The Innovation Tax Credit (ITC): Deciphering and Eligibility
The Innovation Tax Credit (ITC) is a tax tool designed to support French small and medium-sized enterprises in their innovation process. This guide explores how ICN helps reduce the costs of new product development and facilitates investment in prototypes and pilot plants, as well as detailing the eligibility criteria and administrative steps required to benefit from them.
What is the Innovation Tax Credit (ITC)?
Definition and objectives
The innovation tax credit is an extension of the research tax credit for small and medium-sized enterprises (SMEs) that introduce new products to the market, with superior performance to existing products. This scheme makes it possible to obtain a tax credit calculated on the basis of the expenses incurred by these companies for the design and production of prototypes and/or pilot installations.
The objective of this tax credit is to encourage companies that make up the heart of the French economic network to remain competitive by being innovative and by offering new cutting-edge products.
The system is in place until 31 December 2024, and could be significantly modified in the next finance law.
What is innovation?
The reference document for defining innovation is the Oslo Handbook written by the OECD.
Innovation is defined as bringing to market new products with a significant improvement in one of these areas:
- Ergonomics (easier to use, more comfortable,...)
- Technicality (technically better product: lighter, smaller,...)
- Functionality (additional features have been added)
- Eco-design (reduction of the impact of the product life cycle)
With these four criteria, the tax authorities validate the innovative nature of the products in the files they examine.
Benefits of ITN for business and the economy
The ITC is a tax declaratory system. It therefore makes it possible to make the most of expenses that have already been incurred. This tax credit can be secured by rescript.
By valuing the expenses incurred to develop new products, this scheme encourages companies to continue these investments in order to continue to offer products at the cutting edge of innovation on the market.
CII or CIR (Research Tax Credit)?
What is the CIR?
The Research Tax Credit (CIR) is a declarative tax system that allows you to benefit from tax credits calculated on the basis of expenses related to research operations. These research operations must lead to the production of new knowledge, with the aim of removing technological or scientific barriers.
Who is eligible for the CIR?
All companies that carry out research operations are eligible for the CIR, regardless of their sector of activity or size.
Differences between the CIR and the CII
Although the ICN is an extension of the CIR, there are some differences between the main scheme and its extension.
The source of these differences is the market orientation of ICN, while the EIF is science and knowledge oriented.
- Unlike the research tax credit, which is available to all companies, the innovation tax credit is only available to small and medium-sized businesses.
- The research tax credit requires going beyond the current state of the art (research), the innovation tax credit requires going beyond the current state of the market. Research operations will be presented within the framework of the EIF, and product prototypes for the ICN.
- All staff can be valued in ICN, as long as their intervention is justified in the innovation process
- Operating costs (since 2023), and technology watch and standardization costs are not valued in the innovation tax credit.
Why is ITC essential for businesses?
Driving innovation
A crucial step in the development of new products is the transition from a technological concept validated in a laboratory context to a functional product in real-world conditions and marketable. This transition is financially costly because it is poorly supported by public funding (for laboratory research) or private investment (focused on profitable companies). The innovation tax credit makes it possible to make up for this shortfall and thus toencourage the marketing of innovative products.
Encouraging investment by SMEs
For SMEs, the innovation tax credit represents a valuable opportunity to strengthen their capacity to invest in innovation. By providing tax relief on research and development expenditure, this scheme reduces the financial cost associated with innovation, allowing SMEs to devote more resources to exploring new avenues and implementing innovative projects, thus contributing to their growth and competitiveness in the market.
SMEs that do not pay corporate income tax (CIT) or whose ITC amount is higher than their corporate income tax can request immediate repayment of the debt. This allows these companies to benefit from a direct cash injection, especially at the launch of a project where profits (and therefore corporate tax) will be lower and cash needs will be significant.
Who is eligible and eligible for the ITC?
SMEs in the Community sense (fewer than 250 employees at the balance sheet date, with a turnover not exceeding €50 million or a balance sheet not exceeding €43 million) subject to corporate tax or income tax (even if they do not pay any) can receive the innovation tax credit. They also don't have to be in trouble. This scheme is in line with the European Union's Regulation No. 651/2014, which considers the CII as state aid for innovation, and this aid cannot enable a company in difficulty to overcome its financial difficulties.
Expenses eligible for the ITC
Eligible expenditure is expenditure incurred over a calendar year, irrespective of the closing date of the accounting year, for operations located in the European Union.
- Personnel costs: anyone involved in the design and manufacture of prototypes, regardless of their level of qualification.
- Material costs: Fixed assets that appear in the company's depreciation schedule, in proportion to their use for the design of prototypes/pilot plants.
- Intellectual property costs: depreciation of patents, costs of filing and maintaining patents, plant breeders' rights, designs, as well as patent defense costs are recoverable under the ITC.
