Germany: SMEs benefit from R&D tax credit

The federal government wants to strengthen Germany as a business location with the so-called "Research Allowance". An analysis by ZEW now shows that the instrument is developing into a key funding instrument, particularly for SMEs - but should be reformed in parts.

Since 2020, German companies have had access to a tax-based funding instrument for research and development (R&D) called 'Research Allowance', which is increasingly establishing itself as a key pillar for promoting innovation. Small and medium-sized enterprises (SMEs) in particular are benefiting from the research allowance, which is now the largest R&D funding programme for companies in Germany.

The cap on eligible R&D expenditure ensures that SMEs in particular benefit greatly from the research allowance. While large companies can only claim a fraction of their R&D costs, smaller businesses make extensive use of the instrument. This is how, at the start of the funding programme, around 61 percent of the potential funding volume went to SMEs. Even after several reforms, their share is still just under 50 percent. At the same time, the proportion of SMEs conducting continuous research in Germany has risen noticeably since the introduction of the research allowance: from 9.9 percent in 2019 to 12.6 percent in 2023.

“The research allowance has established itself in a short period of time and reaches many companies. The programme is flexible and has been adjusted multiple times. The increase in the funding rate and the ceiling for eligible expenses have led to significantly higher funding volumes and a rising number of applicants," explains Dr. Christian Rammer, deputy head of the ZEW Research Unit “Economics of Innovation and Industrial Dynamics”. 

With an estimated annual funding volume of four billion euros from 2026 onwards, the research allowance will reach the level of direct federal subsidies for R&D in companies for the first time. However, in an international comparison, with tax-subsidised R&D expenditure accounting for 4.7 per cent of internal R&D expenditure in the economy, Germany significantly lags behind countries such as France and the United Kingdom (15 to 20 per cent). Further raising the cap – while lowering the subsidy rate – or introducing an incremental component that promotes growth in R&D expenditure could provide additional incentives. There is also potential to further simplify the application process in order to facilitate access for first-time users.

Beitragsbild: Maria - stock.adobe.com