RTC : can the French tax authorities disregard a scheme with two levels of subcontracting to challenge the RTC ? the Conseil d’Etat takes position.

The Conseil d’Etat (the French highest administrative jurisdiction), in a decision of 9 June 2020 (no. 427441), judges the case of cascading subcontracts in the frame of the French RTC.

For the record, Hays Pharma (HP), a company accredited under Article 244 quater B II d) bis of the French General Tax Code, had entrusted R&D work in the pharmaceutical field to two other companies in the group, Hays Pharma Consulting (HPC) and Hays Pharma Services (HPS), which were not themselves accredited.  This work was ultimately performed for the benefit of a third-party client.

The administration considered that the sums received by HPS and HPC from HP should be deducted from the basis of their respective RTC, since only the principal (the client) could in that case benefit from the RTC on said work, in accordance with Article 244 quater B III of the General Tax Code. In other words, the administration, followed by the Administrative Court of Appeal, reasoned as if the two companies HPC and HPS were themselves accredited, in order to avoid double counting of the same R&D work in their RTC as well as in that of the final client. (Read more on the decision of the Court of Appeal: A specific decision, concerning service companies’ Research Tax Credit (RTC), with two levels subcontracting)

This analysis is censured by the Conseil d’Etat, which points out that, as the law applicable to the dispute stands, no provision of Article 244 quater B of the General Tax Code prohibits a company from benefiting from the RTC in respect of research operations carried out on behalf of an approved private body, unless a scheme constituting a fraud against the law, which is not invoked here, is characterized.

This decision seems logical in law, since Article 244 quater B applies whether eligible R&D expenditure is cross-charged or not, and only the sums received by accredited companies, bodies or experts must be neutralized, by virtue of a specific provision (Article 244 quater B III of the General Tax Code).

It is precisely in order to remedy this situation of cascading subcontracts that the legislator recently amended Article 244 quater B of the CGI, henceforth excluding from the benefit of the RTC at the principal R&D work not carried out directly by the certified R&D provider (unless this work is entrusted to second-tier subcontractors who are themselves certified).

Lucille Chabanel

Lucille has more than 14 years’ experience in tax law. She is a member of the corporate tax department since 2002 and joined the R&D group in 2004. She has […]

Jean-Charles Reny

Jean-Charles is part of the Research & Development service line (GI3). After having assisted large international groups regarding various tax issues (M&A, Supply Chain, or operational tax), he has been […]