Updated: Nov 18, 2021
Less well known than the CIR (research tax credit), the CII (innovation tax credit), or even the JEI (young innovative enterprise) status, there exists another tax arrangements in France to support R&D and innovation: the reduced rate tax arrangements of industrial property (IP) income, also known as IP Box. Following major changes in 2019, this regime is only just beginning to enter its maturity phase. Let's take stock of its modalities and practical implementation.
Basic Principles of the IP Box regime
Under the terms of article 238 of the Code Général des Impôts (General Tax Code), companies subject to corporate tax may, optionally, benefit from a reduced corporate tax rate of 10% on certain IP income.
The chart below presents the general operating principles of the French-style IP Box since the reform of the system provided for by the 2019 loi de finances (finance law).
We then will delve deeper into the details of these general principles, first by describing the scope of the tax arrangements, by explaining the concept of option, and finally by detailing the methods of calculation and implementation.
Scope of the tax arrangements
It is first and foremost necessary to identify the IP assets potentially eligible to the IP Box.
Only the following assets, sometimes with specific sub-conditions, are eligible:
patents (issued or pending, subject to conditions)
plant variety certificates
industrial manufacturing processes which must satisfy the following 3 conditions: (i) be a product of R&D operations; (ii) be an essential accessory to the exploitation of a patent; (iii) be assigned or granted simultaneously with the patent or patentable invention to which they are accessory and under the terms of the same contract as the latter.
software protected by copyright (software is the great novelty of this new reformed version of the tax regime).
It is then necessary to clearly identify the revenue streams that will be eligible for the IP Box. This applies only to transactions involving the sale/transfer, licensing or sub-licensing of the above-mentioned assets.
It is specified by the administrative doctrine (BOI-BIC-BASE-110-10, § 280 to 300) that:
the sale means any transaction resulting in the removal of the assets of the business.
the licensing of an operating license is the contract by which the holder of an intangible asset grants to a person referred to as the “concessionaire”, in whole or in part, the enjoyment of his operating right in return for the collection of a royalty.
the concept of operating license applies in the broad sense to any contract conferring on the licensee the right to use the invention as much for internal purposes, for his own needs, than with a view to producing and marketing goods and services .
the sub-licensing of an operating license is the contract by which the “concessionaire” of an intangible asset in turn grants to a person referred to as the sub-concessionaire, in whole or in part, the enjoyment of the right which has been granted to him by means of the collection of a fee.
In addition, with regard to asset disposals, two additional conditions must be met:
the asset must have been acquired for at least two years on the date of the sale,
there must be no relationship of dependence between the transferring company and the transferee (Article 39, 12 of the CGI). The system therefore does not apply in the event of an intra-group sale.
Finally, the reduced tax rate applies to the net profit (income - R&D expenses). It is therefore just as important to clearly identify "the research and development or acquisition expenses directly linked to the creation, acquisition or development of the intangible asset" which will enter into the calculation.
About the Option
The legislating body wanted this tax regime to be optional, but left a lot of leeway for the taxpayer applying this option. Indeed, the latter does not apply in a uniformly in the company, which then has the choice to formulate it either asset by asset (patent or software for example), or by good or service (set of assets), or by family of goods or services (set of goods or services including a set of assets). In addition, the taxpayer decides on the date from which the option takes effect, which will impact the calculation of the net profit, as we will explain later.
The option exercised requires the taxpayer to complete an appendix to the income statement for each of the subsequent fiscal years. If this appendix is not produced for a fiscal year in respect of an asset, a good or service, or a family of goods or services, this de facto results in the forfeiture of the option, which permanently removes the benefit of the plan, but only for the asset, good or service, or the family of goods or services in question.
As previously mentioned, the company must calculate the net income in relation to the eligible assets. However, the legislator has also introduced a new ratio, known as the Nexus ratio, which should be applied to the net income before applying the tax rate. The purpose of this ratio is to subordinate the benefit of the device to the condition that the company itself has incurred the R&D expenses that generated the IP revenues.
As specified in article 238 of the CGI, the “net result of the concession” is equal to the “difference between the income, acquired during the fiscal year”, drawn from the eligible asset, and the R&D expenses directly relating to it and which are “carried out, directly or indirectly by the company, during the same fiscal year”. In the event that the expenses concerned relate to several assets whose income give rise to separate taxation, they should be allocated in proportion to the added value they provide to each asset or in proportion to the income derived from it.
The expenses to be deducted are:
research staff expenses
R&D outsourcing expenses
the costs of raw materials and supplies used towards R&D activities
expenditures on the acquisition of technical installations, industrial equipment and tools allocated directly to the performance of R&D operations
expenditures on the creation or acquisition of intangible assets benefiting from this system
the concession fees for assets mentioned in the previous indent due by the subcontracting company benefiting from the regime within the framework of a sub-concession
the costs of taking and maintaining industrial property titles
Expenses such as costs relating to land and buildings, costs of defending IP rights and competitive technological watch (i.e. gathering and analyzing technological information and using it to help grow your business) expenses, costs and charges relating to loans should not be taken into account in determining net income.
Finally, an important element to take into account: for the first fiscal year for which income from an asset is recognized, R&D expenses for this particular fiscal year should be deducted, but also those incurred during previous years, starting from the fiscal year in respect of which the option was exercised.
Application of the Nexus ratio
The net income previously calculated and multiplied by the Nexus ratio, made up as follows:
in the numerator, increased by 130%, R&D expenditure directly related to the creation and development of the intangible asset (or grouping of assets) carried out directly by the taxpayer or by arm's length businesses within meaning of 12 of article 39 of the CGI
in the denominator, all the R&D expenses directly related to the creation, acquisition and development of the intangible asset (or of the grouping of assets) carried out directly or indirectly by the taxpayer.
Thus, a company that would have subcontracted all of its R&D work to another company in its group will have a zero Nexus ratio, and therefore cannot benefit from the IP Box regime.
Note that the Nexus ratio is calculated for each fiscal year, taking into account the cumulative expenditure incurred since the inception of the project (and not since the fiscal year for which the option was exercised). Article 238 of the CGI authorizes companies wishing to do so to retain only the expenses incurred over the last two fiscal years for the fiscal years 2019 and 2020 and those incurred for fiscal years beginning on or after January 1, 2019 for fiscal years open from January 1, 2021.
In the event of an audit, the company is required to provide documentation including a general description of the organization of its R&D activities related to products taxed at the reduced rate (the CIR documentation can be useful in this case), but also the following information:
a detailed list and description of each asset or group of intangible assets;
a presentation of the nexus ratio and its monitoring for each of them;
a presentation of the cost allocation method among the assets concerned.
Finally, what opportunities with the french IP Box regime?
This tax arrangements constitute a serious, tangible opportunity for companies which have developed IP assets, and whose (overall) result would be positive (this device is not as optimal for companies in the red). However, its implementation is far from easy, and we have only touched on a few main aspects here.
Synthesized in the table below are some key points to keep in mind:
▶️ For more information on this tax regime, do not hesitate to contact us at firstname.lastname@example.org
▶️ You want to be an expert of the IP Box incentive tool ? Consult the official rules from the tax administration : click here.