The 2013 French Finance law, voted last December, has been a hot topic in the startup community because of a controversial capital gains tax hike proposal. The directions for the new law were set in the National Pact for Growth, a set of measures aimed at helping SMEs grow by fostering innovation, among other things. Apart from the new tax credit for encouraging competitiveness and jobs (CICE), one of the good news for startupers is the new innovation tax credit (commonly called Crédit Impôt Innovation — although this term does not appear in the new law).
I have noticed that few startups actually know how to handle these tax credits and how to exploit them to support their developments. So here’s an idea: what if Paris Capitale du Numérique gave access for free to advisors in “public funding”? At present, the alternative is to hire a consulting company on Enterprise Cost Management, who’s going to take a cut on the funds they help you get… this amounts to using public funds to pay private consultancies to advise on how to get public funds! In any case, it’s good to have a basic understanding of what innovation and research tax credits are all about, and of what has changed in 2013.
Quick tax credit recap
There already existed a research tax credit (Crédit Impôt Recherche) as an incentive for companies to invest in the creation of new technologies, but this was limited to research & development (R&D) activities whose objectives were to remove scientific or technical uncertainties in the development of products or services that couldn’t be conceived by straightforward application of state-of-the-art technologies. Such activities are classified as either fundamental research (very rare in the industry), applied research, or, most often, experimental development. As you may guess, R&D is a very limited view of the innovation that takes place in the world of technology startups. If you’re wondering whether some of the activities you do would fit in the CIR, you can now file a request for a rescript — in previous years, this was only possible if you hadn’t already started your target project…
No R&D? The following concerns you
Starting from 2013, the CII widens expenses accounted in a potential tax credit to activities of development of prototypes or pilots for new products that are not yet “destined to be put on the market” (understand alpha / private beta versions). The only two conditions for eligibility are that the new product isn’t already on the market and that it outperforms existing products, be it on the technical, user experience, features or eco-conception aspects. This means that if you have an idea for a novel web app or mobile app for instance, and you already know how to proceed (no R&D), you’ll be able to get back, after a year, some of your investment in app and interface development!
The CII is only available to independent SMEs and the amount of credit is 20% of eligible expenses, capped at 400k€ per year (so you may get 80k€ at most). Remember that startups who have the JEI status (young innovative company) pay virtually no taxes, so this counts as public funding.
Some remaining questions
That being said, the definitions in the original text of the finance law are somewhat vague, the terminology is confusing, and as a result the CII doesn’t seem to be understood with enough certainty by experts. To illustrate potential issues, consider that R&D and other innovation activities may sometimes be concurrent, and it can be difficult to distinguish between them, hence it can be tricky on occasions to know whether you should affect time spent by your team to the CIR or the CII (the former being more advantageous) while minimizing chances of being challenged by the administration… Also, some expenses such as patent filing are mentioned both in the CIR and the CII, which can be confusing. Other questions one may ask are: what exactly does it mean for a product not to be destined to be put on the market? How to measure and demonstrate higher performance? What exactly is a new product? More specifically, does a major new version of a product (for instance an interface overhaul) count as a new product?
To that question, Pascal Deschanels of Hexaliance could not provide a definite answer but recommended to separate the different components of a product and to give them names in order to help present things in a potential CII declaration. Pushing the versioning issue further, I’m wondering how “compatible” the CII is with the Lean Startup development methodology. While it’s common to find business plans who take the CIR into account, things are a bit too new to also take the CII into account. But until the fisc provides more information, it’s recommended to start planning and to time-track all potentially eligible activities, so you’ll be able to adjust your tax declaration for 2013 in consequence.