R&D tax incentives in Germany


On an annual average, German companies register more than 25.000 patents per year. As an industrialized nation with a significant substance of manufacturing and other businesses Germany’s tax law framework is not primarily focused on attracting foreign investments by specific tax breaks. One important exception are substantial tax subsidies available for Eastern Germany and the City of Berlin. Other than that, the more important objective of German tax law regulations is protecting the German tax base against erosion and profit shifting.

Nonetheless, German tax law does provide some features of interest for foreign investors engaged in R&D activities.

According to German tax law intangible assets are tax-effectively written off over their typical economic lifetime. Acquired good-will is amortized over 15 years. A purchased patent is written off over a period of five to 20 years, depending on and limited by the patent protection period. Generally, the purchased intangible assets will be amortized on a straight-line basis.

The expenses for specific self-developed intangibles may be capitalized under certain conditions under German GAAP rules. Only the development costs may be recognized. Development is the application of research findings or other knowledge to a plan or design for the production of a new or advancement of assets or procedures. However, the research costs are directly deductible for German GAAP purposes. For tax purposes, neither research nor development costs are capitalized. Instead, these costs are directly deductible for German tax purposes.

Apart from regional tax subsidies it should be taken into account that German cities and communities may independently assess their local trade tax rates. Trade tax rates vary between 7% and 16% or even more. Hence, the overall corporate tax burden of companies (including corporate income tax and solidarity surcharge amounting to 15.8%, plus local trade tax) may be as low as 22.84%. Tax planners should thoroughly look at the taxation base, taking into account generous tax-loss carry-forward and depreciation rules.

Further lowering tax rates or introducing Patent Box regimes or expat tax incentives is not on the political agenda in Germany at the moment.

This article is part of the International Tax Bulletin for July 2014