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Finance Bill Introduces New Innovation Tax Credit
Taxand France examines the changes to the R&D tax credit introduced by the new law.
Until this year French R&D tax credit (RTC) was equal to 30% of a company's R&D expenses, with an increased rate for a 2 year period (40% and 35% for the first and second year respectively), and a reduced rate of 5% for the fraction over EUR 100million. The 2 advantageous rates have been suppressed, generating savings (EUR 100million) and allowing the engagement of other modifications.
One major change concerns the extension of the eligibility of innovation expenses (Innovation Tax Credit or ITC) of approximately EUR 300million. This new ITC has been created exclusively for SMEs and aims to limit costs; the basis of the eligible expenses used for the calculation does not exceed EUR 400k and has a reduced tax rate of 20%. Moreover the criteria under which activities will be considered eligible are voluntarily restricted and only the design of prototypes and pilot plants of new products will be taken into account. Eligible expenditures include staff expenses, depreciation allowances, operating costs, R&D subcontracting, any patents, models and design fees. A fiscal instruction aimed at clarifying the definitions is expected in the next few weeks.
The ruling procedure has also been simplified. As of 1 January 2013, a company can deposit its ruling request even after the beginning of a project and until 6 months prior to the date of the RTC declaration. In the absence of a response within a 3 month period, the request is deemed to be accepted. However this procedure is not yet effective for the new ITC.
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The extension to certain innovation expenses raises some issues that have not been solved at this time. The main question concerns the new distinction between R&D and innovation, which introduces some risks for all French and international companies applying to RTC. A major risk is that some expenditures, included in the former RTC, could now be included in the ITC. In the case of a tax authority audit, the risk of contestation is high especially as the fiscal rules are different between RTC and ITC (the EUR 400k cap for the latter, different calculation rates etc).