The tax-based incentives aim to make Germany more attractive for investment and new enterprises.

Tax-free research and development allowance

Specifically the new bill provides for the following:

• The assessment base consists of HR and contract costs for research and development, up to a maximum of two million euros per year.
• Assistance will be equivalent to 25% of the assessment base, with a maximum allowance of 500,000 euros per year.
• The assistance is to help raise R&D spending to 3.5% of Germany’s gross domestic product (GDP) by 2025.

Focus on small and medium enterprises

To encourage more small and medium enterprises to invest in research and development activities, they are to be given targeted financial support. Larger companies are not to be entirely excluded from the financial incentives.

In this, the German government is following the proposal of the former Chairman of the Commission of Experts on Research and Innovation, Dietmar Harhoff. In February 2019, he advocated the introduction of tax incentives to encourage small and medium companies to engage in research. "Every euro lost in tax revenue is more than offset by an average additional private-sector R&D spending of 1.33 euros, giving a positive overall impact," explained Dietmar Harhoff.

Research boosts competitiveness

At the citizens’ dialogue in Bremerhaven in March 2019, Chancellor Angela Merkel underlined the importance of research and development for Germany. She explained that tomorrow’s prosperity depends on today’s research. If we stop research, we will sooner or later become no more than an extended workbench. "We must not let that happen," declared the Chancellor.

Thanks to R&D, Germany is an international leader in terms of competitiveness, as demonstrated by the consistently high level of research-intensive products exported by the Federal Republic of Germany.

R&D is booming

With R&D spending currently equivalent to 3% of GDP, Germany is one of the world’s five biggest spenders on research and development, in front of the USA, France and China.

In 2017 companies in Germany spent about 68.6 billion euros on R&D. That marks a rise of 9.3% over 2016 (62.8 billion euros). Provisional estimates also point to a significant increase in state investment.

Every euro invested in research generates 1.70 euros in additional value creation for the economy as a whole.

At the same time, the number of people employed in research departments inside companies has risen. In 2017, some 432,000 people were working in research, whereas in 2016 this figure was only 413,000. That translates as an increase of 4.7 percent (or almost 20,000 people).

According to a study conducted by the Fraunhofer Institute for Systems and Innovation Research, the economic research and consultancy firm Prognos and the Leibniz Centre for European Economic Research an increase in spending on R&D to 3.5% of Germany’s gross domestic product will generate additional GDP growth of 1.3%. Parallel to this, an additional 170,000 full-time jobs will be created.