The French tax system is innovation - and investment - friendly
France boasts competitive taxation of research and temporary exemption arrangements for innovative start-ups and new businesses.
The French corporation tax (IS) system contains assessment measures that are comparable with those of our main partners: right to deduct most provisions and depreciation, carrying over losses without a time limit, a wide exemption on allocations of dividends and capital gains on equity shares, favourable tax consolidation regime, etc.
The 40% higher depreciation allowance scheme provides support for businesses to upgrade their manufacturing facilities and increase their competiveness.
Relief on local direct taxation (local economic contribution, property tax) is also available in certain parts of the country, particularly for setting up or expanding industrial businesses. It should however be verified that the relevant local authorities have approved these measures.
Cutting labour costs
The goal of the Competitiveness and Employment Tax Credit (CICE) is to free up funds to improve businesses’ competiveness. This tax break applies to businesses with salaried employees and represents a lowering of their social security contributions.
Research Tax Credit
Businesses that spend money on research may be granted a tax credit, which can be offset against the corporation tax they owe.
All industrial, commercial or agricultural businesses taxed on the basis of their actual profits (under both the simplified and normal tax regimes) are eligible for the CIR, regardless of their business structure.
Scientific or technical research eligible for the scheme includes fundamental and applied research, as well as experimental development.
Research expenditure eligible for the tax credit includes :
- depreciation of fixed assets, created or acquired new and used immediately for scientific and technical research operations ;
- personnel expenditure for researchers and research technicians who are directly and exclusively involved in these operations In cases where this expenditure concerns individuals with a doctorate or equivalent degree, they shall count for double for the first 24 months following the individual's hiring (certain conditions apply) ;
- other operating expenditure incurred under the same conditions: this expenditure shall be fixed at 75% of depreciation expenditure and 50% of personnel expenditure (or 200% in the case of newly-hired holders of doctorate degrees) ;
- research expenditure sub-contracted to public research bodies, private research organisations approved by the minister with responsibility for research, or scientific/technical experts who have been approved under the same conditions. The expenditure incurred must be for the purpose of carrying out genuine, clearly-specified R&D projects. If the company and the research body are unrelated, expenditure sub-contracted to public research bodies shall count for double their amount.
Since 2013, the Research Tax Credit has been extended to cover certain innovation investments by SMEs.
These have to do with operations to design prototypes for new products not yet on the market, or which have superior features.
Calculating the CIR
The tax credit rate for R&D expenditure is 30% of outlays up to €100 million per year, and 5% over this limit.
The tax credit rate for innovation expenditure is 20% of the eligible outlays up to a maximum of €400,000 per year.
In certain cases, the tax credit rate may be more than 100% of the research expenditure.
Booking the CIR
The CIR is deducted from taxes due by the business. Any remaining non-deducted CIR can be offset against taxes owed for the subsequent three years. The unused portion of the tax credit is refunded after this period. It is immediately refundable for SMEs (as defined in Community regulations), innovative start-ups (JEIs) and firms subject to amicable settlement or safeguard procedure, court-ordered reorganisation or winding up.
To benefit from the CIR, businesses must complete Declaration 2069 A, available from the impots.gouv.fr website under the heading "Recherches de formulaires" (Search for forms). Businesses must be able to substantiate the items listed in the declaration.
For more information, please consult the official documentation : BOI-BIC-RICI-10-10-20131009.
New businesses, created until 31 December 2019, that invest in R&D and that have innovative start-up (JEI) or university start-up (JEU) status are eligible for exemptions from taxes and social security contributions.
To have innovative start-up status, at each financial year-end, a business must meet all the following conditions:
- Be an SME
- Have been set up less than eight years ago
- Be independent (it must be a minimum of 50%-owned either by individuals or by certain firms in the venture capital sector, or by research and education institutions, or by non-profit organisations or scientific public interest foundations, etc.)
- Not to have been created out of a merger, restructuring, spin-off or takeover of pre-existing businesses
- Invest an amount for research representing at least 15% of tax-deductible expenses
To have university start-up status, a business does not have to have to meet the criterion for research expenditure but must fulfil a number of special conditions.
