Definition of R&D expenses

The long-awaited draft Tax Instruction (see issue 1 of “Info CIR”) on the definition of R&D expenses eligible for France’s research tax credit has finally materialized; it was published in the government’s Bulletin Officiel (Official Bulletin) on February 21, 2012. The Instruction is based on the OECD Frascati manual, the international benchmark on defining the scope of R&D activities and measuring them using national statistics. A variety of examples are mentioned in the Instruction, illustrating the procedures to be followed by companies engaged in R&D activities. However, these examples are limited in that they do not cover all business sectors and fields.

The authorities have nevertheless pointed out that those disciplines and sectors that are missing from the Instruction still fall within its scope.

Source: Tax Instruction 4 A-3-12 of February 21, 2012

Adjustments made to the research tax credit in 2011

The tax authorities commented on adjustments made to the research tax credit by way of an Instruction published in the Bulletin Officiel des Impôts (Official Tax Bulletin) on January 27, 2012.

Higher rates: The higher rates applicable during the first two years have been lowered. The 50% and 40% rates for new applicants to the scheme were lowered to 40% and 35% respectively. For companies that were eligible for the higher rate of 50% during their first year in 2010, the higher rate applicable to their second year is now 35%.

Operating expenses: Eligible operating costs are defined as:

• 75% of the amount of depreciating fixed assets assigned to R&D activities.
• 50% of employee expenses for employees (researchers and research technicians) assigned to R&D activities and additional remuneration paid to employees who design an invention.

Expenses subcontracted to private-sector research agencies: These are now included up to a maximum of three times the total amount of other research expenditure eligible for the research tax credit, before applying the aggregate limit of €2 million a year (which is increased to €10 million in some cases). This limit does not apply to research activities entrusted to public-sector research agencies, higher education institutions or similar organizations.

Payments for consultancy services: Companies must henceforth deduct such payments from their total expenses eligible for the research tax credit (Article 244 quater B-III of the French General Tax Code). The amount of expenses to be deducted from those eligible for the research tax credit is calculated as follows:

• Total amount of payments for these services, fixed in proportion to the amount of the research tax credit obtained by the company.
• Total amount of expenses incurred, other than the proportional payments referred to above, in excess of the higher of the following two amounts: €15,000 excluding taxes or 5% of total eligible research expenses excluding taxes less government subsidies received.

The amount of consultancy services must be deducted from total expenditure eligible for the research tax credit in the year in which those services are deducted from profit subject to income tax or corporate tax.

Immediate reimbursement of research tax credit claims: The immediate reimbursement measure for EU SMEs has been extended to cover expenses incurred with effect from January 1, 2010. Companies less than two years old will need to submit additional documentation proving that research expenses have actually been incurred. In particular, they will need to submit documents such as contracts, invoices, annual social security returns and pay slips issued to researchers and technicians.

Additional reporting requirements for expenditure in excess of €100 million: Above this threshold, affected companies remain eligible for the 5% tax credit on R&D expenditure. They must produce a report describing their research work, failing which they are liable to incur penalty taxes.

Source: Tax Instruction 4 A-3-12 of February 21, 2012

Assessing the conditions under which the scheme is applied

As a rule, the tax authorities have sole discretion to assess all conditions regarding the application of the research tax credit other than those related to the scientific and technical nature of the research project.

Although advance rulings are currently issued by regional technological research directorates (DRRTs) or any other body tasked with supporting innovation (National Research Agency, state innovation agency OSEO, etc.), they relate only to the eligibility of expenses as research expenditure. They are in no way concerned with approving amounts of expenditure, since these are not yet known by the company at the time when it files its request for an advance ruling.

Source: Question AN no. 113278, Journal Officiel (Official Journal) of February 14, 2012

For more information about France’s research tax credit, we encourage you to consult the Research Tax Credit Guide (in French) on the website of the Ministry for Higher Education and Research.