(French Administrative Supreme Court, Mar. 12, 2014, no. 365875, Société Diana)

Taking into account incentive and profit-sharing plans in staff expenses related to researchers and research technicians for calculating the research tax credit (“RTC”) led to frequent tax reassessments by the tax authorities, who refused to treat this additional compensation as research expenses eligible for the RTC.

The tax authorities argued that only compensation subject to labor legislation and to social contributions could be taken into account in staff expenses, excluding the incentive and profit-sharing plans of persons eligible for the research tax credit.

After several lower court and court of appeal decisions ruling to the contrary, the French Administrative Supreme Court (Mar. 12, 2014, no. 365875, Société Diana), definitively affirmed that these amounts, which were not deemed an allocation of profits, constitute incidental compensation for researchers and research technicians, and, therefore, pursuant to the provisions of Article 49 septies I of Schedule III of the French Tax Code, they have to be included in the tax base for the RTC.

This puts an end to the litigation involving many cases and undoubtedly should have been previously referred to the French Administrative Supreme Court for an opinion.  This procedure is not commonly used, but it is justified to resolve a technical issue that, in the end, is rather simple, and to avoid a large amount of litigation.

Companies which have applied the tax authorities’ position may now think about claims to obtain an increase in the RTC initially declared.