Definition: Contract Research (Auftragsforschung) per §2(4) FZulG
Contract research is a central component of the Research Allowance Act (FZulG). According to §2(4) FZulG, contract research exists when a taxable company – the client (Auftraggeber) – commissions an external service provider to carry out research and development (R&D) activities. The external service provider is referred to as the contractor (Auftragnehmer) and can be a university, a research institute, an engineering firm, or another company.
A crucial principle: only the client applies for the R&D Tax Credit for costs incurred through contract research. The contractor may not additionally claim these costs as its own R&D. This regulation prevents double funding of the same research project.
Distinction of R&D Categories in the FZulG
The Research Allowance Act distinguishes three forms of eligible R&D activity that differ significantly in their tax treatment:
- In-house research and development: The company conducts R&D with its own personnel and resources. Eligible are the gross wages and salaries of R&D employees plus a 20% overhead allowance from 2026.
- Contract research: The company commissions an external service provider in the EEA for R&D work. 70% of the contract fee is recognized as the assessment basis.
- Cooperative research: Two or more partners jointly research a project. Each partner applies for the R&D Tax Credit only for their own personnel costs – offsetting the partner's expenditures is not possible.
The correct classification of your R&D activities into these categories is crucial for the amount of your R&D Tax Credit. In practice, many companies operate a combination of in-house research and contract research – both components can be claimed in parallel, thereby increasing the total assessment basis.
The 70% Rule: How Contract Research Costs Are Calculated
The FZulG contains a special calculation rule for contract research: only 70% of the remuneration paid to the contractor is recognized as the eligible assessment basis. The legislator assumes that the remaining 30% covers the contractor's profit margin, administrative overhead, and other non-research-related costs.
This regulation was deliberately designed as a flat rate to limit the administrative burden for companies and tax offices. There is no requirement to disclose or verify the contractor's actual cost structure. The 70% flat rate applies regardless of the type of contractor – whether it is a university with low overhead costs or a commercial research institute.
Calculation Example: Contract Research in Practice
To illustrate the 70% rule and its impact on the R&D Tax Credit, let us consider a concrete calculation example. A mid-sized mechanical engineering company commissions a Fraunhofer Institute to develop a novel sensor concept for quality control in manufacturing:
Invoice amount to Fraunhofer Institute: EUR 500,000
Eligible portion (70%): EUR 350,000
+ 20% overhead surcharge (from 2026): EUR 70,000
Assessment basis: EUR 420,000
R&D Tax Credit (25%): EUR 105,000
With SME status (35%): EUR 147,000
This example shows: even after the 70% reduction, a significant eligible amount remains. Especially for SMEs with the increased funding rate of 35%, including contract research in the R&D Tax Credit is worthwhile. Additionally, contract research can be combined with in-house personnel costs – the assessment basis from both sources is added up, up to the maximum limit of EUR 12 million per fiscal year.
The newly introduced 20% overhead allowance, effective from fiscal year 2026, is also applied to the 70% basis of contract research. This means: on top of the recognized EUR 350,000 in the above example, an additional EUR 70,000 in overhead is added – an additional funding advantage that many companies are not yet aware of.
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When Is Contract Research Eligible for Funding?
For contract research costs to be recognized under the R&D Tax Credit, several prerequisites must be met simultaneously. The requirements are clearly defined in the FZulG and the associated administrative guidelines. Below we explain the five key criteria in detail:
1. EEA Requirement: Contractor's Location
The contractor must be located in the European Economic Area (EEA). The EEA comprises all 27 EU member states plus Iceland, Liechtenstein, and Norway. Contracts with research institutions outside the EEA – for example in the USA, China, India, or since Brexit also in the UK – are not eligible. This restriction is one of the most common stumbling blocks in practice and particularly affects internationally positioned companies with research partners worldwide.
2. Contract Design: Written R&D Contract
A written contract must be in place that clearly indicates the research and development nature of the commissioned work. The contract should unambiguously define the research subject, the scientific-technical objectives, the timeframe, and the remuneration. Framework contracts without specific R&D reference or pure service contracts are insufficient. Ideally, the contract also includes an assignment to the R&D categories of the Frascati Manual (basic research, applied research, experimental development).
