As a reminder, the 2019 Finance Act has deeply changed the tax regime applicable to income derived from Patents (Article 238 of the French General Tax Code). In July 2019, the French Tax Administration (“FTA”) published, for public consultation (closed since 15 September), its draft comments on the new system.
The final comments have just been published on April 22, and they provide clarifications and some modifications compared to the previous version under consultation.
The clarifications provided by the Administration
2 highly expected clarifications:
- The draft comments allowed, by way of a tolerance, the possibility to elect to the special regime for patents not yet granted subject to the condition of grant at at the end of the third FY following the date of filing of the patent application. This tolerance was modified in the final comments and the 3-year period is now assessed “at the close of the third financial year following the date of option for the regime in respect of this asset” (BOI-BIC-BASE-110-10-20-20200422, n°30). After this period, the company is required to file an amended tax return for the FY in which it has applied the special regime for the patents concerned.
- The territoriality requirement which, in the previous version, required companies to benefit from legal protection of inventions in all countries in which licences were granted is largely attenuated. Henceforth, “When an invention is protected in France, in an EU Member State or in another State party to the European Economic Area agreement by a title mentioned in 1° of I of Article 238 of the French General Tax Code, it is accepted that the royalties received for licensing this invention in territories where it is not protected are also included in the net result of the concession” (BOI-BIC-BASE-110-10-20-20200422, n°290).
No changes are to be noted regarding the definition of the software and the conditions under which this asset is accessed to the new tax regime.
Generally speaking, the FTA states that assets must have the character of fixed assets. However, it is now specified that this character can be fulfilled for intangible assets even when they do not appear in the balance sheet, i.e. when the costs of studies or research leading to their development have been recorded as overheads (BOI-BIC-BASE-110-20-20-20200422, n°1).
With regard to the strict application of the scheme, the FTA is providing much-needed clarification, in particular on the following points:
- The sentence making it possible to disregard the subsequent inclusion, for the calculation of net income, of the R&D expenses of an eligible asset incorporated into a family that has already been the subject of an option has been rewritten but retains the same scope (BOI-BIC-BASE-110-30-20-20200422, n°140).
- In addition, the FTA introduces a new tolerance regarding intra-group subcontracting in cases where R&D expenditure outsourced to unrelated entities has been passed through a related entity which has re-invoiced it without margin to the company benefiting from the scheme. However, this tolerance is accompanied by a certain number of supporting documents (BOI-BIC-BASE-110-30-20-20200422, n°190).
- Clarifications are provided on the application of the new tax regime to partnerships.
- Finally, the FTA confirms the possibility of deducting the ordinary tax loss incurred in the FY from the net profits subject to the reduced rate for the same FY, as provided for by law. However, the FTA accepts, by way of tolerance, the possibility for companies to offset the net result at the reduced rate with the tax loss carry-forward from previous years. Therefore, depending on the will of the company to use such a tolerance, deferred tax assets on tax losses carried forward would be valued using 10% tax rate or 33,33% tax rate The administrative comments detail the terms of application of the ceiling and the use of the €1m deductible when offsetting these tax losses, with a mechanism finally similar to that which existed under the former Article 39 of the FTC (BOI-BIC-BASE-110-30-20-20200422, n°420).
Ultimately, clarifications are made for the tax groups, which essentially include the aforementioned tolerances and, in particular, the possible offsetting of tax losses carried forward against the net profit subject to the reduced tax rate.