10 Misconceptions about French support for startups

10 Misconceptions about French support for startups
Finance

There are several schemes to help startups in the complicated launching phase. The Research tax credits (CIR) scheme celebrates its 35th anniversary this year and has proved to be one of the main drivers for innovation in France: over 20,000 companies presently benefit from it.

However, many misconceptions still persist about this support facility, as well as about the two resources linked to it, the Innovation Tax Credit (CII) and the status of Young Innovative Companies (JEI). Some popular beliefs die hard and can act as a brake on companies which are fearful of committing to new initiatives or which are unaware they can benefit from these facilities. 

Let’s learn more and these schemes and debunk 10 of these misconceptions on the CIR with the help of NÉVA.

 

No, the CIR is not synonymous with tax controls

 

This is, without doubt, the main misconception about the CIR and one of the toughest to challenge.

To repeat: registering a CIR is not synonymous with tax controls. Some 10 years ago, an overall accounting fiscal control process was the only means available to the authorities for controlling CIRs. But this was very restrictive for the tax authorities, which could only manage a tiny number of the CIRs registered by this means.

So they then adopted a much better method, individual control of the CIR, a much lighter and faster monitoring process.  Nonetheless, this was still not really suitable for the situation. So for many years now, the tax authorities have applied an even simpler process, using “requests for information”, now almost routine, which involve just requesting the company to provide all the supporting documentation for its CIR or CII.

 

No need to “obtain a ruling” (i.e. ask for advice from the tax authorities) before declaring a CIR, CCI or obtaining JEI status.

Even though CIR/CII and JEI status are reporting procedures, some companies prefer to take the precaution of asking beforehand for the authorities’ advice (“obtaining a ruling”).

However, on the one hand, the tax authorities may come back on a positive ruling, and maintain in their report that the work carried out does not precisely match that which the company has described (before doing it).  On the other hand, a negative ruling, in this case, is an effective dismissal, while a negative opinion in a reporting procedure offers a variety of options.

The easiest, the most logical and above all the most efficient method, is to use the systems as they were designed by the legislator, namely as reporting systems. The possibility of a “rolling ruling”, recently suggested by the tax authorities, does partly meet the objectives relating to a ruling, but also significantly complicates the system.

 

8 further misconceptions to challenge 

1 / SMEs are overlooked by the CIR

FALSE – While it is true that major companies are, in terms of amounts distributed, the largest beneficiaries of the CIR, in numerical terms SMEs are the main recipients of this type of support: 91% of companies benefiting from CIR are SMEs (Observatoire 2017 of CIR / https://www.bpifrance.fr/A-la-une/Dossiers/Les-chiffres-du-jeudi/Janvier-2017) .

In addition, for the past fifteen years or so, the legislator has demonstrated a real willingness to refocus the process on SMEs: not only did it create the status of JEI in 2004, reserved only for SMEs, but in 2013, the CII system, also for SMEs only, was added to the CIR in 2013.

 2 / CIR and CII are incompatible  

FALSE – Not only can a company benefit from both these systems, but a single project can consist of one part eligible for CIR, and another part eligible for CII.

3 / Being eligible for CII also allows JEI status to be claimed 

FALSE – Despite the apparent similarity of terminology (innovation tax credit, and young innovative company) only the eligibility for CIR, and thus real R&D work being carried out, allows the application for JEI status. The conditions are: a company eligible for CII only, and not CIR, cannot claim JEI status.

4 / Work which is entirely sub-contracted by a company, with no in-house work, can be eligible for CIR and/or CII 

FALSE – Except for patent costs, and attendance at official standards meetings, for which claims are made separately, there is no option for claiming CIR/CII without internal personnel costs.

Along with this rule, for CIR though not CII, there is also a strict upper limit on sub-contracting costs: sub-contracted R&D costs for private companies may not exceed the amount of other R&D expenses by more than 3 times.

5 / Like CIR, CII is not limited, and applies to all companies 

FALSE – CII is capped at 80,000 euros per company and per year, and is reserved solely for SME in the Community sense (fewer than 250 employees and less than 50 M€ turnover or less than 43 M€ balance sheet total).

The rate for calculating CIR set at 30% of R&D expenditure up to 100 M€ of annual expenditure, goes to 5% above this limit. The minister of the economy may consider removing this limit and keeping the rate at 30 %, no matter what the amount of R&D expenditure.

Rather than this kind of measure, since the creation of the new system in 2013, NÉVA has campaigned for the removal of the ceiling on the CII: “removing the ceiling” for CIR (eliminating the 100 M€ threshold) would affect at most a few dozen companies in France. Removing the ceiling on CII would affect a much great proportion of the industrial and tech sector for innovative French SMEs, the leading source of job creation in our country. 

6 – An innovation has to be technically complex to be eligible for CII.

FALSE – The complexity criteria for work, central to CIR, does not apply to CII. All that matters is that it is new on the market.

7 – An innovative service is eligible for CII 

FALSE – Only “product” innovations are eligible for this benefit. However, a service innovation often relies on innovative software, a virtual product which can be eligible for CII.

8 – After an investigation, if the tax authorities reject the application for CIR, there is no appeal

FALSE – The officials responsible for CIR, their management and the Court of Auditors are very vigilant, and rightly so, over the allocation of public funds. For safety’s sake, or because the quality of the technical applications they receive is sometimes inadequate, it is not unusual for a complete or partial rejection at the start.

This allows it to obtain further information from the company and to justify further validation through a better-documented application.

It might also discourage applicants who are not genuine or those who themselves doubt the eligibility of their work.

This attitude on the part of the authorities is only the start of a dialogue with the company, which progresses through meetings arranged between the company’s representatives and the officials and experts from the tax authority.