Research Allowance in the Corporate Income Tax Return

The Research Allowance in the corporate income tax return is primarily a question of liquidity for CFOs, CTOs and founders. The Research Allowance is a tax-based incentive under the Research Allowance Act (Forschungszulagengesetz, FZulG): non-dilutive and predictable, with no repayment obligation. Anyone who understands the mechanism can time the payout deliberately.

What is the Research Allowance and who can apply for it?

The Research Allowance is a tax-based R&D incentive that companies can claim regardless of profit and company size. Its legal basis is the Research Allowance Act, in force in its current version since January 2026 after the amendment of 22 December 2025.

Legal basis: the Research Allowance Act

The FZulG funds basic research, industrial research and experimental development, provided a BSFZ certificate is in place. The BSFZ (Certification Body for the Research Allowance) reviews the degree of novelty, the technical uncertainty and how systematically the work is planned and carried out.

Today's catalogue of eligible costs grew in steps, and each item carries its own cut-off date:

• Wages and salaries for R&D personnel, eligible since the FZulG took effect in 2020
• 70% of contract research costs paid to external research partners, for orders placed after 27 March 2024 under the Wachstumschancengesetz (Growth Opportunities Act)
• Pro-rated depreciation on movable assets used on a project basis, added by that same amendment
• 20% overhead flat rate on the eligible expenses, for projects starting after 31 December 2025

Eligible companies

Any company subject to tax under the Income Tax Act or the Corporate Income Tax Act can apply, regardless of legal form and size. SMEs qualify for the increased funding rate of 35%, while larger companies receive the base rate of 25%. This article uses the SME rate throughout.

The law does not limit eligible industries. What counts is a genuine R&D project:

• Software and AI: new model architectures, optimisation under technical uncertainty
• Biotech and pharma: preclinical procedures, assay development
• Automotive and mobility: batteries, sensors, new test methods
• Mechanical engineering: new materials, manufacturing processes, prototyping
• Energy and climate tech: storage, grid integration, efficiency optimisation

Research Allowance and corporate income tax: how does the offset work?

The offset of the Research Allowance against corporate income tax happens once, inside the tax assessment, and never on an ongoing basis. For expenses incurred from 2026 onwards, the annual assessment basis runs up to EUR 12 million, which for SMEs corresponds to as much as EUR 4.2 million of Research Allowance (source: Federal Ministry of Finance, Research Allowance).

Offset against corporate income tax

The entitlement arises with the financial year in which the eligible expenses fall, and it is realised only when the tax office issues the Research Allowance assessment. The amount is then set off at the next initial corporate income tax assessment; identical assessment periods are not required (Section 10 (1) FZulG). Advance payments can be reduced as well, but the tax office does so only on application, only while the return for that next initial assessment is still outstanding, and only down to EUR 0 (Section 10 (2a) FZulG).

Only the Research Allowance assessment notice from the tax office counts here, not the estimates in internal controlling.

Ten people in R&D already produce a six-figure allowance under the 2026 rules.

Take an AI GmbH reporting these expenses for the year.

The figures are eligible amounts, already capped and pro-rated where the law requires:

R&D wages: EUR 900,000

Contract research (70%): EUR 140,000

Project-related depreciation: EUR 50,000

Subtotal: EUR 1,090,000

Overhead flat rate (20%): EUR 218,000

Total assessment basis: EUR 1,308,000

Research Allowance (35% for SMEs): EUR 457,800

Payout in the case of no or low tax burden

If the Research Allowance exceeds the assessed corporate income tax, the excess is paid out as a tax refund. That is the decisive advantage over a classic loss carryforward, which only takes effect in a future profitable year: a loss-making start-up sees cash at the next assessment, without waiting for that year.

SMEs dominate the applicant base: their share of BSFZ certification applications rose from 74% in 2023 to 77% in 2025 (Bundestag printed paper 21/5841). Where such a company has no corporate income tax for the allowance to reduce, the refund route above is the only one that pays.

Tax treatment of the Research Allowance

The Research Allowance never increases taxable income. Sole traders and partnerships get there by negative implication from Section 12 No. 3 of the Income Tax Act (EStG); for corporations the amount is corrected outside the balance sheet under Section 10 No. 2 of the Corporate Income Tax Act (KStG), as the BMF circular of 7 February 2023 sets out in margin numbers 284 to 287. One correction worth making early in any mandate: Section 3 No. 71 EStG is often quoted as the legal basis here, but that provision governs the INVEST venture capital grant and has nothing to do with the Research Allowance.