3. R&D Character of the Commissioned Work
The commissioned work must actually constitute research and development activities. Routine services, testing, quality control, market research, or pure consulting services are not eligible – even if provided in a scientific context. The decisive factor is whether the activity aims at gaining new knowledge or developing new or significantly improved products, processes, or services.
4. Client Risk and IP Rights
The client must bear the economic risk of the research project. This means: the client pays the remuneration regardless of the research outcome and bears the risk of failure. Furthermore, the intellectual property rights (IP rights) arising from the research must rest with the client or be acquired by them. If the intellectual property remains with the contractor, it is generally not contract research within the meaning of the FZulG.
5. No Double Funding
Contract research costs may not be claimed by both the client and the contractor. The contractor may not claim the same costs as its own R&D in its R&D Tax Credit application. Double funding constitutes a violation of the FZulG and can lead to reclaim, interest, and in the worst case, criminal consequences.
Typical Contractors in Practice
The range of contractors that can be eligible under the R&D Tax Credit is broad. The decisive factor is not the type of institution, but whether the service provided has R&D character and the contractor is based in the EEA. Below are the most common types of contractors in practice:
- Universities and higher education institutions: Classic partners for contract research, particularly for basic research-related questions. Many universities have their own technology transfer offices that assist with contract design. Costs here are often comparatively low.
- Fraunhofer Institutes and other research institutions: The Fraunhofer Society, Helmholtz Centers, Leibniz Institutes, and Max Planck Institutes are typical partners for applied research and experimental development. They have specialized laboratory infrastructure and highly qualified personnel.
- Specialized engineering firms: Engineering firms that carry out product development, design, or simulation work on commission can act as contractors – provided the activity goes beyond routine engineering and has genuine R&D character.
- IT service providers and software developers: Commissioning external software developers to develop novel algorithms, AI models, or innovative software solutions can qualify as contract research. The decisive factors are technical novelty and a systematic approach.
- Testing laboratories and test facilities: Only eligible if the tests conducted have genuine R&D character – meaning the focus is on knowledge gain rather than routine quality control or certification testing.
- Foreign research partners in the EEA: Contracts with research institutions and companies in other EEA states are fully eligible. This opens access to international cutting-edge research in countries such as the Netherlands, Sweden, Austria, or Switzerland (only if EEA-associated).
In practice, a typical mid-sized company commissions an average of two to three external research partners per year. The combination of in-house R&D and contract research maximizes the assessment basis and thus the R&D Tax Credit.
Contract Research vs. Cooperative Research: What Is the Difference?
The distinction between contract research and cooperative research is not merely academic – it significantly impacts the amount of the R&D Tax Credit and who can apply for funding. Many companies confuse the two models or incorrectly classify their research collaborations, leading to unnecessary funding losses.
| Criterion | Contract Research | Cooperative Research |
|---|---|---|
| Relationship | Client ↔ Contractor | Equal partners |
| Who applies | Only the client | Each partner for own costs |
| IP rights | With the client | Shared by agreement |
| Eligible costs | 70% of remuneration | Own personnel costs |
| Economic risk | With the client | Shared between partners |
| EEA requirement | Contractor must be in EEA | No restriction |
The choice between contract research and cooperative research should not be made solely for tax reasons, but should primarily reflect the actual structure of the collaboration. If a company fully controls the project, defines the requirements, and uses the results exclusively, it constitutes contract research. If both parties work as equals toward a common research goal and share results and risks, it constitutes cooperative research.
In some cases, restructuring the collaboration from cooperation to contract – or vice versa – can optimize the funding amount. This depends on the specific costs and the respective partner constellation. NOVARIS Consulting analyzes your existing R&D collaborations and recommends the tax-optimal structure.
The 5 Most Common Mistakes in Contract Research
In our consulting practice, we repeatedly encounter the same mistakes companies make when claiming contract research under the R&D Tax Credit. These mistakes can lead to partial or complete rejection of funding.
How to Maximize Funding for Contract Research
Contract research offers significant potential to increase the assessment basis for the R&D Tax Credit – especially in combination with in-house personnel costs. Below are the key levers for maximizing your funding:
Review Contracts and Explicitly State R&D Reference
The most important optimization lever is contract design. Ensure that every research contract clearly describes the scientific-technical character of the commissioned work. Use the terminology of the Frascati Manual and explicitly state which technical uncertainties are to be overcome. Professional contract wording can make the difference between approval and rejection by the BSFZ.
