Foreign companies : why set up a research center in France?

THE RESEARCH TAX CREDIT - CIR

General overview

Calculation of CIR

- The depreciation allowances for assets used in research projects,

- Gross salaries and the employers' social tax costs for researchers (executives and technicians), up to double the amount for young PhD possessors under specific conditions,

- Operational expenses at a percentage of personnel expense,

- The costs of subcontracted research entrusted to public research entities, to scientific experts and private structures approved by the Ministry of Research,

- Intellectual protection expenses (patents costs)

- Technology watch expenses assured by the researchers.

The spending engaged has to present non-controllable technical risks and allow an increase of knowledge in the considered technical domain. Accordingly, are excluded from the 15% quota the expenses intended to adapt existing techniques.

You must substrate all subsidies received from the expenses engaged.

Because the CIR is a tax measure, it is not subjected to any regulatory framework and is not taken into account for the limit of European public fund aids.

Calculation of the CIR 2010 (2010 R&D expenses declared in 2011)

Through 2010, running costs are evaluated at a flat rate of 75% of salaries and employers’ payroll taxes for researchers. To obtain the CIR, we apply to the eligible expense a rate of:

-                  50% for companies that benefits from the CIR the first year,

-                  40% the second year,

-                  30% for the following years.

Calculation of the CIR 2011 (2011 expenses declared in 2012)

Since the first of January 2011, some rules have changed in the calculation of the CIR:

-                  Running costs based on staff expense have been reduced to a rate of 50% of salaries and employers’ payroll taxes for researchers,

-                  The depreciation allowance benefits from an increase of 75% within operating costs,

-                  The service costs for consultancy firms for CIR planning are deductible from the eligible expense base if they are calculated in proportional to the CIR amount; or the amount which exceeds one of the larger of two of following amounts: 15 000€ (excluding tax), or 5 % of the total R&D expense (excluding tax) net of public subsidies,

-                  The research expenses entrusted to private organisms are limited up to three times the total amount of other eligible expenses,

-                  Reduction of the rate for the first year (40%), and for the second year (35%),

-                  Perpetuation of immediate reimbursement for SME under the European’s Union definition, with the obligation for those less than two years old to submit evidence attesting the reality of R&D operations.

How to legally optimize and secure the CIR.

Companies that want to secure their CIR can file a prior notice request to the tax authorities before starting research operations. This procedure is highly recommended. The opinion will constitute a position on the part of the tax authorities standpoint, although it keeps its right to control the reality and the amounts of the expenses eligible.

How to tell if my company can benefit from the CIR?

First of all fill the form below. You need to answer “yes” at least on the following queries to potentially benefit from it.

When can we file a reimbursement request for CIR?

You can file

-                  until the 31 of December 2011 for a CIR request concerning the year 2008,

-                  until the 31 of December 2012 for a CIR request concerning the year 2009,

-                  until the 31 of December 2013 for a CIR request concerning the year 2010.

THE STATUS OF THE YOUNG INNOVATIVE COMPANY (JEI)

General overview

The status of JEI enables young companies very active in R&D to get significant financial support to get past the hurdle of the first and most difficult years of their development.

Conditions

To acquire the JEI status, the company must fulfill 5 conditions:

-Be less than 8 years old,

-Be a SME according to the General Tax Code (less than 250 employees and an annual turnover inferior to 40M€, or a total balance sheet under 27M€),

-Be independent (at least 50% directly or indirectly owned by physical persons, including venture capitalists),

-Practice an authentically innovative business,

-Dedicate at least 15% of the total company’s spending in R&D,

The calculation of R&D’s share of expenses is roughly the same as the research tax credit (CIR above mentioned).

Payroll tax and tax incentives granted

Companies that obtain the JEI status benefit during the eligible period (maximum of 8 years for newly created companies) of 2 types of exemption:

-Exemption of employers’ payroll taxes for research personnel salaries,

-The following tax relief:

-Exemption on corporate income tax during 36 months,

-50% tax allowance on profits for the following 24 months,

-Total exemption of the Contribution Foncière des Entreprises (C.F.E.) “Company Office Tax contribution”, and the Contribution à la valeur ajoutée économique (C.V.A.E.) “economic added value contribution”, French tax on businesses.

