What does France's IP tax regime mean for multinational companies?
An overview of France’s IP tax regime from a U.S. perspective
INSIGHT ARTICLE |
France enacted an attractive and unique intellectual property (IP) tax regime, effective Jan. 1, 2019.
This IP regime enhances France’s existing favorable research and development (R&D) tax credit regime. The R&D regime generally allows for a cash refund of 30% of R&D expenditures (up to €100 million and 5% thereafter); and has historically incentivized U.S. companies to follow talent to France without being dissuaded by the country’s relatively high corporate tax rates. As compared to the U.S. corporate income tax rate of 21% and similarly low rates throughout the European nations, France’s corporate income tax rate is currently 28%, with a scheduled phase-down to 25% over time.
Under the new IP regime, license revenue is now subject to a rate of tax as low as 10%, provided certain conditions are satisfied. When both tax regimes are applicable, owning and developing IP in a French company may present significant tax savings.
In accordance with certain OECD recommendations, the French IP regime applies only if licensing revenue is aligned with its costs and expenses. Presumably, IP revenue-generating costs and expenses are the types of costs eligible for the R&D tax credit, if they are already being conducted in France by a French entity. If a U.S. parent company owns a French subsidiary that is providing R&D services, transferring IP to the French subsidiary would theoretically allow the low French IP regime rate to apply to such revenue. This would not be the case if the IP remained in the United States and the United States compensated the French subsidiary for such R&D services at cost plus. The 10% rate on the license revenue, combined with the R&D credit for the costs incurred, may make the French IP box regime comparatively more attractive than other countries’ preferential patent box rates, including the U.S. federal tax rate of 13.125% after the new foreign derived intangible income (FDII) deduction. 1
The two conditions necessary to benefit from the French IP regime require establishing:
(1) eligible IP assets
(2) eligible net income
The regime is optional and may be elected selectively for eligible assets, or for products or services (family of products) if not possible per asset.
Documentation is required to be included with the corporate tax return each year in order to substantiate the application of the regime. If a company does not opt to elect the regime for a specific asset during the first fiscal year it has the patent (even if no revenues are earned during that first year), then the company misses the right to elect the regime for this specific asset in the future.
Eligible IP assets include patents, utility certificates, complementary protection certificates, manufacturing processes, and software (including for example patents delivered by the United States Patent and Trademark Office). In addition, inventions that are considered patentable but not actually patented, may also qualify as eligible IP assets if:
(1) The licensor has earned, on average, less than €7.5million of IP income annually during the last five years; and
(2) The French National Institute of Intellectual Property has certified the invention.
Excluded from the French IP regime are trademarks, designs, models, marketing authorizations, orphan drug designations, and related exclusive rights.
Eligible net income includes royalties and license fees from licenses (and sublicenses), as well as capital gain from the disposition of assets held for at least two years and that are transferred to an unrelated party. The eligible net income is calculated after deduction of R&D expenditures related to the IP asset. This deduction for R&D expenditures captures both current and historical R&D expenditures from previous tax years, but beginning only with the date the taxpayer elects into the IP regime.
Overall, France’s new IP regime contains certain attractive features that may impact a company’s global tax planning strategy. However, since the U.S. tax reforms enacted in late 2017, many .U.S companies are increasingly abandoning their tax planning strategy to move IP offshore and bring the IP back to the United States. We are seeing examples of U.S. companies with foreign operations adjusting their global tax planning strategies; including Google’s recent efforts to step away from Bermuda as a tax planning strategy. This trend is partly explained by increased substance requirements under the OECD BEPS initiatives, heightened scrutiny from competing tax jurisdictions from which base eroding payments are made, and the new U.S. foreign derived intangible income deduction. Nonetheless, the new French IP regime may be tax efficient for some companies. Modeling, careful documentation and planning are critical for a global company so as not to confuse strategy with numbers, and vice versa.
If you are a U.S. company with operations in France, understanding the changes in their IP tax regime and its potential impact on your business are important. Connect with your RSM professional or a member of our France Desk today to review your specific situation and ensure you are prepared to comply with these new regulations.
1 U.S. state and local taxes will increase the effective overall tax rate on this income.