The Research Tax Credit 2020 Guide has just been published on the website of the French Ministry of Higher Education, Research and Innovation (MESRI). This release follows a May 2020 public consultation. More than 200 contributions have been collected and analyzed by the Ministry. It seems thought that the novelties introduced are quite limited both in terms of numbers and impact.
Reminder to readers: the CIR guide is not an opposable document, binding on the Ministry or the French Tax Administration.
This annual Research Tax Credit (RTC) guide, which has no legal or regulatory value aims to guide companies regarding the terms of application, tax security and tax audit processes. Inter alia, the MESRI provides guidance as to how to assess the eligibility of research and development (R&D) and the base of eligible expenses.
Scope of eligible research in the sense of the RTC and RTC documentation required
We can observe a few lexical changes, mostly wordings without major impact. One of the most substantial modification from previous years may be related to the purpose of eligible research : previously defined as the intention “to increase the amount of knowledge and its use for new applications” (the classic Frascati Manual definition) this text was replaced by the intention “to lift scientific obstacles, i.e. problems that cannot be solved with the state of accessible knowledge“. This reflects challenges we can see on the field in the course of recent tax audits with a MESRI expertise – for instance projects where new knowledge is derived from natural phenomena observation projects and/or data collection seems to be more challenged today upon tax audits.
Among the new topics introduced, we can highlight new comments on R&D in the field of architecture as well as higher education organizations, and interesting amendments on clinical trials for the pharmaceutical industry, where the 2020 Guide acknowledges the potential eligibility of post-marketing authorization studies, while the 2019 version of the Guide was categorically negative as to their eligibility. Potential eligibility (only by exception/on a case by case) can put forward only if such studies lead to further scientific and/or technical progress (alignment with the French tax authorities official guidelines “BoFiP”).
Concerning the RTC justification files, the Ministry of research has clearly chosen continuity and stability of the guidelines and recommendations, as compared to the 2018 and 2019 Guide.
It should be also noted that Guide 2020 updates the justification plan for a project submitted as part of a subcontractor accreditation application : it is new confirmed that this document show follow the same plan as a standard RTC justification file.
Personnel expenditure: an opening in favor of the eligibility of free shares and stock options allocated to researchers?
The 2020 Guide provides new indications regarding the eligibility of certain personnel expenditures.
For instance, the Guide considers compensation for employment termination to be ineligible. It is worth noting the Guide does not comment on notice or retirement indemnities.
A bit surprisingly, the 2020 Guide considers that the researchers’ remuneration corresponding to the allocation of free shares or stock options may be eligible to the RTC. Such comment is however not binding on the Ministry of Research or on the French Tax Authorities.
Outsourced R&D: new changes brought by the 2020 Guide surprisingly appear contradictory to certain recent State Council caselaw
A first expected element is related to the new anti-abuse rules on cascading subcontracting applicable as of Jan 1st 2020.
A second new element is related to the definition of eligible outsourcing. A distinction between “capacity subcontracting” and “specialty subcontracting” was introduced in the 2019 RTC Guide – such distinction has been removed from the text of the 2020 Guide – but it is still present as the underlying philosophy. For instance, it is stated that:, outsourced R&D “must meet a need for specific skills and means“. Elsewhere, it is stated that: “the subcontractor must bear the scientific coordination of the research outsourced.“.
What is more shocking, the 2020 guide asserts that “a subcontracted task that is not in itself qualifying research is not eligible for the CIR even if it is essential to carry out a client’s research and development operation”. But the French State Council recently ruled ( FNAMS case) that when a company entrusts subcontracts to an [accredited or public] organization R&D work necessary for carrying out of its research operations, the related expenses can be taken into account in its research tax credit basis, even if the outsourced work, on its own, would not constitute an independent research operation.
As a result, the appendix 3 (scientific and technical file of outsourced research and development operations) is partly obsolete because it requires that any outsourced work meet the R&D criteria, regardless of whether the subcontracted work is necessary for the R&D project of the principal or not.
Regarding technical assistance in the premises of the ordering company (or “régie” in French), Guide 2020 states that “technical assistance (“régie”) in the premises of the ordering company are not eligible to the RTC“. This also is highly questionable. First, the concept of “technical assistance (régie)” is not clearly defined. In addition, none of the Research Tax Credit regulations can be interpreted as preventing the eligibility of technical assistance in the premises of the order-giving company, if it constitutes R&D operations, or if they are necessary for the completion of the eligible R&D work.
Finally, the 2020 Guide provides new comments regarding the Research Tax Credit of a company accredited by the Ministry of Research. It states that the company that chooses to benefit from the RTC “must declare all R&D, whether carried out in-house on its own initiative or at the request of a client.” Such comment also seems somewhat obsolete in light of another recent Council of State caselaw in Takima case.
According to the comments of the public Rapporteur, “one should not include subcontracted research expenses and then deduct the amounts charged, but simply ignore these research expenses, to retain only those which, carried out on their own account or for ineligible beneficiaries, are only intended to be included in the calculation base of the organization’s own Research Tax Credit“.
Dematerialization of the accreditation application forms for private subcontractors
The guide clarifies the practicalities of subcontractors’ accreditation applications and confirms a minimum processing period of about 6 months.
The online approach is now the norm: https://www.service-public.fr/professionnels-entreprises/vosdroits/F35438 (and the online entry form has been reshaped).
On exceptional basis, a a USB key can be mailed if the online approach is not possible (however this mail process will not be treated in priority).
Nonetheless, the Ministry of Research annual RTC guide remains a high-quality reference tool for of the majority of French companies.
However, we fear that confidence in this Guide may be eroded by the choice of the Ministry to release comments clearly contradicting recent FNAMS and Takima caselaw mentioned above.
We support a legalistic and pedagogical approach for the largest number of companies benefiting from the RTC regime. Such an approach requires that the Ministry of Research Guide has to provide clarity and intelligibility of the law, which cannot be achieved by openly disregarding new major caselaw. Let’s hope that an updated version of the 2020 Guide will correct these flaws.