France actively supports companies to invest in R&D activities, mainly through the R&D tax credit. The R&D tax credit decreases the cost of R&D activities in France. According to several surveys, it reduces the cost of a researcher by one third, effectively placing the French researcher among the most efficient in the world. The R&D tax credit makes France one of the most competitive European countries. According to the OECD, France has one of the best R&D incentives in the world, ahead of the USA and Japan.
However, along with the R&D tax credit, the French Tax Code also provides for other incentives for companies operating in France.
All these incentives allow companies to significantly decrease their taxable basis and the burden of social security contributions.
These tax incentives may be summarized as follows:
R&D Tax Credit
Offsetting a tax credit against CIT equal to 20% of innovation expenses limited to €400,000 per year
The maximum tax credit obtained is equal to €80,000 per year
- CIT / social contributions YIC
For the companies qualified young innovative company, full exemption of CIT the first beneficiary fiscal year
And, a 50% exemption of benefits incurred the following fiscal year
Offsetting a tax credit against CIT equal to 30% of R&D expenses limited to €100 million and 5% for the portion exceeding €100 million
- Immediate and full deduction of R&D expenditure for the taxable basis to CIT
- Straight line depreciation over 5 years of R&D investment expenses
- Exceptional depreciation for software (full depreciation over 12 months following the acquisition)
- long term capital gain regime - reduced CIT rate of 15%
Expatriate and Impatriate regimes
- Expatriate regime: full exemption of wages paid to an engineer working abroad
- Impatriate regime: favorable tax regime for foreign worker
Corporate Income Tax
Young Innovative Company
1. Specific R&D incentives for SME’s
1.1 Young Innovative Company (YIC) Regime
What is a YIC?
Under article 44 sexies-0 A of the French Tax Code (hereafter “FTC”), young innovative company is a company performing R&D projects and providing the following conditions:
- A small or medium enterprise which has less than 250 employees and either an annual turnover not exceeding €50 million or a balance sheet of not more than €43 million;
- Created for less than 8 years;
- Performing R&D expenditures at least equal to 15% of deductible expenses of the fiscal year;
- 10% of the company is held directly by students, or persons having for less than five years, a diploma conferring the master's degree or doctorate, or assigned to teaching activities or research, and its main activity is the promotion of research which these officers or partners were involved in their scholarship or in the exercise of their function within a higher education institution;
- Share capital is held continuously at least 50% by individuals, joint ventures, public interest associations or scientific foundation.
Where qualified as a YIC, the company benefits from:
- a full exemption of CIT the first fiscal year at profit, and a 50% exemption the following fiscal year.
- an exemption of social security charges during seven years under certain conditions.
Though attractive, this regime falls in the scope of the De Minimis Aid, that is to say the tax reliefs of the company may not exceed €200,000 for three fiscal years. The company shall permanently check not to reach this threshold.
1.2 The Innovation Tax Credit for SME’s
The innovation tax credit for SME’s allows offsetting a tax credit against CIT equal to 20% of innovation expenses limited to €400k per year, i.e. the maximum tax credit a company may obtain is equal to €80k per year.
This regime falls in the scope of the De Minimis Aid so that the recipient company shall monitor this tax credit.
2. R&D tax credits available to all companies
French tax law provides three R&D tax credits. The most used by companies is the R&D tax credit which is very favorable and attractive for companies carrying on R&D activities.
2.1 The R&D tax credit
The R&D tax credit allows offsetting a tax credit against CIT equal to 30% of R&D expenses limited to €100 million, and 5% for the portion exceeding €100 million.
What is R&D?
R&D activities comprise “creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications”.
Under article 49 septies F of the schedule 3 of the FTC, the term R&D covers three activities:
- Basic research is experimental and theoretical work undertaken primarily to acquire new knowledge of the underlying foundation phenomena and observable facts without any particular application or use in view;
- Applied research is also original investigation undertaken in order to acquire new knowledge. It is, however directed primarily towards a specific practical aim or objective;
- Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services or to improving substantially those already produced or installed.