Solving the UK Problem: Switch to EEA Alternatives
Since Brexit, the UK is no longer part of the EEA. Companies that have previously awarded R&D contracts to British universities or research institutions should consider EEA alternatives. The Netherlands, Sweden, Austria, and Ireland have excellent research landscapes in many disciplines. Switching the contractor can make contract research costs eligible for the first time.
Don't Forget the Overhead Surcharge
Since 2026, a 20% overhead allowance applies to the eligible assessment basis. This allowance is also applied to the 70% basis of contract research. In our example above, this means: instead of EUR 300,000 assessment basis, EUR 360,000 is applied – an additional effect of EUR 15,000 at the 25% funding rate (or EUR 21,000 for SMEs at 35%).
Combine In-House Personnel Costs and Contract Research
The assessment basis from in-house R&D (personnel costs) and contract research (70% of remuneration) is added together. Use this effect deliberately: when your own R&D personnel work on a project and additional external research contracts are awarded, the total assessment basis increases significantly. The upper limit is EUR 12 million per fiscal year – most companies still have plenty of room here.
Build Documentation from the Start
Don't start documentation only when filing the application, but alongside the project. Maintain a project folder with the contract, invoices, proof of performance, interim reports, and relevant correspondence. This saves you the time-consuming and error-prone process of retrospective reconstruction.
1. Draft contracts with explicit R&D reference
2. Choose contractors in the EEA (review UK contracts)
3. Apply 20% overhead allowance to the 70% basis
4. Combine in-house personnel costs + contract research
5. Ongoing documentation instead of retrospective reconstruction
6. Request invoices with clear R&D/non-R&D separation
Contract Research with Universities and Fraunhofer Institutes
Public research institutions such as universities, Fraunhofer Institutes, Max Planck Society, Helmholtz Centers, or Leibniz Institutes are particularly attractive partners for contract research under the R&D Tax Credit. They automatically meet the EEA requirement, have extensive research infrastructure, and are familiar with the documentation requirements for R&D projects.
Advantages of collaborating with public research institutions
Contracts with universities and non-university research institutions offer several advantages for the R&D Tax Credit: The R&D nature of the service is usually clearly identifiable and easy to document. The institutions produce professional performance reports and interim reports that can serve as documentation for the BSFZ application and tax claim. Additionally, collaborations with universities frequently already have a clear separation between R&D and non-R&D services.
Fraunhofer Institutes as contract research partners
The Fraunhofer-Gesellschaft is Europe's largest organization for application-oriented research. Contracts with Fraunhofer Institutes are particularly well-suited for the R&D Tax Credit because the institutes conduct applied research and experimental development as their core competency – precisely the categories that the FZulG supports. Fraunhofer contracts typically already contain standardized clauses on IP rights and service descriptions that meet the requirements of the R&D Tax Credit.
Special consideration: Distinction from funded projects
Important: If a company collaborates with a university or Fraunhofer Institute on a publicly funded collaborative project (e.g., BMBF, EU Horizon Europe), a clean separation is required. Costs that are already covered by project funding may not be double-claimed through the R&D Tax Credit. Only the company's own share – i.e., costs not covered by other funding – is eligible as contract research. A precise cost breakdown is essential here.
1. EEA requirement automatically met (for German institutions)
2. Research contract with clear R&D description and IP provisions
3. Invoices with breakdown into R&D and non-R&D components
4. No double funding with public project grants
5. Performance reports and interim reports as documentation
6. 70% of R&D remuneration eligible as assessment basis
Contract Design for Contract Research
The contract between client and contractor is the central document for the R&D Tax Credit in contract research. Errors in contract design are the most common reason for rejections or reductions. Following the points below will secure the eligibility of your contract research.
Clearly define the R&D component in the contract
The contract must unambiguously identify the research and development component of the commissioned service. It is not sufficient to generically describe a "development service." The contract should specifically set out which scientific or technical uncertainty is being addressed, what new findings are sought, and which research methods are being used. The BSFZ reviews the contract to determine whether the three criteria of the Frascati Manual (novelty, creativity, uncertainty) are met.
