Tax-Based Research Allowance: 25% Funding, Application Process, and Practical Tips

The tax-based research allowance is a government funding instrument that supports companies of all sizes in their investments in research and development. As a legally based tax credit, it grants up to 25 percent of eligible expenses and can be paid out directly if no tax liability exists.

What is the tax-based research allowance?

The tax-based research allowance under the Research Allowance Act (Forschungszulagengesetz) provides direct financial relief for companies that invest in research and development. Unlike project-based funding programs such as ZIM, it does not involve a selection process: companies that meet the requirements have a legal entitlement to the funding.

Functionality and structure

This funding instrument works as a tax credit that is automatically offset against income tax or corporate income tax. For companies with low or no tax liability, any excess amount is paid out directly. Since 2025, companies have also been able to reduce their tax prepayments to zero, even before the final tax assessment is issued.

The funding rate is generally 25 percent of recognized R&D expenses. Up to €10 million in eligible costs per company and fiscal year can be taken into account, resulting in a maximum annual funding amount of €2.5 million.

Eligibility and scope of application

All companies subject to taxation in Germany with income from agriculture and forestry, commercial business, or self-employed activities are eligible to apply. Legal form, company size, or profit situation are irrelevant. Even start-ups or companies in loss-making phases can benefit from the funding.

Research Allowance Act: fundamentals and framework

The Research Allowance Act (FZulG) came into force in 2020 and can be applied retroactively to all research projects that began on or after 1 January 2020. Its objective is to strengthen Germany’s innovative capacity and competitiveness by creating targeted incentives for private-sector research activities.

European state aid limits

In addition to the national annual cap of €2.5 million, a European state aid ceiling of €15 million per company and research project applies over the entire project duration. This limit includes all forms of public aid, including other funding programs.

Distinction from other funding instruments

The research allowance complements existing project-based funding programs such as ZIM or BAFA schemes. While these programs support specific innovation projects through competitive selection processes, the research allowance provides a general tax-based relief for all recognized R&D activities of a company.

Eligible projects and activities

The definition of eligible research follows established EU and OECD standards. Three categories are recognized:

• Basic research
• Industrial research
• Experimental development

Criteria for R&D projects

Projects must meet four key characteristics: novelty, uncertainty of outcome, a systematic approach, and a scientific or technical basis. Pure routine activities, quality control, or market analyses are not eligible for funding.

Project types and collaborations

Eligible projects include in-house R&D activities, contract research carried out by third parties within the European Economic Area, and collaborative projects involving multiple partners. In the case of contract research, costs are recognized proportionally, depending on the type of contractor.

Practical application examples

Typical eligible activities include the development of new materials, prototype construction, software development with an innovative character, process optimization, or the development of AI algorithms. Adapting existing technologies to new fields of application can also qualify for funding.
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Eligible Costs and Assessment Base

The calculation of the research allowance is based on a clearly defined assessment base that includes several cost categories.

Personnel costs

The largest share typically consists of the gross wages of employees who are directly involved in R&D projects. This includes engineers, scientists, technicians, and other specialists with relevant qualifications. Administrative, management, or sales activities are not eligible.

Contract research and external services

Costs for contract research are weighted differently depending on the type of contractor. Contracts awarded to universities or research institutions are recognized at 100 percent, while contracts awarded to affiliated companies are taken into account at only 25 percent.

Depreciation and tangible assets

The depreciation of movable tangible assets that are used exclusively or predominantly for R&D projects can be claimed on a pro-rata basis. This includes specialized laboratory equipment, development software, or prototyping equipment.

Overheads and other expenses

Additional recognized cost items include project-related material costs, energy, rent for R&D areas, or external testing services. However, a flat-rate overhead allocation is not provided for.

Application process: certification and assessment

The application procedure for the research allowance follows a two-stage process and requires both technical and financial reviews.

First stage: Certification Body for the Research Allowance

The Certification Body for the Research Allowance (BSFZ) examines the technical eligibility of the planned R&D activities. Companies submit a detailed project description documenting the R&D nature of the project and the scientific and technical challenges involved.
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If the assessment is positive, the BSFZ issues an eligibility certificate, which is the basic prerequisite for subsequent funding. This process can take several months, especially for complex projects or if follow-up questions arise.

Second stage: Tax office and assessment

After the end of the fiscal year and once the eligibility certificate has been issued, the company submits an electronic application to the competent tax office. This application includes the actually incurred eligible costs and evidence of how they were generated.
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The tax office reviews the financial information and determines the research allowance by official notice. Payment is made as part of the regular tax assessment or as a separate refund.