Research Allowance in the corporate income tax return: entry and tax groups

The return and the allowance are decided in two different places: the corporate income tax return does not assess the allowance, and the tax office sets it in a notice of its own and offsets it afterwards. That split is what makes the Research Allowance in the corporate income tax return a procedural matter.

Not a deduction item in the return

The Research Allowance has no direct effect on the corporate income tax return as such, and you do not enter it as a deduction item. The tax office assesses it in a separate notice under Section 10 FZulG, independently of the corporate income tax assessment notice.

The tax office then offsets the allowance against the assessed corporate income tax ex officio.

Where the allowance is entered: Annex WA and DATEV

In practice the entry runs through Annex WA (Further Information) of the corporate income tax return, whose Research Allowance lines ask the tax office to keep the assessment open until the allowance has been set. In DATEV the approved amount then sits in the "Offset amounts" area, comparable to capital gains tax or advance corporate income tax payments, though that is how DATEV organises it rather than an official form field.

The amount shown in the Research Allowance assessment notice is recorded as an amount to be offset, and the tax office then decides whether that becomes an offset or a refund.

What changes for a controlled company in a tax group

A controlled company (Organgesellschaft) normally has its corporate income tax assessed at EUR 0, because its income is attributed to the controlling company (Section 14 of the Corporate Income Tax Act, KStG). It stays entitled to the allowance in its own right, but where the assessed tax is EUR 0 there is nothing for a Research Allowance for a controlled company under the KStG to be set against.

Where that is the case, the full amount is refunded to the controlled company itself. Nothing moves it up to the controlling company: the BMF circular expressly rules out applying Section 19 KStG to the Research Allowance (margin number 259). It is still worth agreeing the treatment with your tax adviser before the return goes out.

Process: from application to offset against corporate income tax

From the first BSFZ application to the money in the account, the process runs through three stages, and the order is not negotiable.

Application and assessment notice by the tax office

• Apply for the BSFZ certificate: the company first files an application with the BSFZ to have its R&D projects certified. The BSFZ reviews the substance of the work and decides whether it qualifies as research and development.
• Apply for the Research Allowance: with the certificate in hand, the company files the Research Allowance application with its own tax office after the end of the financial year, through Mein ELSTER, the tax administration's online portal (Section 5 FZulG).
• Notice and offset: the tax office sets the allowance by notice and offsets it at the next initial corporate income tax assessment.

Relationship of the Research Allowance to other funding

The Research Allowance can be combined with grants from BMFTR (Research, Technology and Space) programmes, Horizon Europe or KfW funding loans. Double funding of the same costs is out, though: an expense already covered by a grant cannot also enter the assessment basis of the Research Allowance.

Take-up keeps climbing. BSFZ certification applications rose from 8,361 in 2023 to 11,717 in 2024 and 14,553 in 2025, and by 30 June 2026 a cumulative 26,042 companies had applied since the FZulG started in 2020 (BSFZ statistics; Bundestag printed paper 21/5841). The OECD overview of R&D tax incentives sets the German instrument against its international peers.

Accounting for the Research Allowance: what corporations need to watch

In the accounts the entitlement becomes a receivable from the tax office as soon as the requirements are met and the notice is on the table. Commercial and tax law only part company at the last step of the accounting for the Research Allowance, where the income is corrected back out of the taxable base.

Correct posting of the Research Allowance

Three entries carry the whole cycle:

• Recognition: receivable from the tax office (other assets)
• Contra entry: income from the Research Allowance, corrected outside the balance sheet under Section 10 No. 2 KStG so that it never reaches taxable income
• Offset: when the allowance is set off, the receivable is released against the corporate income tax liability

The accounting is rarely where these projects go wrong. In our client work the damage is done earlier, in the project delineation: costs are booked onto an R&D cost centre wholesale, the BSFZ certifies only the work packages that carry genuine technical uncertainty, and the allowance the tax office sets ends up well below the figure that was already sitting in the liquidity plan.

Conclusion: the Research Allowance as a tax refund for corporations

The Research Allowance in the corporate income tax return is not a form field but a separate assessment process: the tax office sets the allowance, offsets it against corporate income tax and pays out whatever is left where there is no tax burden. For SMEs the funding rate of 35% applies to an assessment basis of up to EUR 12 million a year for expenses from 2026 onwards. The money does not increase taxable income, costs no equity and sits alongside other funding programmes. With the accounting, Annex WA and the tax group case under control, the allowance becomes a precise liquidity instrument rather than an afterthought in the tax return.