Case law - Eligibility of subcontracting - June 2022
The applicant company was seeking a refund of its CIR balance for 2018.
By questioning the eligibility of operations carried out by subcontractors, the tax authorities have rejected the use of employees on a contract basis.
Indeed, this practice is widely questioned in the context of tax audits, even though it is not formally prohibited (despite what the latest version of the MESRI CIR guide states).
The applicant company thus defended the valuation of the employees employed on a fee-for-service basis, by presenting a table showing the number of hours spent by each of the employees thus valued.
This table, established from the extraction provided by a software program, made it possible to visualize the progress of the project (division of projects into "user stories": tasks, components, time spent) and their assignment to developers.
The extraction identified the employee, the date, the number of hours spent on that date, the name of the assignment and the description of the work performed.
From these time extractions and on the basis of the monthly invoices sent by the service provider, the company had determined the share of eligible subcontracting expenses. It then applied an "R&D rate" to each employee's daily cost (excluding VAT) to determine the amount to be credited to the CIR.
The Court therefore considered that the company should be considered to have established the eligible nature of the expenses thus valued.
Source: CAA of PARIS, 9th chamber, 28/06/2022, 21PA04372, Unpublished in the recueil Lebon
Case law – confirmation of FNAMS case law – April 2022
In this case, the judges of the Administrative Court of Appeal of Bordeaux confirm that the operations necessary for the work carried out internally are eligible for the Research Tax Credit.
But, beyond confirming the position of the Council of State (FNAMS, CE, July 22, 2020), this judgment is particularly interesting in that it validates the possibility of valuing subcontracting expenses in the CIR of the donor order, even though the subcontractor's service consists only of the provision of equipment necessary for the research work of the ordering company.
Thus, the judges here believe that to take an invoice in its CIR :
- It is not necessary to provide deliverables
- It is not necessary for the subcontracted work to involve the lifting of a technological lock.
The simple provision of equipment, necessary for the client's research work, may constitute for the judges an operation eligible for the client's CIR.
Source : CAA of BORDEAUX, 4th chamber, 19/04/2022, 20BX02879
Precision of the MESRI: on the dates of approval
The Ministry of Higher Education, Research and Innovation (MESRI) has updated its website and specifies that the first CIR approval campaign has been extended until April 6, 2022, for both public and private companies.
It is also specified that the CIR accreditation renewal campaign will be open from 1er September to November 30, 2022.
The Ministry also indicates that accreditation (first application and renewal) is granted after examination of a complete preliminary application file submitted by decision of the Minister responsible for research.
Regulatory developments: Publication of approval procedures for public bodies
From 1er January 2022, the 2021 Finance Law provided for the abolition of the doubling of expenses incurred with public service providers or public-similar providers, and the end of the exemption from approval for the said bodies.
Thus, from 1er From 1 January 2022, all research organizations, whether public, assimilated to the public sector or private, will need to be approved by the Minister for Research in order for the client to benefit from the tax credit for expenditure corresponding to the research operations it entrusts to them.
The MESRI, by updating its website on December 15, made available the forms to be completed to obtain the approval of organizations exempted before 2022.
Please find the link to these forms below.
As envisaged, the form becomes mandatory for all companies but the supporting documents vary for public or similar bodies. For the most part, only the submission of the form is requested.
Legislative evolution – Adoption at second reading of the Tax Credit in favor of collaborative research – December 2021
This tax credit of 50% (for SMEs) and 40% (for non-SMEs) would be calculated on expenditure arising from R&D collaboration with an Organisme de Recherche et de Diffusion de la Connaissance (ORDC).
During this second passage before the lower chamber, the ceiling for research expenditure retained in the calculation basis, increased from €2m to €6m. It was also added that the benefit of the tax credit would be conditional on compliance with the framework regime relating to aid for research, development and innovation.
As a reminder, this system would not be cumulative with the Research Tax Credit (CIR) and would concern contracts concluded until 31.12.2025.
We will have to wait for the promulgation of the finance bill (PLF 2022) and the publication of an implementing decree to find out how this tax credit will be implemented.
Source: https://www.assemblee-nationale.fr
Case law - The Council of State provides additional details on the possible valuation by the approved subcontractor of the expenses entrusted by a principal - June 2021
In a judgment of June 18, 2021, the Council of State ruled on the methods for valuing the expenses of the approved subcontractor.
