Undertakings in Difficulty: What Does This Status Mean for the German R&D Tax Credit?

Dr. Anne Küsters, October 5th, 2026

A company can be running a technically strong R&D project, hold a positive certificate from the R&D Certification Office (BSFZ), and still have no entitlement to the German R&D tax credit. In that case, the project is not the problem. The company’s financial position is.

The State aid status of an “undertaking in difficulty” is narrower and more formal than the name suggests. Operating losses, a short cash runway, or a difficult funding round do not automatically lead to exclusion. Conversely, a company can fall within the definition while continuing to trade if certain balance sheet, insolvency, or State aid criteria are met.

For founders and CFOs, one point in time matters in particular: the end of the financial year. A company that waits until it files its later application through ELSTER to check its status may already be too late.

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Why does the status exclude a company from the R&D tax credit?

The German R&D tax credit constitutes State aid under EU law. It is granted under the General Block Exemption Regulation, or GBER. The GBER allows certain categories of aid to be granted without prior individual approval from the European Commission, but generally excludes undertakings in difficulty.

Section 9(2) of the German Research Allowance Act implements this rule directly. A company has no entitlement to the R&D tax credit if it qualifies as an undertaking in difficulty under the GBER. This applies even when its R&D project is technically eligible. The BSFZ assesses the project’s substantive eligibility, while the tax office checks the remaining entitlement requirements in the second stage of the process.

The R&D tax credit can be claimed regardless of a company’s current profit position. A tax loss is therefore not harmful in itself. The line is crossed only when at least one of the State aid criteria for an undertaking in difficulty is met. This follows from Section 9 of the Research Allowance Act in conjunction with Article 2(18) GBER.

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When is a company considered an undertaking in difficulty?

The GBER defines five alternative scenarios. A company is considered an undertaking in difficulty under State aid law as soon as any one of them applies.

For a limited liability company, the development of its equity is particularly relevant. The status applies where more than half of the subscribed share capital has disappeared as a result of accumulated losses. The calculation also takes reserves, share premiums, and other elements of the company’s own funds into account. What matters is not the loss recorded in a single year, but the cumulative effect of losses on the company’s capital base.

Consider a four-year-old German limited liability company, or GmbH, with subscribed share capital of €100,000 and no additional reserves. Accumulated losses have reduced its balance sheet equity to €35,000 at the end of the financial year. More than 50 percent of its share capital has therefore disappeared. Unless an exception applies, the company qualifies as an undertaking in difficulty.

A comparable test applies to companies in which at least some members have unlimited liability for the company’s debt. The relevant question is whether more than half of the own funds shown in the company’s accounts have disappeared as a result of accumulated losses.

Irrespective of its capital structure, a company is also an undertaking in difficulty if it is subject to collective insolvency proceedings or meets the criteria under domestic law for being placed in such proceedings at the request of its creditors. In Germany, insolvency due to inability to pay and, for legal entities, over-indebtedness are particularly relevant. The definition therefore extends beyond cases in which insolvency proceedings have already been opened.

Another criterion concerns public rescue and restructuring measures. If the company has received rescue aid and has not yet repaid the relevant loan or terminated the guarantee, it continues to qualify as an undertaking in difficulty. The same applies for as long as a company that has received restructuring aid remains subject to a restructuring plan.

An additional financial ratio test applies to companies that are not SMEs. They qualify as undertakings in difficulty if, in each of the previous two years, their book debt-to-equity ratio was greater than 7.5 and their EBITDA interest coverage ratio was below 1.0. Both conditions must be met together.

The full set of criteria is contained in Article 2(18) GBER. They operate independently. A company does not need to be balance-sheet insolvent, unable to pay, and highly leveraged at the same time. One criterion can be enough to exclude it from the R&D tax credit.

Which date determines entitlement?

Entitlement to the German R&D tax credit arises at the end of the financial year in which the eligible expenses were incurred. The State aid requirements must be met at that precise point in time.

The Federal Ministry of Finance guidance on the R&D tax credit expressly refers to the end of the relevant financial year. For a company whose financial year follows the calendar year, that date is December 31. For a company with a non-calendar financial year, the relevant date is its year-end balance sheet date.

The date of the BSFZ application is not decisive for this test. Nor does the later application to the tax office through ELSTER move the assessment date. For a multi-year R&D project, each financial year is assessed separately.

A company may therefore be excluded for one financial year and regain entitlement in the following year if the criteria are no longer met at the new balance sheet date. The status does not automatically result in permanent exclusion. Conversely, a funding round completed only in the following year cannot generally restore an entitlement that was lost at the previous balance sheet date.

What exception applies to young SMEs?

For startups, the three-year exception is particularly relevant. The two capital-based criteria do not apply to SMEs that have been in existence for less than three years. High initial losses and correspondingly low equity therefore do not, on their own, cause a young SME to qualify as an undertaking in difficulty.

The exception reflects the funding mechanics of young technology companies. A deep-tech startup may incur substantial costs for engineering, prototypes, laboratory testing, and certification during its first few years, before it generates material revenue. The resulting consumption of equity should not automatically exclude the company from the R&D tax credit.

The exception does not protect a company from the remaining criteria. An SME that is less than three years old still qualifies as an undertaking in difficulty if it is already subject to collective insolvency proceedings or meets the criteria for such proceedings to be opened at a creditor’s request. The same applies if rescue aid has not yet been settled or the company remains subject to an aided restructuring plan.

The three-year exception also requires the company to qualify as an SME under the GBER. As a general rule, it must have fewer than 250 employees. In addition, its annual turnover must not exceed €50 million or its annual balance sheet total must not exceed €43 million.

