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The new IP Box regime in France
For several decades, France has applied a favorable tax regime to license income and capital gains from patents and some associated intangible assets. This system has been reformed in the 2018 Finance Bill to bring it into line with EU and OECD standards. It is now codified in Article 238 of the French General Tax Code, applicable to fiscal years beginning since January 1, 2019.
The new regime lowers the corporate tax rate on eligible income and capital gains from 15% to 10%. Conditionally, the regime is also applies to income from sub-licenses. In terms of the scope of eligible assets, it still covers patents, but now also utility certificates and, above all, original software protected by copyright. However, it is no longer open to patentable inventions, except those subject to certification of patentability by the Institute of Industrial Property by an SME. As before, in the case of assets purchased and not own developemnt, a period of 2 years must elapse before the new plan can be claimed.
In order to benefit from this reduced rate, several new conditions must be respected and anticipated :
- Income subject to the reduced rate is subject to a so-called "Nexus" ratio, which is all the lower if R&D expenses are subcontracted to a related company or if acquisition rather than development expenses are incurred by the company.
- The new regime is optional, this option may be global or relate to certain assets or products, or families of assets or products.
- New documentary obligations and specific rules in tax consolidation or as a result of internal restructurings apply.
Despite a recent French administrative doctrine, there are still areas of uncertainty, such as the application of the regime to patents in the process of being granted, the use of deficits resulting from the result taxable at the reduced rate on the result taxable at the ordinary rate and vice versa, or the definition of R&D expenses to be deducted, especially upon entry into the new regime.
For SMEs that do not sub-contract their intra-group R&D, this new regime should be both attractive and relatively simple to set up, provided that they are able to track the associated R&D expenses, for example through the documentation of the Research Tax Credit.
For the largest groups, whether French or international, this new regime entails additional monitoring and documentation obligations that should be anticipated now, in order to put in place the appropriate monitoring tools, simulate the impacts of the legislative change and define an option strategy for the new regime that is as optimized as possible.