France’s research tax credit, better-known as the “CIR” (Crédit d’Impôt Recherche), is a mechanism by which, to simplify, eligible companies in France may deduct a percentage of their R&D expenditures from their CIT (even up to a reimbursement if its CIT is below its CIR credit or if it pays no CIT). It is a widely-used mechanism in France, and per the latest data published by the government1, in 2019 nearly 26,900 companies declared a total EUR 25.5 billion in eligible expenses, for a combined tax credit of EUR 7 billion.
Several multinational companies with R&D affiliates in France have sought to make the most of the government research subsidies and the CIR by taking them into account in their Transfer Pricing policies. The French Tax Administration took issue with these policies, leading to a major judgement by the French Supreme Administrative Court clarifying how government research subsidies and Transfer Prices could be articulated2, followed by two recent Administrative Court of Appeals judgements confirming this approach3 could also be applied to the CIR.
In all three cases, the facts were broadly similar. A multinational corporation has a company in France (“FRCO”). FRCO provides R&D services to a foreign parent company, which remunerates FRCO on a “cost-plus” basis. FRCO is eligible for the CIR or similar government subsidies and benefits from them.
Then, in computing its cost-plus, FRCO deducts the CIR and/or subsidies from the cost base (precisely: subsidies in the Supreme Court case, CIR in the two Court of Appeals cases). In other words, if FRCO has a fully loaded cost base of 100, and benefits from a CIR and/or subsidy of 5, then it calculates its cost plus on a basis of 95 – thus effectively sharing part of the benefit of the CIR/subsidy with its foreign parent company.
This last part is what drew the ire of the French Tax Administration and led to subsequent litigation: in the French Tax Administration’s view, this was purely and simply transferring the benefit of the CIR/subsidy to a foreign entity. The French Tax Adminis-tration was, however, unsuccessful in defending this opinion before the courts, which supported this method of calculation, citing that:
These court rulings therefore seem to pave the way for consistently deducting the CIR and/or similar subsidies from any R&D cost-plus services provided by eligible French companies. However, the authors can only highlight the importance of carefully documenting the process–by having both a complete Transfer Pricing documentation and well-drafted contracts, which were essential in obtaining positive judgements–so as to limit the risk of being successfully challenged by the French Tax Administration.
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