As a preliminary point, it is advisable to recall the judgment of the Administrative Court of Appeal of Versailles of January 22, 2019. Indeed, this case law reveals 4 cumulative conditions allowing an approved subcontractor to retain in its CIR expenditure of R&D in connection with operations entrusted by a principal, without the latter being legitimate to declare the invoice in its own CIR. Thus, we found the following 4 cumulative conditions:
- R&D work must be distinct from the services covered by the subcontract,
- Their cost is therefore not fully / directly passed on to the ordering party,
- The results of this work are used for the service provider's own account,
- The service provider retains the intellectual property of this R&D work
In the decision of the Council of State in question, the judges came to specify the methods for calculating the base of the CIR benefiting the approved subcontractor. In this case, Sopra Steria, which benefited from the authorization, was forced by the administration to exclude from the base of its own CIR the invoices sent to its principals who themselves benefited from the CIR on these expenses entrusted to the company in question.
The company therefore claimed the benefit of the CIR, justifying that the work entrusted to it, which was the subject of the invoices questioned by the tax authorities, was IT engineering work, but that the research work resulting from these orders was not provided for in the contracts, and therefore no research services had been directly ordered.
In a judgment of June 4, 2019, the Administrative Court of Appeal of Versailles hearing the dispute considered that one of the cumulative conditions, namely the absence of full repercussions of the cost to the principal, was not respected. .
The Conseil d'Etat censured this decision, ruling that when an accredited organization " incurs research expenditure on its own behalf, including in cases where such expenditure is incurred in the performance of services on behalf of a third party, the purpose of which is not to carry out research operations, this organization may include these expenses in the basis for calculating its tax credit if they meet the requirements laid down in Article 244 quater B of the French General Tax Code, without being obliged by these provisions to deduct from this basis the sums invoiced to the beneficiary of the services, which do not constitute, for the latter, expenses eligible for this tax credit ".
In addition, the Council found that the Court of Appeal had erred in law by refusing to allow the company to benefit from the CIR, basing its decision in particular on the fact that it had passed on the full cost of these operations to its principals. In addition, it is specified that it is only necessary to verify whether :
- The expenses in question were indeed research expenses.
- Ensure that Sopra Steria's co-contractors had not entrusted it with the performance of research operations.
- That the cost of the expenditure did not constitute expenditure eligible for the research tax credit for the principal.
In conclusion, the Conseil d'Etat, by specifying the methods for calculating the base for the research tax credit available to an approved research organization for research expenditure on its own behalf, has reduced the list of cumulative conditions introduced by the Versailles CAA ruling of January 22, 2019. As a result, the requirement that costs not be passed on to the principal has been censured.
However, recent case law (Council of State of July 23, 2020, FNAMS). Indeed, it could be complicated for a subcontractor to demonstrate that the cost of the expenditure did not constitute expenditure eligible for the research tax credit on the part of the principal, even though the principal can include subcontracted expenditure in its own RTC, provided that it is necessary for the R&D approach of its eligible project, and even if the subcontracted operations do not individually correspond to R&D work.
Source: Conseil d'État, 9th - 10th joint chambers, 18/06/2021, 433319, Société Sopra Steria
Finance law for 2021 - End of the doubling of subcontracting expenditure with public bodies - January 2021
Article 35 of the Finance Act for 2021 abolishes, as of January 1, 2022, the 2004 system for doubling the tax base for research services entrusted to public or similar third parties, which encouraged greater synergy between the public and private sectors.
Eliminating this double base would harmonize the way subcontracting expenses are taken into account across Europe. This also entails the abolition of the increased ceiling of 2 million euros for expenditure entrusted to public bodies. The initial ceiling of 10 million euros for subcontracting expenses remains in place.
Conditions for taking into account R&D expenses by a private CIR approved subcontractor - September 2020
The Council of State canceled the restrictive doctrine of April 4, 2014 on subcontracting.
This had the effect of obliging approved bodies to include in their CIR eligible expenditure incurred on behalf of eligible third parties, before deducting the invoice amount, with the excess impacting internal project expenditure.
An approved subcontractor can therefore now do without re-invoiced projects in order to declare only operations carried out for its own account, thus benefiting on its internal projects from the same advantages in terms of CIR as any declaring company.
Source: CE, 09/092020, n ° 440523
Case law - Nature of eligible work - July 2020
The Conseil d'Etat confirms that when a company entrusts an eligible organization with the services required to carry out its research project, the corresponding expenses can be taken into account in determining the amount of its tax credit. even though the subcontracted services, taken in isolation, do not constitute research operations.
Thus, this decision should put a stop to the practice of the tax administration which consists in excluding the valuation of any externalized expenditure by requiring that the latter correspond to a real clearly individualized R&D operation.
However, this does not exempt the declarant from having to justify the contribution of the service within the framework of his project and how it fits into the R&D process, even though it is not directly a question of research operations.
