U.S Tax Desk Newsletter - August 2022

Several R&D incentives are available under French tax law in addition to the well-known R&D tax credit. In the recently published 2021 OECD study (Measuring Tax Support for R&D and Innovation – OECD (oecd.org), France was ranked amongst the most favourable jurisdictions in Europe. Specific programs involving financing and assistance to start-ups and SMEs have been implemented recently, such as the 'Greentech innovation' initiative. 

An appealing R&D Tax credit that allows research and development activities not only in France but also in Europe

Companies may qualify for R&D tax credits whatever their type, sector, size, number of employees, and revenues, provided they perform R&D activities. 

The tax credit, amounting to 30% of eligible expenses, does not target specific sectors but applies to all kinds of activities. Eligible expenses are notably depreciation of fixed assets, wages and salaries, fees paid to sub-contractors, and other specific costs. In addition, contrary to other R&D tax incentives worldwide, R&D costs are included in the credit basis regardless of their accounting treatment, deducted or capitalised.  

Regarding sub-contractors, France permits research activities to be undertaken in other European countries, subject to the condition that sub-contracting companies have obtained approval from the Ministry of higher education and research. The approval procedure is mainly based on a research activities presentation and its analysis by an expert of the Ministry. Approval is given for a 3-year period and can be renewed.

It is then possible within a group to have multiple research centres and still benefit from the R&D tax credit in France for expenses incurred in other European countries but paid for in France. This presents many structuring opportunities open for international groups.

There are other tax incentives that may also apply 

The main tax incentive regimes for R&D activities are as follow, some of which were introduced in 2022: 

Innovation tax credit: The innovation tax credit applies to innovative expenses defined as prototypes and pilot installations (not eligible for R&D tax credit) for SMEs. It amounts to 30% of the expenses (as of 2023, an increase of 20% applicable prior to 2023).

Collaborative research tax credit: This new tax credit in France introduced in 2022 is applicable to collaborative research. Sub-contracted expenses can give entitlement to a 40% tax credit if not included in the R&D Tax credit claim, whether subcontracted to a public body or not (provided the conditions for the credit are met). This measure was introduced to compensate for the doubling of the expense related to research outsourced to public bodies. 

Junior university enterprise and junior innovative enterprise regimes allow tax benefits exemptions, subject to certain conditions. The duration of this benefit has been extended in the 2022 finance act from seven to eleven years from the first application to an enterprise.

Incentives concerning certain investments in, or financing of, specialised research and development bodies, allowing a tax deduction equal to 60% of the gifted amount.

A Special tax regime known as the "IP Box" applies to profits deriving from IP as patents and software (OECD nexus approach). Under this regime, intellectual property income benefits from a lower tax rate (15% in place of 25%). 

In the context of tax competition between countries, Europe and France remain very attractive

The structuring of research activities is key for companies. Companies will want to make sure the organisation is as efficient as possible. When considering the research activities' organisation, assessing tax effects and opportunities is important. The entire research lifecycle is key to understanding and organising these functions nationally and internationally.

With numerous incentives, investment projects, and a high number of R&D personnel, France is one of Europe's most attractive R&D ecosystems. European projects such as 'Horizon Europe' are additional reasons to consider France a location for R&D activities.