(French Administrative Supreme Court, Nov. 13, 2013, no. 341432)

After a tax audit of GEMT, a company specialized in marketing items for all types of food and agri-food transport, the tax authorities had called into question the eligibility of expenses incurred in fiscal years 1993, 1994 and 1995 for the research tax credit (“CIR”) on the basis of Articles 244 quarter B of the French Tax Code (“FTC”) and 49 septies F of Annex III to this code.  As the tax credits could not be sett off against tax losses of the company, no additional taxation was charged.  However, the company subsequently requested a refund of the tax credits by deducting them from the corporate income tax paid for its first positive fiscal year in 2001 and the discharge of the corporate income tax paid.  The lower courts refused to grant the company’s claim on the grounds, firstly, that it was not evidenced that the company carried out scientific and technical research operations within the meaning of the aforementioned Article 49 septies F and, secondly, that the technical improvements made on the products were in line with the company’s ordinary business and could not be considered to be substantial.  The company then appealed this decision to the French Administrative Supreme Court.

Concerning scientific and technical research operations that may benefit from the CIR regime, Article 49 septies F of Annex III to the FTC provides that activities involving experimental development have to be , “conducted, thanks to prototypes or pilot facilities, for the purpose of gathering all the necessary information needed to provide decision-makers with technical data for the production of new materials, devices, products, processes, systems or services, or to substantially improve existing ones.  ‘Substantial improvement’ means changes, with novelty character, which do not result from using the existing state-of-the-art techniques.”  The French Administrative Supreme Court approved the fact that the lower court deduced from these provisions that filing a patent is not sufficient, in and of itself, to establish the substantial character of technical improvements.  Indeed, the improvements the company made to certain materials in this case were only improvements to existing techniques, and not substantial, although certain projects had been followed by filing patents.

Therefore, although previously the French Administrative Supreme Court appeared to consider that a patent filing was evidence that proved the substantial improvement made to existing techniques (French Administrative Supreme Court, Feb. 9, 2005, no. 250920), this decision, in which the existence of a patent does not constitute a presumption that research and development expenses are eligible for the CIR, turns out to be particularly stringent.  It is nonetheless consistent with the tax authorities’ position stated in their guidelines (BOI-BIC-RICI-10-10-10-20-20120912, no. 330) and with the position stated in the Houillon ministerial response (AN 17/03/2009, no. 37202).