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French R&D tax incentives : overview and recent developments
French tax incentives remain a key point in the competitiveness of French research and development (“R&D”), thanks to three main items.
Firstly, the research tax credit (“RTC”), which amounts to 30 % of the expenditures related to R&D up to 100 million euros and 5 % for the excess. The eligible expenses are quite broad and include in particular personnel expenses, depreciation of fixed assets allocated to research, research expenses sub-contracted to public research bodies or private research organisations approved by the research minister or even collection expenses (whose eligibility was extended until 31 December 2024 by the last Finance Act). It should however be noted that the eligibility of "soft sciences" projects is regularly discussed and challenged. The RTC can be offset against French corporate income tax (“CIT”) or reimbursed after 3 fiscal years (or immediately reimbursable for SMEs).
The second incentive relates to new innovative companies. It applies to SMEs in which at least half of the capital is held by individuals. To benefit from this regime, the company must carry out R&D activities for an amount at least equal to 15% of its total deductible expenses and must exist for less than 8 years. The time limit was 11 years for companies created between 2013 and 2022 but has been reduced to 8 years by the Finance Act for 2023.
This regime provides for a total exemption from CIT for the first 12 months of profit, and a 50 % exemption for the following 12 months of profit, as well as exemptions from local business tax and employers’ social security contributions on the salaries of personnel involved in research (up to an annual cap per establishment equal to 5 times the annual social security ceiling i.e. 219 960 € in 2023) for a period of 7 years. This incentive, which was supposed to end on 31 December 2022, was extended by three years by the Finance Act for 2023.
Last but not least, the IP Box regime allows income from licensing, sub-licensing or capital gains from the sale of patents and innovative software to be taxed at a 10 % CIT rate, rather than the normal 25% rate. Expenditures related to the development of these assets must be deducted from qualifying income to determine a net profit or loss, to which a nexus ratio (allowing to determine which portion of the R&D is actually borne rather than acquired or subcontracted to related parties by the company) must be applied to determine the actual profit or loss eligible for the 10 % reduced rate. In an international and group context, there are many interactions with transfer pricing matters and RTC to make such computations (level of licensing income, tracking of expenditures, impact of group-related operations such as cost sharing, transfer of IP etc…).