Arsene Taxand - VAT & indirect taxes

An in-depth reform of the French research tax credit

The French government has just announced a large-scale reform of the research tax credit. This reform should put into place an attractive tax regime, allowing international groups to keep or to locate their R&D departments in France.

1. Main features of the French R&D tax credit regime

The French legislation is influenced by the OECD models, e.g. the ‘manual Frascati’. Therefore, the basic criterion for distinguishing R&D is the presence in the R&D of:
o an appreciable element of novelty,

o the resolution of scientific and/or technological uncertainty, i.e. when the solution to a problem is not readily apparent to someone familiar with the basic stock of commonly used knowledge and techniques in the area concerned.

The French tax code and the French administrative doctrine accepts not only basic research but also applied research, developing ideas into operational form and experimental development, systematic work, drawing on existing knowledge, that is directed to producing new materials, products, to installing new processes or to improving substantially those already produced or installed.

In order to encourage corporations to locate in France their R&D facilities or reduce the loss of existing jobs to other jurisdictions, the French companies are granted with a credit incrementally (40%) and volume based (10%) for calendar year 2007.

The volume is calculated via the aggregation of expenditures, which are roughly speaking : 175% of the Staff costs, i.e. wages and social security payments where they are mandatory contributions, 100% of the amortization of the instruments and equipment used in the performance of R&D, 100% of the Subcontract costs for R&D.

The tax credit is limited to €16 millions per year and per entity.

The main issue of this tax regime is the difficulty to track the incremental part of the tax credit, the negative credits being offset with the positive credits. Furthermore the credit rate on the volume based credit is not sufficient to be an efficient attractive regime.

2. New developments : the upcoming French reform

The new tax credit would be exclusively calculated on the basis of the volume of expenditure and the increasing share (calculated on the basis of the difference between the research expenditure incurred during the year as compared to that incurred in previous years) would no longer be taken into account.

The rate of the tax credit would be increased to 30% for up to 100 million euros in research expenditure, and to 5% over and above such amount.

A rate of 50% would be applied for companies that benefit from the tax credit for the first time and for those who have not been entitled to a tax credit for the last 5 years. Finally, the nature of the eligible expenditure should be broadened, in order to favor the development of the intangibles economy.

The purpose of the research tax credit is above all to promote and maintain research in France, and therefore to locate both researchers and innovation here, even if the intellectual and industrial property that may result from the research may in fact belong to foreign companies.

This reform is therefore of interest to French companies engaged in research and approved French research organizations, but also to the French subsidiaries of foreign multinationals carrying out research and development operations in France.

This reform will be part of the French Finance Bill for 2008.

Arsene-Taxand has set up a group that will follow the reform as well as a special hot-line service. You can ask our specialists any questions you may have with regard to the reform currently being undertaken, by sending your emails to: R&Dtaxcredit@arsene-taxand.com