There is a specific tax credit mechanism in France known as “Credit d’impôt recherche” or tax credit for research (TCR). The mechanism provides for a tax credit equal to 30% of research and development (R&D) expenses up to 100 million euros and equal to 5% above that amount.
The system is highly valuable for industrial, commercial or agricultural companies.
French General Tax Regulations give a list of R&D expenses that can qualify for the TCR. There are, among others (and with certain conditions):
- Research personnel expenses such researchers and technical research staff;
- Operating expenses for research;
- Technology watch expenses;
- Patent application expenses and patent maintenance expenses;
- Even, under certain conditions, industrial design application expenses.
Intuitively, the fact that patent expenses can be taken into account for the TCR seems rather normal since patents are industrial property titles protecting “Inventions which are susceptible of industrial application, which are new and which involve an inventive step” (Article L.611-10 of the French IP Code).
However, it is not that easy. For the French tax administration, a patent application is not enough to qualify for a tax credit.
French General Tax Regulations has its own definition for scientific or technical research operations within the meaning of the TCR mechanism. Within the patent field, scientific or technical research operations can be several types of R&D operations with a view to producing new materials, devices, products, processes, systems, services or with a view to substantially improving the same. Substantial improvements are modifications that do not merely result from the use of existing techniques and that are novel.
Implementing this rule in 2013, the Conseil d’Etat, the Highest Administrative Court in France, held that a patent application is not enough, in itself, to establish the substantial character of a technical innovation. The Court confirmed the judgment by the Administrative Court of Appeals of Paris to reject the claim from a company to benefit from the TCR mechanism on the ground a patent application had been filed. According to the Court of Appeals, the improvements made to certain materials were improvements of existing techniques that did not show substantial character or value even though patent applications had been filed for some of these improvements.
Since the end of 2016, this decision has been implemented into the official rules of practice French tax administration. As a consequence, tax administration can decide on its own that a patent (or at least a patent application) is related to an invention devoid of substantial improvement.
It is a known fact that patented inventions are not always major technical improvements having regard to the state of the art. But is the French tax administration best placed to judge if a patented invention or an invention for which a patent has been applied for is devoid of substantial improvement?
The French Patent and Trademark Office should be in charge of deciding if an invention covered by a patent application involves an inventive step or not. Curiously however, the law does not entitle the French PTO to do so. There is an examination for novelty but not no examination is performed for the inventive step criterion. Would it be possible that the French tax administration does not trust patent examination and registration proceedings?
More probably, the French tax administration is like any other State organization: they need the money. And if they can avoid spending it through tax credit, why should they do otherwise?
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