Lyon Administrative Court of Appeal of Lyon judges that a subsidy must be deducted in full from the CIR basis when the financed project is eligible for the CIR, regardless of the fact that certain costs financed by this subsidy are not eligible for the CIR.This solution, which can lead to generating a negative CIR, is, in our opinion, in contradiction with the mechanism and the jurisprudence of the Council of State.
This article is a summary of our analysis published in the Revue de Droit Fiscal, n° 11 of 14 March 2024. Feel free to check out the full article or contact us for more information.
Key principles
The French R&D Tax Credit (CIR) is governed by mechanisms aimed at preventing double financing of the same R&D expenses (CGI, Art. 244 quarter B, III).
In particular, public subsidies must be deducted from the expenses eligible for the CIR:
“Public subsidies received by companies for operations giving entitlement to the tax credit shall be deducted from the bases for calculating this credit, whether they are definitively acquired by them or refundable.”
However, this deduction must not be total. Only public subsidies received “in respect of operations giving entitlement to the CIR” must be deducted. But the texts do not detail either the meaning of this expression, nor the method of calculating the subsidy ratio to be deducted.
History
MGDC had received a grant under the Nano 2012 program. The grant financed both costs eligible for the CIR (researchers’ costs) and ineligible costs (management costs, subcontracting). The company had only deducted the part of the subsidy corresponding to the costs eligible for the CIR.
The Administrative Court of Appeal of Lyon ruled that the subsidy should be deducted in full from the basis for calculating the CIR, even if not all the expenses covered were eligible for the CIR.
In other words, the Court ruled that an operation giving entitlement to the CIR must be understood as a research operation scientifically eligible for the CIR, regardless of the granting of financial rights to the CIR.
Comment
In our opinion, the interpretation of the Administrative Court of Appeal of Lyon opens the way to a risk of a negative CIR (in the event of a subsidy to be deducted higher than the costs eligible for the CIR), which would not only be contrary to the spirit of the CIR regime, but also to the case law of the Council of State. Indeed, in its judgment of September, 9 2020 (CE, 8th and 3rd ch., 9 Sept. 2020, No. 440523, Sté Takima), the Council of State ruled, in the context of the second mechanism preventing the double taking into account of the same research expenses provided for in Article 244 quarter B, III of the CGI, that a negative CIR could not be generated.
The approach adopted by Lyon Administrative Court of Appeal would cancel the tax incentive and could lead to a refund of an uncollected tax credit!
The partial eligibility of a research project should lead to a partial deduction of the related grant
Assuming that the concept of a grant received in respect of operations giving entitlement to the CIR must be analyzed exclusively in the light of the R&D operations financed, the analysis of the grants received should be positioned at the same level as that of the CIR eligibility, in other words at the level of the research operations financed and not at the overall level of the project subsidized.
If the subsidy finances a project comprising several lots, operations, and only some are scientifically eligible, then the company should be able to exclude the part of the subsidy financing the ineligible lots. Correlatively, the work on these lots should not be retained in the CIR.
For example, assuming that the subsidy finances a “research on nanoconductors” lot, for 90% of its amount, a “dissemination of research to schools” lot for 5% and a “coordination of the various European partners” lot, these last two lots being scientifically ineligible, then only 90% of the amount of the subsidy should be deducted from the CIR base.
The mere fact that a research project includes both eligible and ineligible operations should lead to the acceptance of a partial deduction of the grants of the project in question.
A capped subsidy deduction?
Lyon Administrative Court of Appeal of Lyon judged that the subsidy must be deducted from the CIR base in the year of its payment.
Since 2014, the Administration has provided for a cap on the deduction of the subsidy to eligible costs incurred on the R&D operation. This cap avoids any negative CIR (BOI-BIC-RICI-10-10-30-20, n°10).
However, the doctrine is only enforceable against tax reassessments. Companies requesting a refund of CIR cannot use it. In other words, companies applying for CIR reimbursem*nt cannot cap the subsidies received to the amount of the research expenses incurred, but must deduct the entire subsidy in the year of its payment.
We believe that a legislative change is necessary to ensure that all taxpayers use administrative doctrine with the same effectiveness.
