Germany’s New Investment Funding Map
On January 1, 2022, the latest investment incentive funding map from the Joint Task Program for Europe came into effect. Michael Schnabel, Germany Trade & Invest’s senior manager for Finance & Incentives, tells us what it means for businesses in Germany.
So what’s new in the funding map for Germany?
Michael Schnabel: Well, the effects of Brexit have made themselves apparent. The map is designed to fund investments in areas of Europe that are economically weaker, structurally underdeveloped or shrinking in population compared to the more prosperous areas. Because the comparatively wealthy British population has now left the EU, Germany in general has become more prosperous relative to the rest of the EU-27 population, so the funding to some regions has been reduced, along with the actual number of regions covered by the incentive.
That doesn’t sound like good news. Or is it?
Michael Schnabel: Taken on its own, it’s not, but it’s certainly not all bad news. Although there are fewer funded regions, the actual funding has increased in some regions. For example, in almost all of the regions close to the Polish border, an investment can now be part-funded with a 25-percent cash grant instead of the previous 20 percent. Many other regions in eastern Germany, as well as some areas where the economy has shifted away from coal, can be funded with a 15-percent cash grant compared to 10 percent. Moreover, small and medium-sized enterprises get additional benefits, with medium-sized companies eligible for an extra 10 percent and small enterprises up to an extra 20 percent. So a small enterprise on the Polish border could be eligible for a cash grant of up to 45 percent of the capital expenditure as an incentive for its investment.
What exactly do these incentives cover?
Michael Schnabel: There are two ways of assessing the eligible costs of a business investment: either on the eligible capital expenditure of the investment, or on two years’ salary of the jobs created at a cost to company. The capital expenditure option is often an interesting opportunity as it reduces the large upfront costs associated with construction or development of a new facility. There are some investment cases where personnel costs are decisive, for example in the services sector, where the investment grant solution of reducing salaries for two years can be more beneficial.
That sounds generous. Is there a catch?
Michael Schnabel: No major catches. But it is down to the individual regional German states to govern and distribute their own budgets as efficiently as possible. The pots of money are not endless, and the incentive amount decreases incrementally. For investments over EUR 50 million, the incentive is halved, and over EUR 100 million it is reduced to a third and an EU Council notification is required.
Is there a limit in absolute terms? You hear of investments for which capital expenditure totals millions, even billions.
Michael Schnabel: There’s no explicit limit, but each state ultimately determines how much they can afford. Nobody has a right to the maximum incentive.
German Chancellor Olaf Scholz, Brandenburg State Premier Dietmar Woidke and Tesla CEO Elon Musk attend the opening of Tesla’s German gigafactory in March 2022 © picture alliance/ASSOCIATED PRESS/Patrick Pleu
And this grant, or incentive, can be used to pay for anything and everything?
Michael Schnabel: That would be great, wouldn’t it, but sadly, no. The grants are covered by both EU and German legislation, which is quite precise about the kind of investment this program is designed to incentivize. Sales and marketing activities, for example, are excluded, as are activities like agriculture, which has its own incentive programs.
What other conditions are attached? You said, “no major catches,” but presumably there are definitions and limits?
Michael Schnabel: There is a national coordination framework that sets out the basic conditions. It’s our job to help guide a business investor and assess an investment’s viability. But perhaps the most important conditions are as follows: Firstly, 25 percent of the cost threshold – be it capital expenditure or the salary option – must be obtained by the company from a nonsubsidized source. So a company wanting to spend EUR 10 million on a new facility must provide EUR 2.5 million from its equity or a loan without any subsidy component. Secondly, the jobs created, and the subsidized assets, have to be kept at a given location for five years after the investment commences (there are some exemptions for SMEs). Thirdly, incentivized projects should normally not take more than 36 months to complete – although that can be extended in some cases. Fourthly, the maximum capital expenditure that can be incentivized is EUR 750,000 per job created, meaning very capital-intensive investments will have a built-in limit on expenditure. Finally, and perhaps most importantly, nothing can be incentivized retrospectively, so it is important not to proceed before an incentive has been approved.
Ok, so check first before spending. But how does an investor go about applying for the incentive? Do you do that as well?
Michael Schnabel: No. The grants are administered by the economic development agencies and state banks of the regions where the grants are applicable. So a prospective business investor would, ultimately, have to apply to these banks for the grant. We can only say what the incentive level in each respective region is and explain the legal framework to help investors make their location decisions, assuming cash incentives are a major factor. Disbursement of the money and processing of applications are matters for the regional states.
Is there a lot of bureaucracy involved?
Michael Schnabel: Not as much as you might think. There is documentation to procure, but the process itself is fairly straightforward. For a clarified investment you could expect to wait about three months from application to approval.
Finally, what happens if an investment changes from what was outlined in the application?
Michael Schnabel: If an investment ends up being smaller, the incentive money is simply returned for the part of the investment that was not realized.