These tax exemptions are subjected to the European de minimis rule, which sets an upper limit on tax relief that a company can receive each year. For the 2009-2011 period, these aids cannot exceed 200 K€ by company. Payroll tax exemptions are not taken into account for the upper limit calculation.

To preserve its status, the company must maintain a 15% portion of research for each fiscal year.

The company can accumulate the JEI status with the CIR.

As from the January 1, 2011, employers’ payroll tax exemptions are capped:

-For each employee, to the portion of revenue up to 4.5 times the SMIC (minimal French pay) of the gross salary, which represent today 6 142.50€ per month,

-For each establishment, up to three times the social security’s annual ceiling, about 106 056€ in 2011,

-Lastly and also as from the January 1, 2011, the total exemption of the employers’ payroll taxes from the first to the fourth year, is respectively reduced 25%, 50%, 70% and 90% for the 4 final years.

In order to reduce the risk of queries from the tax authorities on the innovative nature of the research program, and consequently the JEI status, it is highly recommended for companies to request from the Service des Impôts des Entreprises (SIE) “Corporate tax department” to which they file, to take a stand on the innovating nature of the project(s) by filing a prior notice request (rescript). The absence of answer from the Administration is worth agreement of its part. However, it can still control the reality and the amounts of the expenses.

When can we file a request to benefit from the JEI status?

You can file this request under the same condition as for the CIR,

-                  until the 31 of December 2011 concerning the year 2008,

-                  until the 31 of December 2012 concerning the year 2009,

-                  until the 31 of December 2013 concerning the year 2010.

Can a subsidiary company acquire the JEI status? Absolutely, if (i) the group to which it belongs is a European SME, and (ii) the subsidiary company is more than 50% owned directly or indirectly (but with a single link of interposition) by physical persons, and (iii) it dedicates at least 15% of its expenses to R&D.

Example

An American company M, owned 40% by Mr. X and Mrs. Y, and 20% by a venture capital fund, has created at the beginning of 2009 a subsidiary company F in France where it established a new research center. M, which has no other subsidiary than F, has declared for the fiscal year closed on December 31, 2009 a (euro equivalent) 35 M€ turnover, with 120 employees. F declared a 2 M€ turnover, with 23 employees, 1.7 M€ of welfare costs, 0.45 M€ of personnel costs for research operations (including .06 M€ of URSSAF charges), and a 0.1 M€ of corporate tax. The company did not file for either the CIR or the JEI status at the end of 2009. What grant aid can the company still benefit from for 2009? If possible, how much can the aids be?

Answers

1) The company can request the JEI status for the year 2009 until the 31^st of December 2011 because,

1. It is a SME under the European definition (the parent company and the subsidiary company employ together less than 250 people),
2. It is owned by more than 50% by physical persons and venture capital funds,
3. R&D expenses represent 787K€ (450K€ x 1,75), which is higher than 15% of the total charges.

It can also benefit from the CIR for the year 2009 until the 31^st of December 2011.

2) All in all it can save 501K€ !!

Our firm assists you for the following services:

1. Building the procedures to obtain a secure CIR or/and the JEI status (scientific record, financial record, tax record…),

2. Setting up the prior notice request (rescript) if necessary,

3. Support for the execution of tax exemptions (JEI),

4. Calculation of CIR,

5. Assistance in case of tax authorities claim or control.

Our flexible and lean organization relies on experts and tax lawyers, who master the English language (and in some cases German) and have a confirmed experience of CIR. We assure you a quality of service comparable to that of large consulting firms, but at much lower rates. At Jean-Claude Armand and Partners, we consider that tax advantages should benefit above all the companies. For us, this is fundamentally a question of ethics!

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