Importance of Subsidies for Investment Decisions

Subsidies can help to significantly reduce investment and capital costs and thus risks. The 12 largest programs in Germany alone provide annual funding of almost €20 billion. In addition, there are tax breaks of a similar amount. In extreme cases, the funding rate can even be as high as 100% through a combination of subsidies. Therefore, when making investment decisions and hiring new staff, it is important to check whether funding is available.

Fragmented Funding Landscape and Application Complexity

The German and European funding landscape is fragmented and not transparent. There are currently around 2,500 funding programs in Germany. To minimize the effort involved in applications and the risk of rejection for formal reasons, it is advisable to seek external expertise. Experience shows that intensive cooperation between accounting, tax, and application management significantly improves the chances of timely and successful funding.

For a successful application, it is also important to align the intentions of the funding provider with the ideas of the applicant. The central funding themes are innovation, ecological transformation, human rights, and regional development. These relatively vague terms must be translated into everyday and operational, i.e., business situations. The consolidation of locations can thus receive regional funding, or internal process improvements can constitute an eligible innovation.

Overview of Selected Funding Programs

Below are three popular funding programs for SMEs: the research allowance, regional economic development (GRW), and consulting funding.

Research Allowance

The research allowance is a de facto tax refund for expenses incurred in R&D activities. Up to approximately 30% of expenses, currently totalling EUR 3.5 million per year and company, can be subsidized in this way. A special feature is that the refund can be applied for both retrospectively and prospectively. Furthermore, the subsidy is not dependent on the success of the measure or on whether taxes were paid at all. Subsidies are also available for failed activities and start-ups without positive income. Since 2024, expenses for own personnel and material costs (35%) as well as for contract costs, i.e., external services, have been reimbursable. (24.5%). This means that expenses for pool research services and for foreign contract services can also be subsidized, provided that the expenses are incurred in the EU. As a result, potentially cross-border group allocations, e.g. R&D pools can also benefit from R&D funding.

Based on the principle that every company conducts research and development, the eligible activities must be identified and delineated in terms of costs. In some cases, companies are unaware that the relevant activities are eligible for funding. Internal activities such as the optimization of production processes (to the extent that they are best-in-class) are also eligible for funding. The development of prototypes, test procedures, and research into the risks associated with innovations are also regularly eligible for funding.

In addition to the research allowance, SMEs should also consider the innovation program for small and medium-sized enterprises offered by the Ministry of the Environment. The program is also open to all industries and, with an annual budget of EUR 700 million, is a relevant address in the funding landscape.

Regional Economic Development (GRW)

Another popular form of funding is the so-called GRW funding or regional economic development funding from the federal government. This funding can also amount to approximately 35% of the investment or costs and is available as a low-interest loan, a grant, or a combination of these instruments. Depending on the total investment, funding in the millions is regularly possible with this program.

Special features of this funding program include, among others, that the amount of funding varies regionally depending on the typical level of development of the region in which the company is located and that the application must be submitted before the measure begins. However, the qualitative eligibility requirements are not limited to R&D measures. In general, measures for expansion, diversification, modernization of production, and, in particular, measures related to the hiring of new employees are eligible for funding. In addition to GRW funding from the federal government, funding from the European Regional Development Fund should also be considered when examining which funding program is suitable.

Consulting and Training Funding (BAFA)

To complete the list of examples, we will look at the funding of consulting and staff training. A popular funding instrument here is the BAFA (Federal Office of Economics and Export Control). Here, external consulting and training measures in the areas of business development, digitalization, IT security, sustainability, and personnel development are funded. The application process is relatively simple and can usually be largely outsourced to external qualified consultants.

Finally, it should be noted that experienced funding consultants can help identify activities within the company that are eligible for funding by asking specific questions. Once the funding requirements have been identified, the application process can also be outsourced to the consultants, reducing the amount of resources tied up within the company and increasing the likelihood of success.

Overview of Selected Programs

Programm	„Forschungszulage“ – research allowance	GRW – funding for regional development	BAFA – Consulting and training
Type of Subsidy	Cost reimbursemnet	Grant or loan or both	Consulting
Purpose / Target	Innovation	Regional development	Consulting and Training
Amount of subsidy	Approximately 30% of the expenses up to $3.5 million per year and applicant	Up to 35% of the investment amount and wage subsidy	Up to EUR 2,800 per consulting project, more then one possible
Moment of application	Retroactively and before the start of the measure	Before the start of the measure	Before the start of the measure
Sucess-related	No prerequisite	No hard requirement	No checking
Alternative subsidy programm	ZIM – Central Innovation Program for Small and Medium-Sized Enterprises	ERDF – European Regional Development Fund	Subsidy for qualification measures by local governments

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