IP rights and exploitation provisions
The regulation of intellectual property (IP) rights is relevant for the R&D Tax Credit because it documents the client's role as the economic bearer of the R&D. The contract should clearly specify: Who owns the research results? Who receives usage rights to patents, software, or know-how? In contract research, the client must bear the economic risk and exploit the results – otherwise, the BSFZ could classify the service as a mere service provision rather than contract research.
Embed documentation requirements in the contract
Smart contract design goes beyond minimum requirements: Agree in the contract on regular interim reports in which the contractor documents the progress of R&D work. These reports serve as evidence for the BSFZ and the tax office. Ideally, the contract should also stipulate that invoices contain a detailed breakdown into R&D and non-R&D components.
Remuneration structure and billing arrangements
The contractor's remuneration should be structured transparently and traceably. Lump-sum remuneration is generally permissible but makes it more difficult to break down R&D and non-R&D components. Instead, hourly or milestone-based billing that directly shows the R&D share is recommended. For mixed contracts (R&D + routine services), separate invoice line items or ideally separate contracts should be created.
1. Subject clause: "The contractor provides research and development services in the field of [specific research area], aimed at resolving the following technical/scientific uncertainty: [description]."
2. IP clause: "All research results arising under this contract, including inventions and know-how, shall become the property of the client."
3. Documentation clause: "The contractor shall prepare quarterly research reports documenting R&D progress, obstacles encountered, and next steps."
4. Billing clause: "Invoices shall separately identify R&D services and other services."
Frequently Asked Questions about Contract Research
No. Since Brexit (01.01.2021), the United Kingdom is no longer a member of the European Economic Area (EEA). Contract research with British universities, institutes, or companies is therefore no longer eligible under the R&D Tax Credit. Companies should switch to EEA alternatives – such as research institutions in the Netherlands, Austria, Sweden, or Ireland, which offer equivalent or even leading expertise in many fields.
Yes, contracts with affiliated companies can generally qualify as contract research under the FZulG. The prerequisite is that the service relationship is economically separate: a market-standard contract must exist, remuneration must follow the arm's length principle, and the contractor must perform the service independently. Particularly important: no double funding may occur – the affiliated company may not claim the same costs as its own R&D.
Yes, the 70% rule also applies to partial services. If an invoice covers both R&D and non-R&D services, only the R&D-relevant portions are first filtered out. Of this R&D portion, 70% can then be used as the assessment basis. A clean breakdown of the invoice into R&D and non-R&D components is therefore essential – request separate invoice line items from your contractor.
Each company can only claim its own R&D costs. The contractor may not additionally claim costs incurred in the context of your contract as its own R&D for the R&D Tax Credit. If the contractor additionally conducts separate, independent R&D projects (unrelated to your contract), these can of course be claimed independently. The key is the clear separation between contract research and in-house research.
Audit-proof documentation of contract research includes the following: the written research contract with clear R&D reference and IP provisions, all invoices with detailed breakdown of R&D portions, proof of performance and interim reports from the contractor, project correspondence (emails, minutes), and evidence of results (prototypes, reports, patent applications). NOVARIS supports you in creating complete, audit-proof documentation.
Since the Growth Opportunities Act (2024), 70% of remuneration for contract research can be used as the assessment basis for the R&D Tax Credit. Previously, the rate was 60%. The calculation is two-step: First, the R&D portion of the invoice is determined (only actual research and development services count). Of this R&D portion, 70% can then be used as the assessment basis. An example: For an invoice of EUR 500,000, of which EUR 400,000 relates to R&D services, the assessment basis is EUR 280,000 (70% of EUR 400,000). The funding rate of 25% (or 35% for SMEs) is then applied to this amount.
No, in the case of contract research, only the client can apply for the R&D Tax Credit. The contractor may not claim costs incurred in fulfilling the contract as its own R&D (prohibition of double funding). If the contractor additionally conducts separate, independent R&D projects alongside the contract work, it can independently apply for the R&D Tax Credit for those projects.
Further Resources on the Research Allowance (Forschungszulage)
Deepen your knowledge with our specialized resources:
- Research Allowance Guide – The complete overview of the FZulG 2026
- Research Allowance Calculator – Calculate your individual funding in 30 seconds
- Apply Retroactively – Claim up to 6 years of funding