too optimistic can cause issues during later reconciliation, while planning that is too cautious can leave funding potential unused.
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Make use of preliminary advice from experienced funding specialists. A professional assessment of eligibility and careful preparation significantly increase the likelihood of success. For example, Felsaris offers a free initial evaluation of project ideas and supports the entire application process.

Conclusion: the research allowance as a strategic instrument

The Research Allowance Act has established itself as an important instrument for innovation support in Germany. With its technology-neutral approach and streamlined processing through the tax system, it offers all research-active companies a reliable source of financing. The recent improvements introduced by the Growth Opportunities Act particularly strengthen small and medium-sized companies.
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For innovative companies, the research allowance is a strategic tool to finance development activities. Predictable funding of 25 to 35 percent of eligible R&D expenditure can free up substantial budgets and enable additional innovation projects. When combined with other funding instruments, attractive financing mixes become possible.
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However, success depends on a well-prepared application and proper documentation. Companies should seek professional support early to make full use of the potential of tax-based R&D incentives. Start your funding consultation now: with Felsaris, you can secure your research allowance in the best possible way.

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Frequently asked questions about the Research Allowance Act

Which companies can apply for the research allowance?

All tax-liable companies with a registered office or permanent establishment in Germany are eligible to apply, regardless of size, legal form, or industry. This includes corporations, partnerships, and sole proprietors, provided they conduct research and development.

What is the maximum research allowance per year?

The research allowance amounts to 25 percent of eligible expenditure, and for SMEs it has been up to 35 percent since 2024. Eligible personnel costs are capped at 4 million euros per year (10 million euros for large companies), which enables a maximum allowance of 1.4 million euros (SMEs) or 2.5 million euros.

Can loss-making companies receive the research allowance?

Yes, loss-making companies receive the full research allowance as a direct refund. This is a key advantage compared with other tax relief measures, as the incentive does not depend on current profitability.

How long does the application process take?

The process is divided into two phases: the BSFZ decides on the certification of R&D activities within three months. The tax office then reviews the tax aspects as part of the tax return assessment. Overall, companies should plan for six to twelve months.

Which costs are eligible under the research allowance?

Eligible costs include personnel costs for R&D staff, 60 percent of the costs for contracted external research, a 20 percent flat-rate surcharge on that amount, and depreciation on R&D-specific assets. Administrative, sales, or general management costs are not eligible.