Intellectual property taxation in France

Qualifying taxpayers

• Resident companies
• Domestic permanent establishments (“PEs”) of foreign companies
• Foreign PEs of resident companies subject to tax in the jurisdiction providing benefits
• Individuals operating enterprises

• French tax resident companies
• French PEs of foreign companies
• Individuals operating enterprises

Qualifying IP

• Patents ;
• Equivalent rights: utility models (e.g. “petty patents”, “innovation patents”, “short term patents”), IP assets that grant protection to plants and genetic material, orphan drug designations, and extensions of patent protection ;
• Software protected by copyright ;
• Non-patented assets owned by SMEs- certified as obvious, useful and novel such by a competent government agency independent from the tax administration, for taxpayers that have no more than EUR 50 in global group-wide turnover and that do not earn more than EUR 7.5 million per year in gross revenues from all IP assets, on average over a five-year period (SMEs)

• Patents (granted by the French or EU Patent Office ; equivalent foreign patents),
• Equivalent rights: utility certificates and supplementary protection certificates attached to a patent; plant variety certificates; industrial manufacturing processes intrinsically attached to a patent
•  Software protected by copyright;
• Non-patented assets owned by SMEs whose patentability has been certified by the National Institute of Industrial Property 

Modified nexus approach (or other approach)

• Qualifying income = [(qualifying expenditure + up-lift) / Overall expenditure] x IP income
• Jurisdictions could treat the nexus ratio as a rebuttable presumption 

• Qualifying income = [ (Qualifying expenditure + up-lift) / Overall expenditure] x IP income
• Rebuttable presumption under exceptional circumstances where higher than 32.5% and upon prior approval by the tax authorities

Determination of the uplift

• 30% of qualifying expenditure, capped at  the sum of (i) acquisition costs and (ii) expenditure for related-party outsourcing i.e. nexus ratio cannot exceed 100%

• 30% of the qualifying expenditure, capped at  the sum of (i) acquisition costs and (ii) expenditure for related-party outsourcing i.e. nexus ratio cannot exceed 100%

Qualifying expenditure

• Expenditure directly connected to the IP asset; exclusion of interest payments, building costs, acquisition costs.
• Expenditure for general and speculative R&D taken into account on a pro rata basis
• Expenditure included in the nexus calculation at the time they are incurred (irrespective of the accounting and tax treatment)
• Cumulative approach i.e. expenditure incurred all over the life of the IP asset

• Expenses directly connected to the IP asset; exclusion of interest payments, building costs, acquisition costs.
• Expenditure that are not directly attributable to a specific IP asset, product or service or family of products or services are taken into account on a prorate basis
• Cumulative approach, i.e. expenditure incurred all over the year of the IP asset; for tax years 2019 and 2020, possibility to limit to  expenditure incurred during the current year and the 2 previous years; for tax years as from 2021, possibility to limit to expenditure incurred starting from 2019

Person carrying on the R&D and the place where the R&D is carried on

R&D carried out by:

• the IP owner (including by a foreign PE provided that it is operating at the time the IP income is earned)
• unrelated parties (outsourcing) irrespective of their location; jurisdictions may narrow the scope scope to certain types of unrelated parties and provide for a cap of unrelated party outsourcing expenditure; jurisdictions outside the EU could include R&D activities undertaken by resident related parties 

R&D carried out irrespective of the location by:

• the taxpayer itself;
• unrelated parties;
• related party: never

Overall expenditure

• Qualifying expenditure
• + IP asset acquisition costs : include expenditure incurred to obtain rights to research and, in the case of licensing: royalties and license fees (cumulative approach); jurisdictions outside the EU could include R&D expenditure incurred prior to acquisition in case of acquisition of a taxpayer that incurred R&D expenditure in the jurisdiction
• + expenditure for related-party outsourcing (cumulative approach)

• Qualifying expenditure
• Outsourced expenditure from related companies
• Acquisition costs 

Eligible income

• May include royalties, capital gains and other income from the sale of an IP asset, and embedded IP income from the sale of products and the use of processes directly related to the IP asset

• Royalty income;
• Profit arising from the sale of IP assets if the asset has been owned for more than 2 years and the sale is to a third party

Overall income

• Net income from the IP asset i.e. gross IP income – IP expenditure allocable to IP income for a given tax year
• Allocable IP expenditure: determined based on ordinary domestic tax law provisions, on a yearly basis 

• Net income = income from eligible assets earned during the year less R&D expenses directly connected to these assets and realised by the taxpayer directly or indirectly
• No guidance 

Relief mechanism

• Exemption (implicit), or
• preferential tax rate

Special tax rate 

Cost of the entry into the box

• No indication

First tax year for which a net income is computed: recapture of R&D expenditure starting from the election for the regime

Effective tax rate

n/a

10.33% (10%+3.3% tax on corporate income tax for companies which corporate income tax is higher than €763,000) 

Administrative

• Tracking of expenditure, IP assets and income; jurisdictions may allow tracking by products or families of products arising from IP assets if in line with business model
• Documentation requirements 

• Election to be made
• Tracking of expenditure, IP assets and income ; to be done for each IP asset, each product or each family of products (depending on the election made)
• Documentation requirements 

Other special features of the regime

• Jurisdictions may as a transitional measure allow taxpayers to calculate the nexus ratio based on a 3 or 5-year rolling average
• Jurisdictions may provide for grandfathering rules

• Entered into force since 1 January 2019
• Application to tax consolidated groups on a consolidated basis
• Specific roll over provisions in case of mergers or restructurings.