Incentives: Sorting Through the System
Germany offers an extensive system of financial incentives for investors of all shapes and sizes, but a little legwork is required to find the right support program. Germany Trade & Invest’s finance and incentives expert Daniel Stephens considers the best way to do it.
Mr. Stephens, I’m looking to set up shop in Germany – show me the money!
Daniel Stephens: Ha! I’d love to, but it’s not that simple. At the last count, Germany had over 2,500 different incentive opportunities for companies, including region-specific programs. So it’s my job to filter out the ones which are most effective for you.
Where do you start?
DS: The size of your company is important as the incentives often vary accordingly. Small and medium-sized companies often have very little capital of their own with which to make significant investments, so incentives for these companies are correspondingly larger. Moving on, we look at the number of permanent jobs to be created, which is a crucial criterion. Naturally, the planned activity is also important, whether it’s R&D or production or a mixture of activities. Finally, some industries and activities are supported by specific dedicated programs. Those would be the four major starting questions: which industry, what kind of activity, how many jobs, and how large is the company?
So, can you give us an example?
DS: Only a hypothetical one, but let’s say we have a company that makes saucepans with an annual turnover of EUR 30 million, employing 25 people. It’s looking to set up a production facility in Germany that will create 20 jobs. The facility will cost EUR 10 million, and the company has EUR 2.5 million of its own equity. As it’s a small company – by European Union definitions – setting up a production facility and creating employment, we can find a suitable location that has a 20 percent cash grant incentive from the state’s Joint Task program. So, the company is theoretically eligible for a EUR 2 million cash grant.
But our hypothetical company still needs EUR 5.5 million.
DS: Yes, but the company can apply to Germany’s government-owned bank, KfW, for a loan to cover the rest of the financing gap. KfW is the world’s largest business development bank and offers loans with extremely business-friendly conditions. This is not the same as going to your normal primary bank – although, ironically, a primary bank is actually where you make the application.
Small company, large loan. Wouldn’t that cause a problem in terms of collateral?
DS: It might, but the company can also apply for a guarantee from the guarantee bank of the regional state in which the expansion is to take place, as a supplement.
That sounds easy …
DS: It is on paper. In reality, a business will have to prepare a rigorous plan to get any of these incentives.
You specifically mentioned R&D – what’s the story there?
DS: Germany has a strategic imperative to maintain its leading global reputation for R&D and has a large number of programs in place. Companies wanting to carry out good R&D in Germany can, from some programs, receive a cash grant for up to 60 percent of the eligible costs of a project.
Daniel Stephens has worked at GTAI’s head office in Berlin for almost a decade. He began as corporate communications manager in 2012, before moving into investor support services. Since 2019, he has been the senior manager for finance and incentives, offering statistical analysis and support to potential business expansion candidates.