Multi-year projects and repeat applications

For multi-year research projects, a separate application must be submitted for each fiscal year. However, the eligibility certificate can apply to the entire project duration, provided there are no material changes to the project scope.

Is the research allowance tax-free?

The research allowance itself is not subject to income tax or corporate income tax. It directly reduces the tax burden or, if there is no tax liability, is paid out without creating any additional tax charges.

Accounting treatment

From an accounting perspective, the research allowance is recorded as other operating income, which partially offsets research and development expenses. This significantly improves the profitability of R&D projects and makes investments in innovation more economically attractive.

Interaction with other funding programs

When combining the research allowance with other funding instruments, European state aid limits must be observed. In principle, the research allowance can be applied for in parallel with project-based programs such as ZIM, provided that the total amount of funding does not exceed the permissible maximum limits.

Practical tips for a successful application

Successful use of the research allowance requires strategic planning and careful documentation.

Early project planning

Companies should already assess during the project planning phase whether their planned development activities meet the R&D criteria. Early contact with the BSFZ can clarify uncertainties and speed up the later application process.

Documentation and evidence

Complete documentation of all project-related activities and costs is essential. This includes detailed time records, cost allocations, and a transparent presentation of development progress.

Professional support

Due to the complexity of the process and the high requirements for the application, cooperation with specialized advisors is recommended. They can assist both with the technical project description and with the correct recording of costs.

Combination with other funding programs

The tax-based research allowance can generally be combined with other funding instruments, but certain restrictions apply.

Interaction with ZIM funding

When using ZIM funding and the research allowance simultaneously, EU state aid limits must be observed. Since ZIM is granted as a subsidy and the research allowance functions as a tax-based relief, both programs can be used for the same project as long as the total funding does not exceed the permissible percentages.

BAFA programs and other funding schemes

Combination with BAFA innovation vouchers or other consulting-related funding programs is also possible. Special care must be taken to ensure that all funding is properly documented and taken into account in the state aid assessment.

Conclusion: Strategic use of the tax-based research allowance

The tax-based research allowance offers companies of all sizes reliable financial support for research and development activities. With up to €2.5 million in annual funding and the option of direct payout, it is particularly attractive for innovative small and medium-sized enterprises and start-ups. Its legal entitlement distinguishes the research allowance from project-based funding programs and makes it a predictable building block of R&D financing. Companies should review at an early stage whether their development activities meet the funding criteria and consider professional support during the application process. For maximum benefit, a strategic combination of different funding instruments, while observing European state aid limits, is recommended. This enables optimal financing of innovation projects and the creation of competitive advantages through systematic research and development. Would you like to check whether your development projects are eligible for the tax-based research allowance? Felsaris supports you in evaluating your R&D activities and strategically combining different funding instruments. Contact us for a free initial consultation.

Frequently Asked Questions about the tax-based research allowance

Can any company apply for the research allowance?‍

Yes, all companies subject to taxation in Germany with income from agriculture and forestry, commercial operations, or self-employed activities can use the research allowance. Legal form, company size, or profit situation are irrelevant. Even loss-making companies receive the allowance as a direct payout.

How does the research allowance differ from ZIM funding?‍

While ZIM provides project-based grants through a competitive selection process, the research allowance is a legally based tax instrument without competition. ZIM supports specific innovation projects with higher funding rates, whereas the research allowance provides a flat 25 percent support for all recognized R&D activities of a company.

Which projects qualify as eligible research and development?‍

Eligible projects include basic research, industrial research, and experimental development that are novel, outcome-uncertain, systematic, and scientifically or technically justified. Routine work, quality control, or purely incremental adaptations of existing processes are not eligible.

When and where must the application be submitted?‍

The procedure is two-stage: first, an application for an eligibility certificate is submitted to the BSFZ before or during the project. After the end of the fiscal year, the actual research allowance is applied for electronically at the competent tax office. For multi-year projects, a new application is required each year.

Can personnel costs be claimed in full?‍

Yes, the gross wages of employees who work directly on R&D projects can be fully claimed as eligible costs. This includes engineers, scientists, and technicians, but not staff from administration, management, or sales.

Is it possible to combine the research allowance with other funding programs?‍

In principle, yes: subject to compliance with EU state aid limits. Combination with ZIM, BAFA programs, or other funding schemes is possible as long as the total funding does not exceed the permissible percentages and the cap of €15 million per company and project.