R&D tax credit deduction does not imply transfer of benefit between group companies

On 7 July 2020, France’s lower tax court in Montreuil held that product research costs to be invoiced by a French company to its foreign parent could be determined after state subsidies, notably the research and development (R&D) tax credit, had been deducted (decision n° 1900974 dated 7 July 2020, STMicroelectronics). The deduction did not, by itself, imply a shift in taxable income between the group companies.

In the context of this decision, the court also provided welcome clarification regarding comparable data that may be used in the R&D field for transfer pricing purposes.


Article 57 of the French Tax Code (FTC) provides that:

To determine the income tax owed by companies that either depend on or control enterprises outside France, any profits transferred to those enterprises indirectly via increases or decreases in purchase or selling prices, or by any other means, shall be added back into the taxable income shown in the companies’ accounts. The same procedure shall apply to companies that depend on an enterprise or a group that also controls enterprises outside France.

This provision aims to regulate the shifting of profits from a French entity to a dependent foreign entity, or to an entity located in a tax haven, through various means (e.g., price decrease or increase). Under this article, the French Tax Administration (FTA) has the initial burden of proving dependence and control, and that unjustified advantages have been granted to a foreign affiliated entity by reference to third party comparable data. Thereafter, the burden shifts to the taxpayer to demonstrate that either no profits have been shifted or that similar advantages have been granted to other taxpayers.

Facts of the case

A French company providing R&D services in the field of mobile telephony had concluded a framework contract, known as a “sponsored design contract,” with its Dutch parent company. Following a tax audit covering the period from 1 September 2009 to 31 December 2013 (and taking into account the company’s loss carryforwards), the FTA challenged the cost of services invoiced to the Dutch parent company based on article 57 of the FTC.

The FTA and the French company quickly agreed on a margin rate of 7% to be applied to the service costs.

However, the FTA noted that the R&D service costs invoiced by the French company to its parent had been reduced by the amount of subsidies paid by the French state to finance the corresponding projects and by the French company’s R&D tax credit. In the FTA’s opinion, this constituted a benefit in kind that should not impact the amount to be invoiced.

Lower tax court decision

Absence of benefit in kind…

The lower tax court of Montreuil disagreed with the FTA, following the position of the French Administrative Supreme Court in its Philips decision (Conseil d’Etat decision n° 405779 dated 19 September 2018, Sté Philips France). It found that the subsidies deduction could not be considered, by itself and regardless of the price resulting from the application of the contractual calculation method, a benefit implying a shift in taxable income between the group companies within the meaning of article 57 of the FTC—i.e., a transfer of benefit abroad.

… absence of benefit in comparison

According to the lower tax court, the FTA also failed to demonstrate the existence of an abnormal benefit when comparing the facts of the case to third party comparable data: the court found the comparables irrelevant and did not propose alternative data.

In reaching its decision, the court noted that the comparable companies selected by the FTA were all certified for R&D tax credit purposes (contrary to the claimant company), allowing the paying company to directly benefit from the R&D tax credit instead of the company performing the research activities.


Grégoire de Vogüé

Grégoire de Vogüé, Partner, heads the Transfer Pricing team. He has acquired more than 20 years in all transfer pricing issues and corporate strategy. His multidisciplinary skills combined with his […]

Alice de Massiac

Alice de Massiac, Partner, has developed extensive expertise in supporting major French and foreign multinational companies, both in consulting and tax controversy, anticipating the impact of the proposed recommendations in […]