Developers Working Abroad: What Does This Mean for the German R&D Tax Credit?

Dr. Anne Küsters, November 9th, 2026

A developer works from Portugal. A machine-learning specialist is employed by a Polish subsidiary. An embedded engineer supports the team as a freelance contractor from Switzerland. All three may contribute to the same R&D project from a technical perspective. For the German R&D tax credit, the Forschungszulage, however, their costs must be assessed differently.

Working abroad does not automatically prevent a cost from qualifying for the German R&D tax credit. But it does not automatically make that cost eligible either. The decisive factors are the employment model, payroll tax treatment, the contractual counterparty and, where work is outsourced, the contractor's location.

The relevant question is therefore not simply: where is the developer based? It is: who employs or commissions them, who bears the cost, and into which statutory cost category does that cost fall?

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The overseas work location is only one part of the assessment

Internationally distributed engineering teams are standard for software, AI and Deep Tech companies. A product's technical architecture does not follow national borders. The German R&D tax credit, by contrast, applies clearly defined tax-law criteria.

For in-house R&D, the credit is generally tied to employment income paid by the eligible company to its own employees that is subject to German payroll tax withholding. Certain employer contributions towards employees' future security are included as well. Only the documented share attributable to qualifying R&D activities can be taken into account. This follows from Section 3(1) of the German R&D Tax Credit Act (Forschungszulagengesetz, FZulG).

This creates two separate assessments:

Does the technical project constitute research and development under the FZulG?

Are the specific costs of the international team eligible at the company making the claim?

A positive certificate from the Certification Body for Research Allowance (Bescheinigungsstelle Forschungszulage, BSFZ) answers the first question. The BSFZ does not assess whether the stated expenses were actually incurred or qualify for tax purposes. That assessment takes place in the determination procedure at the tax office. A positive certificate therefore does not confirm that every developer cost can be included.

Your own employees can carry out eligible R&D from abroad

Where a German entity employs the developer directly, working abroad is not automatically detrimental. If the employment income remains subject to German payroll tax withholding, it may generally be included as eligible expenditure. This applies only to the documented share of working time spent on qualifying R&D activities.

The law also contains a specific double-tax-treaty rule. If German payroll tax withholding does not apply solely because a double tax treaty assigns the right to tax the income to another EU Member State, EEA contracting state or Switzerland, the employment income may still qualify. This exception is set out in Section 3(2) FZulG.

Consider a software developer employed by a German GmbH who relocates to France. She continues to work on the German entity's qualifying R&D project, is paid by that entity, and the applicable double tax treaty assigns the taxing right to France. Provided the requirements of Section 3(2) FZulG are met, the R&D-related portion of her employment income may still form part of the assessment base.

The Federal Ministry of Finance's guidance on the German R&D tax credit explicitly addresses a comparable case: an employee of a German entity is seconded to a French cooperation partner. Where payroll tax withholding does not apply because of the double tax treaty, the wage costs can remain eligible if the conditions set out in the guidance are met.

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For third countries, the payroll-tax analysis is narrower

The double-tax-treaty exception in Section 3(2) FZulG does not apply worldwide. It expressly covers the EU, the EEA and Switzerland.

If an employee works permanently from the United States, for example, and their employment income is not subject to German payroll tax withholding, Section 3(2) FZulG cannot remedy this absence. The Federal Ministry of Finance illustrates the same underlying principle with the example of a foreign permanent establishment: where employees based there do not earn German-source income and their wages are not subject to German payroll tax withholding, the wage costs are not eligible.

That does not mean that every employee outside Europe is automatically excluded. The specific payroll-tax treatment remains decisive. If employment income remains subject to German payroll tax withholding despite the overseas work location, Section 3(1) FZulG may apply.

For companies, this means that the country name alone does not provide a reliable answer. For long-term remote work abroad, the employment status, applicable double tax treaty and actual payroll treatment should be reviewed. Social-security questions and the potential creation of a permanent establishment also matter, but they are separate issues.

Employees of a foreign subsidiary are not automatically your own personnel costs

The legal boundary between entities is often overlooked. If a developer is employed by a Polish subsidiary, her salary does not become eligible personnel expenditure of the German parent company merely because both entities belong to the same group or work on the same codebase. For the German R&D tax credit, affiliated companies remain separate legal entities.

The German company cannot simply treat the foreign subsidiary's wages as its own R&D personnel costs. What matters is how the collaboration is structured. If the subsidiary provides a clearly defined development service under a paid R&D contract, the German company may be commissioning contract R&D. If both entities work as cooperation partners for their own account and at their own risk, each contribution must be described separately.

An entity that wishes to claim the German R&D tax credit for its own contribution generally needs its own entitlement to claim and a certificate for that contribution to the project. An intra-group cost allocation does not remove this distinction. The contract, scope of services, allocation of risk and economic substance must support the chosen structure.

Contract R&D abroad follows a different location rule

For contract R&D, the individual developer's payroll-tax treatment is not decisive. The key question is whether the German company has commissioned genuine R&D work from a legally independent contractor. For R&D projects commissioned after March 27, 2024, 70 percent of the fee incurred by the commissioning company is eligible expenditure. One requirement is that the contractor has its place of management in an EU Member State or in another EEA state that meets the applicable administrative-assistance requirement. Sections 2(5) and 3(4) FZulG set out these rules.

The EEA comprises the EU Member States as well as Iceland, Liechtenstein and Norway. Switzerland is not an EEA state.

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A remote team does not automatically mean less German R&D tax credit

Internationally distributed engineering teams have become normal for technology companies. The FZulG does not fundamentally exclude this way of working.
But it distinguishes carefully between different structures.

An employee working abroad can still generate eligible personnel costs. In certain double-tax-treaty situations, this can also apply where German payroll tax withholding no longer applies because the taxing right is assigned to an EU or EEA state, or Switzerland.

An external developer, by contrast, is not treated like internal personnel. The company must assess whether the arrangement is genuinely contract R&D and whether the contractor meets the geographical requirements. Nor does a developer employed by another group entity become the applicant company's own R&D employee simply because they work in the same Git repository.
Technical collaboration can be global. The funding logic nevertheless follows the employment contract, tax status and contractual structure.

Structure the team before you calculate the costs

For startups, this is primarily an operating question. The German R&D tax credit should not determine whom a company hires. But once a material R&D project is under way, it is worth reviewing the structure early. For each developer, four elements should align: the employment relationship, tax treatment, actual R&D share and documentation. For external developers, the contractual structure is an additional factor. An invoice labelled "software development" is not enough where contract R&D will later be claimed. The R&D contribution must be traceable through the project, the contract and the work actually performed.

This is how a global engineering team becomes a clearly structured German R&D tax credit case.

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Disclaimer: This article provides general information and does not constitute tax or legal advice. Actual eligibility and the amount of the R&D tax credit depend on the individual circumstances.