In a decision on March 15, 2016, the Bordeaux Administrative Court of Appeal has usefully specified that allowances for amortizations of licensed patents are entitled to the Research Tax Credit, to the extent that such rights constitute fixed assets under the SA Sife case law (French Administrative Supreme Court, 8th and 9th subsect., Aug. 21, 1996, No. 154488, SA Sife).
In this case, a company, Saga Bike, owned three patents, which it licensed under an exclusive licensing agreement to another company, Terranere (the appellant). Terranere booked the license as a fixed asset as part of its innovative bicycle accessory design and manufacturing business.
Consequently, the appellant deducted the allowance for the amortization of this license from its taxable income, which was not disputed. However, the appellant concluded that these allowances were eligible of the Research Tax Credit, which was contested by the French tax authorities and the lower court.
The appellant’s position was based on a broad interpretation of the limitative list of the expenses eligible to the Research Tax Credit, such as:
- allowances for amortizations of fixed assets, created or purchased new, and directly attributed to scientific and technical research activities, including performing prototype or pilot facilities design (French Tax Code, Art. 244 quater B, II, a);
- allowances for amortization of patents and certificates for vegetal material created to perform experimental research and development activities (FTC, Art. 244 quater B, II, f).
The Bordeaux Administrative Court of Appeal assessed the legislature’s intent in light of the preparatory work for the provisions of paragraph (f), and considered that this latter did not evidence the intention of the legislature to exclude allowances for amortization of patent licenses from the benefit of the Research Tax Credit.
Therefore, the Court of Appeal accepted the appellant’s interpretation, subject to two conditions:
- firstly, that the licensee’s use of the license meet the criteria of paragraph (a), namely direct attribution of the license to scientific and technical research activities;
- secondly, that the license constitutes a fixed asset pursuant to the Sife case law. This decision put an end to a certain legal instability by restraining the qualification of intangible fixed assets to the rights (i) constituting a regular source of profits, (ii) granted with sufficient longevity, and (iii) which are be freely transferrable, those three requirements being cumulative.
After having assessed whether the licenses granted met these three conditions, the Administrative Court of Appeal ruled in favor of the appellant. The respect of the other conditions of the Research Tax Credit was not further inquired, as they were not in the scope of the dispute.
This very interesting decision would deserve to be upheld by the French Administrative Supreme Court, before which it has been appealed. The decision should further fully benefit to companies that exploit patents without owning them.