New businesses with innovative start-up status are entitled to exemptions from:
- Personal income tax or corporate income tax:
Total exemption for the first financial year or the first period when they are taxed on profits (this may not be longer than 12 months), followed by a 50% exemption for the next year when they post a profit
- The local economic contribution (CET) and property tax for seven years following a decision by local government
The exemption from tax on profits can be combined with the research tax credit (CIR) and innovative start-ups can also receive an immediate refund of their CIR receivables.
For more information, please consult the official documentation: BOI-BIC-CHAMP-80-20-20-20-20160601
In certain areas, setting up a business provides entitlement to exemption or relief on taxes on profits for the first years of operation.
The purpose of these exemptions for new businesses is to boost employment. Eligible businesses are those set up in :
- Regional assistance zones (ZAFR) by 31 December 2020 at the latest ;
- Rural regeneration zones (ZRR) by 31 December 2020 at the latest
(extension stipulated in the Supplementary Budget Act for 2015)
The businesses’ operations must be commercial, industrial, craft-based or non-commercial (the professions). In the latter case, the business must employ a minimum of three people. These arrangements do not extend to certain specific business activities (agricultural, civil, sea fishing, etc.).
Only businesses subject to an actual assessment regime, and that fulfil certain conditions, are eligible for the benefits, either automatically or by option.
The business activity must be truly new and, as a result, businesses set up as part of a reorganisation or an extension of existing operations are excluded.
The new business’s capital must not be more than 50%-owned by other companies.
The registered office as well as all operations and operating resources must be based in the above-mentioned zones.
Calculating the exemption
In a ZAFR
In theory, full or partial exemption from taxes on profits is granted for five years as from the date when the business is set up. The business calculates the exemption itself and declares it on its return which it files together with a statement detailing the declared profits.
First two years (first 24 months’ operations)
Third year (12 months’ operations)
Fourth year (12 months’ operations)
Fifth year (12 months’ operations)
In a ZRR
Full exemption from taxes on profits is granted for five years, followed by partial exemption for three years, provided the business employs less than eleven people.
First five years’ operations (60 months)
First year following the total exemption period (12 months’ operations)
Second year following the total exemption period (12 months’ operations)
Third year following the total exemption period (12 months’ operations)
The tax breaks are capped under EU’s rules governing de minimis aid.
For the same period and following a decision from the local authorities, businesses benefitting from these arrangements may also be exempted from the local economic contribution (CET) and/or the property tax on developed land (TFPB).
For more information, please consult the official documentation : BOI-BIC-CHAMP-80-10-10-10-20150603
For ZRRs : BOI-BIC-CHAMP-80-10-70-20160706
Higher depreciation allowance scheme
The higher depreciation allowance was introduced to encourage businesses to make productive investments. This temporary scheme is applicable to investments made between April 15, 2015 and April 14, 2017.
The Amending Finance Law for 2016 extended the scheme to cover investments made after 15 April 2017, provided that an order with an advance payment of at least 10% of the total amount of the order has been made before that date, and that the acquisition takes place within 24 months of the order.
Any company, regardless of sector, size or number of employees, provided it is subject to the actual assessment taxation system.
The only exceptions to this are businesses taxed on their non-commercial profits.
Calculating the allowance
Over and above the standard depreciation allowance, businesses can deduct 40% of the original value of the purchased or manufactured good (not including financing cost) from their taxable income. The higher depreciation allowance uses the straight-line method over the depreciation period.
Businesses can thus apply a 140% depreciation rate, which is spread out over the useful life of the investment.
Investments eligible for the scheme
The allowance concerns investments that can be depreciated using the declining balance method, as stipulated in Article 39A, and that fall under one of the following categories :
- Machinery and equipment for manufacturing and processing operations, such as automation and robotics equipment, combine harvesters, fishing vessels, etc. ;
- Processing and handling equipment, which is vital for production-sector businesses, particularly given the growth of online sales ;
- Water purification and air treatment installations, because we are concerned with sustainable development issues ;
- Steam-, heat- or energy-producing installations (excluding facilities or equipment eligible for regulated tariffs for the purchase of the electricity they produce). Installations in this category range from industrial firms' power generators to bakers' ovens ;
- Materials and equipment used in connection with scientific and technical research in both laboratories and plants, in a bid to encourage innovation ;
- Software used as part of manufacturing and processing activities.
