A specific tax credit, the innovation tax credit, aimed at small- and mid-sized companies that incur innovation expenses, was enacted in the research tax credit mechanism. This tax credit is available to companies that have fewer than 250 employees and whose turnover does not exceed €50 million or whose total balance sheet does not exceed €43 million (specific comments are provided on the means for assessing these criteria between related companies and in a tax consolidated group). The assessment of these criteria is performed in relation to the last closed accounting year, calculated over 12 months.
Operations involving designing prototypes of new products or pilot facilities for new products create a right to this innovation tax credit. Expenses of prototypes and facilities in the research phase already have the right to the research tax credit regime and they may still be used for calculating the research tax credit.
A “new product” is defined by the FTC as being a tangible or intangible asset that is not yet available on the market and which is to be distinguished from existing or previous products due to greater performance on the technical, eco-design, or ergonomic level or due to its functionalities. The expenses to be taken into account for this tax credit include:
- amortizations of fixed assets created or acquired new and directly dedicated to performing prototype design operations or new product pilot facilities, other than the prototypes and pilot facilities creating the right to the research tax credit
- expenses for personnel directly and exclusively assigned to performing prototype design transactions or new product pilot facilities
- operating expenses incurred for the prototype design operations or new product pilot facilities (taking into account a fixed flat-rate amount of 75% of the amortizations and 50% of the personnel expenses)
- amortizations, costs for registering and keeping in effect patents and plant variety protections, designs and models related to performing prototype design operations or new product pilot facilities.
The innovation tax credit rate is 20% applied to the volume of innovation expenses incurred over the year within a capped limit of expenses set at €400,000. This tax credit is used in the same way as the research tax credit and is deductible from income taxes — the individual income tax or corporate income tax — due by the company for the year during which the innovation expenses were incurred. Excess tax credits constitute an account receivable against the State, which may be used to pay the income tax due for three years after the year for which it was reported. The tax credit is refunded after the third year.
We are interested in reading the tax authorities’ comments regarding the expenses affected by the innovation tax credit. Indeed, in addition to the need to precisely define the prototypes and pilot facilities involved in the new tax credit, the distinction between expenses that are eligible for the research tax credit and those that are eligible for the innovation tax credit will be of primary importance, given the separate credit rates from which relevant companies may benefit.
With regards to the research tax credit itself, the 40% rates for the first year and 35% for the second year for companies which have not benefited from the tax credit in the previous five years (and which are not in a dependent relationship with another company that has benefited from it over the course of the same period) have been eliminated. The rate was therefore lowered to the ordinary law rate of 30%, up to €100 million in expenses, for expenses incurred as of January 1, 2013 (and remains at 5% beyond €100 million in expenses).
The tax ruling procedure (which will also be available for the innovation tax credit, but only as of January 1, 2014, in order to give the tax authorities time to precisely define the expenses involved in this new credit) has been relaxed to allow companies to make their request with the tax authorities, the Ministry of Research, the company Oseo Innovation or the National Research Agency, if the research work has already begun. Indeed, up to now the ruling requests had to be made before work had begun. As of January 1, 2013, the request may be made at least six months before the deadline for the special research tax credit declaration no. 2069-A-SD.