Finally, this decision contradicts that of December 20, 2018, during which the Administrative Court of Appeal of Paris ruled that subcontracting expenses which do not correspond to real clearly individualized R&D operations are not eligible for the CIR, even though these expenses are essential for the smooth running of the project
Source: CE, reading of 07/22/2020, n ° 428127
Identical conclusions in a similar procedure: TA de Strasbourg, 05/08/2020, n ° 1807359
Case law - Exceptional conditions for taking into account a co-contracting contract - May 2020
An approved organization considered that it could declare in its own CIR the expenditure relating to the work of an R&D project, governed by a co-contracting contract with a non-approved organization, defending the non-eligibility of its invoice to the co-contractor.
The court considered that the eligible work had indeed been outsourced and entrusted within the meaning of the CIR, despite the co-contracting nature of the contract, since:
- Research operations are clearly defined
- The work is carried out by the co-contractor in return for a predefined sum
- The company that values the expenses benefits from the results of the work.
Source: CAA of Versailles of 05/28/2020, N ° 18VE03123
Finance Law for 2020 - Supervision of cascading subcontracting - January 2020
The eligibility of expenditure is limited to the only part carried out directly by approved public or private service providers (the client cannot retain in the base of its CIR R&D operations entrusted to approved public or private bodies which would then be subcontracted by the latter to unapproved private bodies).
The valuation of such an expenditure is possible as long as all the interveners in cascade are themselves approved or public.
Case law - Conditions for taking into account R&D expenses by a private CIR-approved subcontractor - February 2019
A company had been subcontracted to carry out R&D operations, for which it had assumed the financial burden without passing on the cost to the principal, and for which ownership of the result was reserved. In the administration's view, the company should not have included these expenses in its CIR base. It should be noted that the principals, for their part, had not included these expenses in their own CIR base, notably because the subcontracting contracts provided for the performance of IT and engineering services, but did not provide for the performance of R&D operations.
Several years of CIR were involved, the trial judges finally took a position in favor of the company by admitting the inclusion of these expenses in the base of the CIR which it declared because the R&D expenses had been incurred by the company. subcontractor on its own initiative and had not been supported by the principals. In addition, the company retained ownership of the results of the research.
Referring to this judgment, there appear 4 cumulative conditions allowing an approved subcontractor to retain in its CIR R&D expenses in connection with operations entrusted by a principal, without the latter being legitimate to declare the invoice in its own CIR:
- R&D work must be distinct from the services covered by the subcontract,
- Their cost is therefore not fully / directly passed on to the ordering party,
- The results of this work are used for the service provider's own account,
- The service provider retains the intellectual property of this R&D work
Source: CAA of Versailles on 01/22/2019, n ° 17VE01733 and n ° 17VE03361 / TA Montreuil of 02/28/2019, n ° 1709981
Case law - Purpose of the service and importance of the contract - November 2018
In a judgment of 22 November 2018, the Administrative Court of Appeal of Versailles ruled on a case of ineligibility for the CIR for expenditure incurred with a public research body.
In this case, a company valued invoices from an Institute by asserting that the latter carried out fundamental research work on its behalf. However, on reading the convention, the judges noted that the only counterpart of the sums in question lay in the devolution of trademarks and patent licenses and not in the performance of research work.
In addition, the judges noted that neither the agreement nor the instruction shows that the research work carried out by the Institute was the subject of an upstream definition to which the ordering company would have taken part.
Source: CAA Versailles, 22-11-2018, n ° 17VE01553
Case law - Undertaking - March 2018
This ruling clarifies that the activity of bringing together engineers and consultants from companies to carry out research operations is not an activity eligible for the research tax credit.
The applicant company claimed to be able to benefit from the research tax credit by arguing that the MESRI approved a wage-carrying company as a private research organization.
The judges rejected the company's request, considering that it does not fall within the scope of the provisions covered by the doctrine since it does not itself carry out the operations necessary for the research.
Source: Administrative Court of Appeal of Bordeaux, 16-03-2018, n ° 16BX00922, 16BX00923, 16BX00924
Case law - Distinction between subcontracting and co-contracting (or co-financing) - May 2017
In the present case, the judges considered as ineligible the expenses incurred by a company with the INRA (the supposed subcontractor) concerning a project which was the subject of a consortium agreement and in which the two entities were co-funders. The Court therefore considered that the expenditure in question corresponded to “the financial contribution” following the consortium agreement.
Thus, the principle of co-financing seems to be in contradiction with subcontracting within the meaning of the CIR which supposes a real initiative on the part of the ordering party to entrust R&D operations to a subcontractor.
Source: Paris CAA of 05/30/2017, N ° 16PA00453 and N ° 16PA00455