- Subcontracting expenses to approved companies (design and engineering offices, design agencies, industrial technical centres,...). This approval is obtained from the Ministry of Industry, or the Ministry of Higher Education and Research if the application for accreditation is combined with an application for CIR accreditation.
- Thesubsidies and public aid received for projects valued in the tax credit must be deducted from the tax base.
What are the conditions for obtaining an innovation tax credit?
Key steps to benefit from the Innovation Tax Credit
- Check that your company can benefit from the CII (SME that is not in difficulty according to European regulations),
- Determine which projects are eligible,
- Calculate the basis of eligible expenditure, and the corresponding amount of tax credit,
- Report these amounts.
Calculation of the tax credit and the rates applied
For small and medium-sized enterprises located in metropolitan France, the valuation rate of the innovation tax credit is 30% since 2023. (It was 20% until that date, with the addition of additional flat-rate operating costs to the expenditure base).
For SMEs in the overseas departments, this rate is 60%. it is 35% for medium-sized companies domiciled in Corsica, and 40% for small Corsican companies.
Reimbursement ceilings and limits in France
ITC expenses are capped at €400,000, which represents a final ITC amount of up to €120,000.
Businesses that request it can receive an immediate refund. If this immediate request is not made, the portion of the tax credit not applied to the CIT is refundable after 3 years.
Administrative procedures: CERFA 2069-A-SD
Administrative procedures have been simplified. This is an online declaration of the CERFA 2069-A-SD, the same form as for the CIR. To carry out this procedure online, you must contact the local corporate tax office (SIE) to obtain an access code to the online declaration platform.
The request for immediate reimbursement is made by CERFA 2573-SD.
Follow-up of the file
As with any tax scheme, the ITC can be audited by the tax authorities.
In the event of an inspection, if the innovative nature is called into question, an expert may be mandated by the Directorate-General for Enterprise (DGE) to examine the file supporting the application for the tax credit. In the event of a simultaneous application for a CIR and CII, each part of the file will be handled by an expert dependent on the corresponding ministry (MESR for the CIR, DGE for the CII).
Possibility of rescript
Companies have the possibility of requesting a formal position from the tax authorities on the eligibility of the company's activities for the innovation tax credit by tax ruling procedure. The position taken (a lack of response within 3 months is equivalent to tacit acceptance) obtained commits the administration and limits its right to take back.
CII accreditation
What is CII accreditation?
The innovation tax credit (CII) approval is a certification granted by the State to certain companies. It is intended for companies providing design and production services for prototypes or pilot installations on behalf of their customers.
There are two ways to obtain this accreditation:
- The company already has a CIR approval or applies for it in parallel with the CII approval. Accreditation is obtained upon submission of a file to the Ministry of Higher Education and Research.
- The company only wants to obtain CII accreditation. Approval is obtained upon submission of a file to the Directorate-General for Enterprises under the Ministry of Industry.
In both cases, this file must present the company's technical human resources as well as an innovation project to which the company has contributed.
Obtaining this approval allows the clients of the approved company to include in the basis of their ITC the expenses incurred with the company.
How do I get CII accreditation?
To obtain CII accreditation, several steps are required:
- Preparation of the application file : It must include a description of your technical human resources and a research or innovation project to which your company has contributed in the last two years.
- Sending the file: Your application for approval is made online, with the right contact person according to your company's situation. If it is not possible to file online, a (longer) postal procedure is possible.
- Application follow-up: Once your application has been submitted, it is important to monitor its progress. In the event of a request for additional information, it is necessary to respond promptly to avoid any delay in obtaining accreditation.
It should be noted that CII approval is essential for your client to be able to declare the innovation work he has entrusted to you to the innovation tax credit.
Dynergie, a CII-referenced consulting firm
Dynergie is a CIR/CII consulting company referenced by corporate mediation. Our experts will help you obtain your ITC through:
- Exhaustive definition of eligible works and expenses
- Improvement of your internal processes (administration, technical, finance, etc.)
- Calculation of the tax credit
- The gathering of all the necessary supporting documents, while scrupulously respecting the standards and procedures in force.
Useful links:
> Focus on the 2024 Finance Act: C3IV, JEI and other measures
> Reform of the CIR: deciphering the changes to be expected
> The reform of the JEI status in the 2024 Finance Law: what remains of the Midy report?
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Damien Villiers-Moriamé
I assist innovative companies of all sizes in their efforts to obtain public funding (CIR-CII, JEI, bpifrance, CIN, etc.). My technical knowledge intervenes in various fields such as IoT, AI, e-education, embedded systems or service robotics. My daily work consists in accompanying entrepreneurs on key and crucial steps of their projects (construction of Financing Plan, construction of Business Plan, validation of the economic model).