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23-01-2013 » From research tax credit to innovation tax credit

The French Budget Law for 2013 (Law No. 2012-1509 of 29 December 2012) includes an Article 71 which extends the existing Research Tax Credit (RTC) to "Innovation" expenses incurred by companies that meet the European Union definition of micro, small and medium-sized enterprises. It also modifies different aspects of the “general scheme” of the RTC.

The research tax credit is a tax incentive to encourage research and development (R&D) by companies, in the form of a tax credit calculated on the basis of the actual R&D expenses. Before the current Budget Law, it included two components set out in Article 244 quater B of the French General Tax Code (Code Général des Impôts): the “general scheme” and a specific scheme granted to the textile, clothing and leather-related industries.

The general scheme, which can benefit all industrial and commercial enterprises that are taxed according to their actual earnings (or exempt under certain statutory provisions), provides for a tax reduction on the basis of a single rate of 30% for research expenditure up to 100 million euros and at 5% for research expenditure above this amount. The new law also abolishes certain rates increased by 40% and 35% that had been reserved for companies entering the scheme for the first time or which had not been receiving it for 5 years.

Eligible Expenditure for the calculation of the tax credit includes not only expenses in relation to science and technology research operations, but also design, which is a new provision introduced by the law of 29 December 2012. The following expenses are included and maintained, under the same conditions as previously: expenditure for the costs of filing, maintaining and defending patents and plant breeders' rights, as well as the cost of research operations subcontracted to organizations that meet the prescribed criteria , remuneration and employer’s social security contributions of researchers and research technicians [Art. 244 quater B II paragraphs a) to g)] etc.

Tha law of 29 December 2012 does not change the tax credit on expenses incurred by the textile, clothing and leather-related industries in relation to the development of new collections . Also for this business sector the costs of design filings give right to the RTC, as well as the costs of defending these rights up to a limit of 60,000 euros [Art. 244 quater B II paragraphs h) i)].

The new "Innovation" section, implemented by the law of 29 December 2012, provides for a tax credit rate of 20% for eligible expenses incurred from 1 January 2013 up to an overall limit of € 400,000 per year for companies subject to corporate income tax or income tax. Eligible expenses are limited to those listed in Article 244 quater B II paragraph k) 1 ° to 6 °) which primarily relate to the design of prototypes or pilot plants for new products, downstream of Research and Development.

A product is new if it meets two cumulative conditions:

a) it is not yet available on the market,

b) it has superior performance to existing products in terms of technical features, eco-design, ergonomics or functionality.

Expenses taken into account for the tax credit include: the filing costs , maintenance and protection of patent rights and plant variety certificates, as well as of designs, for all business sectors.

Nevertheless, the RTC can only benefit companies that meet the definition of micro, small and medium-sized enterprises laid down in Annex I to EU Regulation (EC) No 800/2008 of 6 August 2008, that is companies cumulating the two following criteria:

a) number of employees under 250 persons,

b) turnover not exceeding EUR 50 million or a total annual revenue of 43 million euros.

However, the thresholds can be assessed differently depending on whether the companies concerned are considered completely independent or related to partners.

Finally, the RTC regime has been made easier since claims can now be submitted after the research and innovation operations have begun. However, for the Innovation component, this provision shall only apply as from 1 January 2014.

The boundaries between such different schemes are blurred and businesses will undoubtedly be well advised to resort to the “rescrit fiscal” procedure to check with the Administration that they are entitled to the benefit of the RTC they have claimed.

Nevertheless, in 2010, nearly 18,000 companies filed a claim for the RTC, representing 18,2 billion euros of expenses and tax debt of 5,05 billion euros. Small firms are the main beneficiaries of the RTC. Thus, in 2010 nearly 11000 companies with under 250 employees benefitted from the RTC for a global RTC debt of over 1,45 billion euros. They represented 85% of the companies receiving the RTC in 2010 and 28.8% of the total RTC debt. The system as now enhanced should keep on developing.

Eligibility for the RTC does not exclude the use of other measures promoting research. This is the case for the “Crédit d’Impôt pour la Compétitivité et l’Emploi” (tax credit for Competitiveness and Employment - CICE) effective as of 1 January 2013, as well as expenses for technological monitoring incurred when performing research operations, which continue to benefit from the credit tax, up to a limit of 60.000 euros per year.

 

In Brief: In a judgment of 17 November 2012, the Conseil d’Etat (French Administrative Supreme Court) confirms that the costs of renewal of a trademark are deductible expenses from the current year’s financial results.

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