In order to encourage companies to invest in France, the French Government introduced in 1983 a research and development tax credit (CIR – “Credit Impôt Recherche”) to encourage the development of innovative companies.

Since 2013, the CIR has been extended to prototype design costs and pilot installations of new products. This tax credit is called CII and it is reserved for SMEs.

These tax credits make France one of the most competitive European countries. According to the OECD, France has one of the best R&D incentives in the world.

1. The research tax credit (CIR)

Eligible companies

The research and development tax credit is applicable to industrial, commercial, artisanal or agricultural companies taxed under the actual regime and which carry out researches and innovation expenses.

All companies incurring R&D expenses are eligible, regardless of their duration, size, business sector and nationality.

The CIR rate

France’s research tax credit covers:

• 30% of all R&D expenses up to €100 million, and 5% above this threshold

Eligible expenses

Expenses must concern research operations within the European Economic Area and must be included in the company taxable incomes.

The following expenses are taken into account by the CIR:

• Tax deductible depreciation related to R&D fixed assets, directly used for the research operations
• Tax deductible depreciation related to patents
• Wages of the R&D staff involved in the research activity.
• 200% of wages of postdoc over the next 2 years following their recruitment
• Operating expenses fixed to 50% of the gross salaries and 75% of tax deductible depreciation above mentioned
• Subcontracted R&D
• Patent expenses related to registration, updating and any litigation cost
• Technological survey expenses

2. The innovation tax credit (CII)

Eligible companies

To qualify for CII, the company must be a SME according to the European definition:

• Staff headcount < 250;
• Annual turnover ≤ € 50 M € and/or annual balance sheet total ≤ € 43 M €

The CII rate

France’s innovation tax credit covers:

• 20% of innovation expenses by up to €400,000 a year

Eligible expenses

Expenses must concern innovation operations within the European Economic Area and must be included in the company taxable incomes.

The CII could apply to all innovation expenses concerning prototype design of new products or pilot installations of same nature.

The innovative activity must concern new tangible or intangible products that meet the following conditions:

• Not yet on the market,
• Differs from existing or previous products with superior technical performance, eco-design, usability or functionality.

Thus, for there to be innovation, a product must not have already been introduced by other economic agents operating in the same competitive environment: it is necessary that the product is new for the market.

The following expenses are taken into account by the CII:

• Tax deductible depreciation related to fixed assets, directly used for prototype design or pilot installation operations,
• Tax deductible depreciation related to patents,
• Wages of the R&D staff directly and exclusively involved in the innovative activity,
• Operating expenses fixed to 50% of the gross salaries and 75% of tax deductible depreciation above mentioned,
• Subcontracted prototype design or pilot installation operations,
• Patent expenses related to registration, updating and any litigation cost,
• Technological survey expenses.

3. Utilization of both tax credit

The tax credit is determined every calendar year, regardless of the date on which the financial year ends.

The tax credit is deductible from the French income tax.

The excess tax credit is carried on the next 3 years. After this period, the amount of tax credit that has not been used may be reimbursed.

Also, an immediate refund is possible under conditions.

The following companies could claim for an immediate refund:

• SME according to the European definition (staff headcount < 250; turnover ≤ € 50 M € or balance sheet total ≤ € 43 M €),
• Young companies,
• JEI “Jeunes Entreprises Innovantes” (i.e SME created for less than 8 years with less than 50% of its shares owned by other companies and which realizes R&D expenses provided it represents 15% of the tax deductible expenses),
• Companies subject to a backup, conciliation and liquidation procedure as well as a judicial settlement procedure,
• Agricultural companies subject to a friendly settlement procedure.

SUMMARY

• An operation could lead successively to CIR and CII for the research phase and the innovative phase. However the same expense could not benefit from both the CIR and the CII.
• In order to secure the future of investments, companies should request a Research Tax Credit advance ruling (rescrit) from the French Tax Authorities to confirm the eligibility of the expenses. The ruling request must be made 6 months before the CIR return. A tacit agreement can be assumed if no reply is received within three months