For a funded startup, looking only at the operating company is not always enough. Depending on the ownership structure, the figures of partner enterprises must be included proportionately, while the figures of linked enterprises must generally be included in full. The calculation method is explained in the Federal Ministry of Finance guidance on the SME definition. A young company within a larger corporate group may therefore lose its SME status. If it does, the three-year exception no longer applies.

How are subsidiaries and corporate groups assessed?

A financially stable group does not automatically prevent an individual subsidiary from qualifying as an undertaking in difficulty.

Under the Federal Ministry of Finance’s administrative guidance, the initial assessment focuses on the company claiming the R&D tax credit. If that company is itself in difficulty, an economically strong parent company is generally not enough. A letter of comfort or a non-binding financing intention does not increase the subsidiary’s own funds either.

A special rule applies if the company claiming the tax credit is included in consolidated financial statements by way of full consolidation. According to the Federal Ministry of Finance guidance, the consolidated financial statements of the group are then decisive for the assessment. The group structure and accounting treatment can therefore materially change the outcome.

For venture-backed startups, corporate spin-offs, and R&D subsidiaries, the analysis should not stop at the individual company’s balance sheet. Ownership structure, SME status, and the scope of consolidation must be considered together.

Can a funding round prevent exclusion?

For startups, the subscribed share capital test is particularly relevant once the exception for SMEs that have existed for less than three years no longer applies. For a GmbH, the capital-based criterion is generally met when accumulated losses, after being offset against reserves and other own funds, have consumed more than half of the subscribed share capital. With share capital of €25,000 and no additional reserves, a negative cumulative amount exceeding €12,500 may already cross the threshold. High development losses can make this relevant quickly.

A properly structured equity round completed in time can change the assessment at the end of the financial year. In a typical priced round, only a small part of the investment increases the nominal share capital, while the larger part is paid into the capital reserve as a share premium. Both components may be relevant to the test. What matters is therefore not only how much cash enters the company, but how the round is legally agreed, recorded in the accounts, and documented. A term sheet or non-binding financing intention is not enough. Convertible loans, shareholder loans, and venture debt generally remain debt for this test, even with a qualified subordination agreement.

In Case C-347/20, the Court of Justice of the European Union clarified that subscribed share capital is not limited to amounts already paid in. It may also include contributions that current or future shareholders have irrevocably undertaken to make. Whether a particular financing agreement meets this requirement depends on its legal structure and the strength of the supporting documentation.

In practice, this means that management, investors, and tax advisers must act before the balance sheet date if high losses and a predominantly debt-funded capital structure make the share capital test relevant. They need to determine which equity measure can become binding in time and how it can be evidenced.

Does the former COVID exception still apply?

A temporary special rule applied to entitlements for the 2020 and 2021 financial years. Companies could receive the R&D tax credit despite having entered into difficulty in the meantime if they were not undertakings in difficulty on December 31, 2019, and only became so between January 1, 2020, and December 31, 2021.

That exception is now historical. It cannot be extended to later financial years. If a company was still, or became for the first time, an undertaking in difficulty at the end of the 2022 financial year or a later financial year, it is generally not entitled to the tax credit for that year. Entitlement can arise again only for a subsequent year at the end of which the criteria are no longer met.

The GBER contains other exceptions for certain types of aid, including aid to make good damage caused by certain natural disasters and some risk finance measures. These provisions do not create a general exception for the German R&D tax credit.

What should founders and CFOs check before year-end?

The assessment should form part of the year-end closing and financing process. A company that waits until it files the later ELSTER application to examine its status may already have missed the relevant date. The decisive point is the end of the financial year in which the eligible R&D expenses were incurred.

The first step is to establish whether the company qualifies as an SME under the GBER. Ownership interests, partner enterprises, and linked enterprises must be included in that assessment. A young company must then determine whether the three-year exception still applies at the relevant balance sheet date.

For limited liability companies

Finance and management teams should track the development of subscribed share capital, existing share premiums, reserves, other own funds, and accumulated losses. A negative result for a single year is not enough to determine the company’s status. The relevant question is how much of the applicable capital base has disappeared as a result of total accumulated losses.

At the same time, the company must assess whether it is unable to pay, over-indebted, or otherwise meets the criteria for collective insolvency proceedings to be opened. Previous rescue or restructuring aid must also be included in the analysis. For companies that are not SMEs, the book debt-to-equity ratio and EBITDA interest coverage ratio for the previous two years must be reviewed as well.

For subsidiaries and corporate spin-offs

For subsidiaries and corporate spin-offs, the scope of consolidation also matters. A financially strong parent company does not automatically prevent the applicant subsidiary from qualifying as an undertaking in difficulty. If the subsidiary is included in consolidated financial statements by way of full consolidation, however, the consolidated accounts may be decisive for the test.

If the analysis indicates a potential loss of capital, any planned financing measure must be legally structured and implemented in time. A non-binding intention to invest does not change the capital base. The decisive questions are which own funds or irrevocably committed contributions can be taken into account at the end of the financial year and how they are documented.

The assessment therefore becomes part of financing strategy. For capital-intensive deep-tech, robotics, and industrial AI companies in particular, entitlement to the R&D tax credit depends on more than the technical quality of the R&D project. The company must also meet the State aid requirements when entitlement arises at the end of the financial year.

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The goal is not to dress up your project in funding terminology. It is to make the technical substance of what you are building clear and defensible.

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About DnA Ventures

Built from industry, for industry: DnA Ventures combines industrial and startup experience with venture capital and non-dilutive R&D funding. For an initial R&D tax credit eligibility assessment, contact Anna Saari or Maite Pazmino.

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. Legal status: September 25th, 2026.

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