In order to be taken into account in the calculation of the R&D tax credit, the expenditures shall derive from eligible R&D projects. R&D projects are qualified as being eligible by the French Ministry of Research in a ruling.
What expenses qualify?
R&D expenses are as follow:
- depreciation deductible from fixed asset and intangible (e.g. patents…)
- wages (including social security charges) paid to engineers up to a certain amount
- operating expenditures
- costs related to subcontracted research….
This list is not limitative and is given for information purposes only.
Amount of R&D tax credit
The R&D tax credit is equal to 30% of R&D expenses limited to €100 million. Where the amount of R&D expenses exceeds €100 million, the tax credit is limited to 5% of the excess expenses.
Use of R&D tax credit
In principle, R&D tax credit is used for being offset against CIT due by a company.
However, if a company cannot offset the R&D tax credit against CIT, French tax law provides some attractive rules to obtain a reimbursement in cash:
- If after 3 fiscal years the tax credit cannot be offset against CIT (e.g. company at loss), the company may obtain its reimbursement in cash.
- However, SME’s or YIC may immediately obtain a reimbursement in cash.
- If the company does not want to wait three years to obtain a reimbursement of the tax credit, it is possible to transfer the R&D tax credit receivable to a bank. The bank will pay in cash the company and the bank, after three years will ask for a reimbursement.
Filing of special tax return
To benefit from the R&D tax credit, a company shall file a special tax return (form#2069-A-SD) before the second business day following the 1st May.
Impact of the tax consolidation regime
Under the tax consolidation regime, each subsidiary member of the consolidated group calculates and declares the R&D tax credit at its level.
However, the parent company receives the R&D tax credit and offset it against the CIT due by the consolidated group.
2.2 Specific R&D tax credit for “haute-couture"
In addition to the R&D tax credit (as calculated in the same conditions as described above), companies operating in the textile, clothing or leather sector have the right to benefit from an additional specific tax credit.
This tax credit equals to 5% of expenses incurred for elaborating a fashion collection.
However, this regime falls in the scope of the De Minimis Aid so that the recipient company shall monitor this tax credit.
- General rules for companies carrying out R&D activities
1) Companies may benefit from an immediate and full deduction of R&D expenditures incurred during the financial year provided that R&D expenditures do not constitute an abnormal act of management i.e.:
- Expenditures shall not be excessive;
- Expenditures shall be justified and incurred in the interest of the company.
Moreover, in respect of a license agreement, a licensee can fully deduct royalties if it is demonstrated that the licensed right is effective and creates added value. Otherwise, royalties paid are only deductible up to 15/33,33% of their amount.
2) The French tax law provides two attractive regimes of depreciation for companies operating in R&D activities:
- Firstly, the company may use the straight-line depreciation (“amortissement linéaire”) which allows a full depreciation of the residual value to be depreciated over five years. This depreciation applies to R&D investment expenses.
- In addition, there is an exceptional depreciation for software. This method allows a full depreciation over 12 months following the acquisition.
3) Companies located in competitiveness clusters benefit from a full exemption of CIT for the first three fiscal years and, a 50% exemption the two following fiscal years.
These tax credits fall also in the scope of the De Minimis Aid, that is to say the 50% exemption may not exceed €200,000 for three fiscal years.
4) Some subsidies may be granted by the French Government to a company in respect of a R&D project. These subsidies may be taxable.
5) The patents and IP are submitted to a long term capital gain regime allowing application of a reduced CIT rate of 15% (CIT standard rate is equal to 34,43% and 38% for large companies).
6) In France, no specific expatriate regime for engineers exists. A global expatriate regime allows a full exemption of wages paid to an engineer working abroad. Besides, a favorable impatriate regime exists for foreign workers detached to France.
This article is part of the International Tax Bulletin for July 2014