Tax: New 2019 French Patent/Software box regime

• In order to bring the preferential tax regime applicable to patents and other intangible rights into compliance with OECD and European standards, a new taxation regime for income generated by industrial property and software will be adopted as from 1^st January 2019, subject to the definitive vote of the draft 2019 Finance Act.
• This new regime should provide taxation at a reduced rate of 10% of net income generated by industrial property (patents, certificates of Public Convenience, non-patented patentable inventions, Proprietary Obtention Certificates and manufacturing processes) and copyrighted software. The major change is the opening of the preferential tax regime to copyright software which should also benefit many sectors of activity.
• The new regime would be optional either by type of intangible assets or by family of products or services.
• Without fully expanding on the details of the complicated calculation formula, the net income basis subject to a reduced rate of 10% (instead of the standard rate of 31% in 2019) will take into account the research costs (which could also qualify for the Research Tax Credit) and a percentage determined from the “nexus” approach (i.e. ratio between the qualified costs and the total costs including the purchase cost).
• As part of the first year of the option, a “capture” mechanism is foreseen to take into account the research costs previously incurred, the amount of which will vary depending on the option date.
• Additional information from parliamentary debates and instructions is expected but it is certain that, in addition to the Research Tax Credit, this new regime will be very interesting to analyze for all sectors, particularly with respect to audio software.
• This new regime will also apply within tax consolidated groups.
• In order to opt for the preferential tax regime, detailed documentation will need to be provided to the French Tax Authorities the first day of the tax audit under a penalty corresponding to 5% of income generated from the non-documented, intangible asset.
• Analysis of the potential option (by family of products/services or by intangible asset) will need to be carried out to determine the tax impact as well as to prepare the appropriate documentation as soon as possible before the audit.
• Other counties have implemented IP box regimes. It is important for groups to compare the different regimes in Europe in order to localize their R&D activities for industrial property and software in the country where the tax cost is as low as possible.