Changes to the AGVO make classical grants significantly less attractive
For the longest time, Germany has pursued a strategy of subsidies in its funding landscape. While tax incentives and tax credits dominated funding in the rest of Europe, with grant funding only available for specialized, highly innovative projects, grants were the sole funding option in Germany until 2020. And for good reason: an analysis conducted for the Ministry of Finance prior to the introduction of tax incentives (Research Allowance) found that grant projects had a return on investment of about 5, while tax incentives in the rest of Europe only had an ROI of about 1.
When tax incentives were introduced in Germany in 2020, they were less attractive in many aspects compared to grant funding. The funding rate was only 25% for personnel costs and 15% for external research and development contracts. In grant funding, however, the funding rate was usually 50% or even 60%, and additional costs such as material costs, travel, etc., could also be claimed.
One particular aspect that made grant funding significantly more attractive was the overhead cost allowance. As a small or medium-sized enterprise, you could choose a flat-rate overhead rate of 100%, which was added to personnel costs.
An example makes this clear: Mrs. Müller earns €5,000/month and works on a research and development project for one month. With the Research Allowance, you can still include the employer’s contributions (about 20%), thus receiving a total subsidy of €1,500 for Mrs. Müller’s work.
For the same activity, you could set costs of €10,000 in a grant application (€5,000 salary + 100% overhead costs), which would then be subsidized with often 60%, i.e., €6,000 in funding.
This comparison is not perfect since the grant must still be taxed, unlike the Research Allowance. But even then, the grant was significantly more attractive in terms of funding conditions.
Two events simultaneously
Now, however, two practically simultaneous changes have upheaved the research landscape. In April, the Growth Opportunities Act was passed. For small and medium-sized enterprises (less than 250 employees), the subsidy for personnel costs under the Research Allowance has now been increased to 35%. Furthermore, capital expenditure investments are now eligible for funding.
On the other hand, the EU has revised the AGVO. Specifically, this requires Germany to abolish the flat-rate overhead costs within grant funding. This has now been implemented in practically all funding programs, so that even small and medium-sized enterprises must now account for their actual overhead costs. In addition to the significant additional effort required for calculation, these costs are typically much lower than the previously possible 100%.
So while Mrs. Müller is now subsidized with €2,100 under the Research Allowance, in a grant application one often only receives €3,900 in funding (30% overhead costs, 60% funding). Whereas previously the difference was still significant even after taxes, it is now much smaller: at a tax rate of 30%, this only amounts to €2,730 in funding.
Decisive factor: Lead time
Grant funding is still financially more attractive, but the gap has narrowed significantly. Thus, other comparison factors become more important and should be considered.
The most important factor now is the necessary lead time until a project can start with the Research Allowance, this is 0. Projects can be started directly, and the Research Allowance can be applied for and settled in advance, during the project, or even retrospectively after project completion.
In comparison, the lead time for typical grant funding with a 60% funding rate, such as SME-innovative or announcements from the Federal Ministry of Education and Research, is ideally 9-12 months. During this time, work on the project must not commence.
The lead time is partially reduced for medium-sized enterprise funding programs like the Central Innovation Program for Medium-Sized Enterprises or regional state funding, but still usually amounts to more than 6 months. And in this case, the funding rate also decreases, for example, to approximately 40% with ZIM. So Mrs. Müller would only be subsidized with €1,820 after taxes (less than with the Research Allowance), and there would be a long lead time.
Conclusion
Existing grant funding programs will need to adapt, as currently there isn’t much in their favor. Experience shows, however, that this will take time; in the past, such changes have taken several years. Until then, there is thus a new dominant funding scheme in Germany: the Research Allowance.
Exception: Projects with universities or research institutions
An exception is projects with universities or research institutions. To finance a doctoral student, for example, grant funding remains the only suitable option. This is because they continue to be subsidized with 100%, while with the Research Allowance as a company, you would have to bear most of the costs (at least 75.5%).
Source: epsa.com
Contact:
EPSA Germany Funding advice
Salma Tarek
Tel.: +49 211 38 78 99 76
Mail: starek@epsa.com