The benefit for companies
The benefits are twofold: an improved cash flow situation because of the combined higher depreciation allowance and declining-balance depreciation, and a greater ROI.
At a standard corporation tax rate, the allowance represents a tax incentive of roughly 13% (40% X 33%) of the value of the acquisition. The additional depreciation will be spread out over the useful life of the investment.
For example, for a piece of equipment with a useful life of four years that is purchased on 1 January, the additional depreciation allowance will be 10% of the total value of the equipment per year, or an annual supplementary tax incentive equal to roughly 3.3% of the cost price. Thus, for a machine tool that costs €100,000, the total tax savings, in addition to the standard amortisation, would be €13,200 (€100,000 X 3.3% x 4).
For more information, please consult the official documentation: BOI-BIC-BASE-100-20150421.
Competitiveness and Employment Tax Credit
The purpose of the Competitiveness and Employment Tax Credit (CICE) is to enhance the competitiveness of businesses in France, mainly by funding capital expenditure, R&D, innovation, training, hiring, canvasing of new markets, environmental and energy transitions and the replenishment of working capital.
All businesses employing staff and taxed on the basis on their actual profits are eligible for the CICE. The measure applies irrespective of economic sector (agriculture, crafts, commercial, manufacturing, services, etc.).
The CICE also benefits firms whose profits are temporarily exempt from tax, either because of their geographic location (urban tax-free zones, rural regeneration zones, etc.) or by virtue of schemes to encourage creation or innovation (new businesses and innovative start-ups).
Calculating the CICE
The tax credit is not capped.
From 2017, the rate is 7% (and 9% in France's oveseas départements starting in 2016).
The CICE is based on a company's gross wages up to 2.5 times the minimum wage. Wages over this amount do not count towards the tax credit, even for the portion within the cap. The minimum wage for determining this cap is calculated for one year based on statutory working hours. The CICE is determined on a calendar-year basis, regardless of the date or length of a company's financial year.
The wages used to calculate the CICE base are the same as those used to calculate the employer’s social security contributions (base pay, bonuses, holiday pay, benefits in kind, etc.). Eligible expenditures (wages) are those that are deductible from income subject to either corporation tax or income tax under ordinary law.
Deducting the CICE
The CICE is deducted from the income tax or corporation tax due by the business for the year in which the remuneration was paid. Any remaining non-deducted CICE is considered to be a (non-taxable) claim on the State that can be offset against taxes owed for the subsequent three years following the year for which the claim was established. After this three-year period, it is refunded.
As a departure from the foregoing, any remaining non-deducted CICE is immediately refundable for SMEs, innovative start-ups, new businesses and firms subject to amicable settlement or safeguard procedure, court-ordered reorganisation or winding up. This is because these businesses are unable to deduct the full amount of the CICE from tax owed.
Pre-financing the CICE
CICE receivables may be assigned to credit institutions as may accrued receivables – i.e. those calculated for the year when the wages on which the tax credit is based are paid and prior to the assessment of taxes for year N+1. Once accrued receivables have been assigned, the assignor will only be able to offset against tax the non-assigned portion of the receivable (the difference between the assigned amounts and the tax credit actually declared when the return is filed). Only a single assignment per year is allowed. Accrued receivables may not be subject to several assignments in respect of the same year. For some SMEs, pre-financing is partly guaranteed by the BPI (Public Investment Bank). The credit institution is responsible for requesting this guarantee, with firms having no formalities to accomplish.
Using the CICE
As the CICE is intended to enhance the competitiveness of businesses, particularly by funding capital expenditure, R&D, innovation, training, hiring, canvassing of new markets, environmental or energy transitions, and the replenishment of their working capital, firms’ financial statements must reflect the fact that the tax credit is being used in pursuit of these goals. Firms may not use the CICE either to pay out larger dividends or to increase executive pay.
For more information, please consult the official documentation : BOI-BIC-RICI-10-150-20150701.
MAJ le 27/12/2017