Germany needs tax incentives for research and development (R&D) that provide non-bureaucratic R&D support without preference for certain technologies – this is the finding of a working group on R&D tax incentives for research partnership between science and industry. The working group, which is composed of well-known tax experts as well as scientists belonging to the Centre for European Economic Research, the Max Planck Society and the Cologne Institute for Economic Research, bases its recommendation on deficiencies in the current state of R&D subsidy in Germany. Subsidies are stymied by a falling share of government financing, incoherent programs and excessive bureaucratic costs. Additionally, they are very selective and scare off small and medium-sized enterprises (SMEs) due to high application costs and extensive disclosure requirements.

"The German economy lacks a broad-based R&D tax subsidy program of the kind already employed successfully in most other industrialised nations," says the head of the working group, Prof. Christoph Spengel from Mannheim University. Creating this kind of tax incentive system is all the more urgent given Germany’s obligation to reach a level of expenditure for Research and Development that is equivalent to 3 percent of gross domestic product (GDP) by the year 2010 (this goals was set by the Lisbon Strategy for member states of the European Union). With the current level at 2.54 percent of GDP, Germany remains far behind achieving the goal of 3 percent. Yet an R&D tax incentive program would also be an ideal component of a much-needed second economic stimulus package in Germany.

Currently, the German government grants some 16.6 billion euros annually in R&D subsidies. Of this amount, the lion’s share, or approximately 14.7 billion euros, is received by the science sector, which includes universities and independent research institutes, along with federally owned research facilities. R&D activity in the private sector is supported directly with subsidies of over 1.9 billion euros. Between 1981 and 2006, the federal government’s overall share in R&D expenditures in the private sector fell drastically from 16.9 percent to 4.5 percent. Additional negative factors include the incoherent structure of the support programmes, their high application costs and extensive disclosure requirements. These requirements scare off small and medium-sized enterprises (SMEs) in particular. In the past five years, only 27 percent of SMEs have explored the possibility of receiving R&D subsidies; of these, only half actually submitted an application. Current R&D subsidy in Germany thus functions in a highly selective manner. It is limited to particular areas of technology and industries as well as regions, and places small and medium-sized enterprises at a disadvantage in comparison to large companies, which are 250 percent likelier to receive assistance. The emphasis upon a few specific areas of technology also risks excluding innovative ideas at the outset from any consideration for government support.

The working group does not, however, limit itself to advocating for the adoption of R&D tax incentives in Germany. It is also developing concrete proposals for their implementation. Among the different models for R&D tax incentives – including reduced tax rates for revenues related to R&D, tax credits or tax base relief (with, for example, increased operating expense allowances for R&D expenditures) – the working group recommends the option of tax credits. Through tax credits, a given percentage of qualifying R&D expenditures would be deducted from total tax liability. From the perspective of improving liquidity, tax credits that exceed tax liabilities should be paid out promptly.

The determination of qualifying R&D activities and expenditures should be made in accordance with the internationally accepted guidelines found in the Frascati Manual of the OECD concerning expenditures for basic research, applied research and experimental development. Qualifying R&D activities should also include expenditures for contract research. To avoid duplicating support for R&D activities already sponsored by the federal government, government-affiliated agencies or state governments, the received subsidies should be deducted before calculating the tax credit.

Experience in other countries demonstrates that legal consistency, reliability of planning as well as the manageability of a tax incentive program for R&D can be ensured by means of legal regulation. All expenditures supported by tax incentives should be predicated upon accounting data that can be audited by certified accountants or tax professionals. In principle, all companies should be able to enjoy the benefits of tax credits independent of their legal form. Support should be offered to corporations as well as individual enterprises and partnerships. Additionally, neither the size nor the technological level of the company should determine the type or level of R&D tax incentives received. In this way, SMEs should enjoy identical opportunities for R&D support as larger companies. With regard to large companies, there is a higher risk that R&D operations will be shifted offshore.

The working group is not committed to a specific level of tax credit support, as this must remain a political decision. Any efforts to mitigate loss of tax revenue associated with the introduction of an R&D tax credit program in Germany should be limited to modification of the tax credit percentage. Other measures to mitigate cost, such as exclusive support for SMEs, would only create complicated problems of definition along with additional administrative costs, and also provoke discord among the various stakeholders.

For further information please contact

Prof. Dr. Christoph Spengel, Phone: +49/621/181-1704, E-mail:

Members of the working group

Prof. Christoph Spengel (Chairman), University of Mannheim and the Centre for European Economic Research in Mannheim; Prof. Dieter Endres, PricewaterhouseCoopers Frankfurt/Main; Prof. Dietmar Harhoff, LMU Munich; Dr. Friedrich Heinemann, Centre for European Economic Research in Mannheim; Prof. Martin Hellwig, Max Planck Institute for Research on Collective Goods in Bonn; Prof. Michael Hüther, Cologne Institute for Economic Research (IW Köln); Dr. Christoph Regierer, RöverBrönner Berlin; Prof. Wolfgang Schön, Max Planck Institute for Intellectual Property, Competition and Tax Law, Munich; and also, Dr. Klaus Stein, WMS Treuhand GbR in Osnabrück.

The working group obtains its research funding from the Forschungsunion Wirtschaft-Wissenschaft ("Science and Industry Research Union"). The report has been published in the Springer Verlag (Heidelberg) series, "MPI Studies on Intellectual Property, Competition and Tax Law," from the Max Planck Institute for Intellectual Property, Competition and Tax Law under the title "Steuerliche Förderung von Forschung und Entwicklung (FuE) in Deutschland - Ökonomische Begründung, Handlungsbedarf und Reformbedarf" and may be ordered directly from the publisher (ISBN: 978-3-540-88650-1).





Press Officer

Phone: +49 0621 1235-133