Thomas Perrin, Patrick Fumenier & Lucille Chabanel
This material has been prepared by professionals in Taj, French tax and legal firm, member of Deloitte Touche Tohmatsu

On 9 April 2008, Taj obtained a favorable private letter ruling confirming the applicability of the French research and development (R&D) tax credit where the R&D expenses are recharged by a French company to another company within or outside the group. Prior to the ruling, a French administrative court had ruled that such R&D expenses did not qualify for the credit.

R&D Tax Credit

Under article 244 quarter B of the French Tax Code, French companies may benefit from a tax credit on R&D expenses incurred during the year that may be offset against corporate tax or refunded after three years. The 2008 budget enhanced the attractiveness of the R&D incentive by providing for a credit equal to 30% of qualified expenses incurred as from fiscal year 2008 (and 5% for the portion of R&D expenses exceeding EUR 100 million). The language of the Code itself, however, was unclear as to whether “recharged expenses” qualify as “expenses incurred” for purposes of obtaining the credit.

The issue was submitted to the Administrative Court of Appeals of Versailles, and on 29 November 2007, the Court held that expenses charged to other companies within the same group could not be used in determining the R&D tax credit. Moreover, R&D expenses invoiced to foreign companies that do not benefit from a similar incentive system in their country also are ineligible for the credit. According to the Court, only research expenses incurred by companies directly for their own account are eligible for the tax credit under article 244 quarter B of the French Tax Code.

Tax practitioners criticized the Court’s decision claiming that its conclusions were contrary to the purpose of the law which was enacted to enhance French innovative research investments. It was also posited that the decision contradicted the language of article 244 quarter B. Specifically, the law refers to “research expenses incurred” by the company, without any other specifications or conditions. Accordingly, no distinction should be made between research expenses incurred by a company in the course of its own R&D projects and those incurred for the account of other companies as a subcontractor. The Court apparently added a condition not provided for by the statute.

The Versailles court’s decision had the potential to jeopardize large amounts of R&D credits claimed by French entities engaged in contract R&D activities even though the tax authorities had already approved specific cases of such activities. In light of the ambiguity in the law, Taj sought a ruling from the tax authorities clarifying their position on the issue and confirming that the authorities would not rely on the decision issued by the Versailles Administrative Court.

Ruling

The private ruling from the Minister of Budget overrules the decision of the Versailles Court and states that research expenses incurred by a French company that are charged back to another entity (related or not) may be taken into account for the computation of its own R&D tax credit. The ruling also specifically states that the decision of the Versailles Administrative Court cannot be considered as precedent that will impact the position of the French tax authorities.

This welcome determination is expected to be posted on the Ministry of Budget’s website as an official position in the near future.

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