France caters to innovative companies and offers the best research tax credit in Europe

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1 1/5 The Frech Govermet has three objectives : > improve Frace s fiscal competitiveess > cosolidate R&D activities > make Frace a attractive coutry for iovatio Tax icetives have become a key elemet of public policy i favor of research ad iovatio. Accordig to OECD figures, 20 OECD member coutries had itroduced research tax credit measures i 2007, compared with oly 12 coutries i I Frace, the research tax credit (Crédit Impôt Recherche CIR) represets a reliable elemet of a iovative compay s fiacial pla, ad is particularly well adapted to the eeds of SMEs. This tax icetive eables compaies to icrease their competitiveess by supportig their Research & Developmet efforts. The Frech Govermet has udertake a major reform of the research tax credit by meas of the Fiacial Law of 2008, which is i lie with the "Lisbo strategy" (kowledge-based ecoomy) ad the "Barceloa objective" (3 % of total GDP dedicated to R&D). What you should kow about the research tax credit Defiitio : The research tax credit is a corporate tax icetive based o R&D expediture icurred by ay compay located i Frace, regardless of sector or size. > All idustrial, commercial or agricultural busiesses, as well as associatios uder the Law of 1901 (uder certai coditios), are eligible for the research tax credit. > The research tax credit is either deducted from aual corporate tax (Impôt sur les sociétés IS), or reimbursed after a period of three years. Certai iovative SMEs (Youg Iovative Compaies, "gazelles" or ew compaies) ca receive their research tax credit i cash at the ed of their first year of busiess (if the compay has ot already deducted it from its corporate tax). > Eligible expeditures iclude mapower ad equipmet dedicated to i-house R&D activities, subcotracted research activities, techological surveillace, ad patet filig ad protectio. > Shorteed advace approval times (rescrit fiscal) allow compaies to obtai cofirmatio of their R&D eligibility from the Miistry of Research ad Advaced Educatio before the lauch of a research project. The miistry has three moths to respod, after which time eligibility is assumed. As of 2010, compaies will be able to directly request the services of the Frech Miistry of Research or the public orgaizatio Oseo Iovatio with o tax admiistratio required. R Poi t The research tax credit applies to all sectors of activity, icludig ew sectors ad eve traditioal sectors that are ot geerally targeted by R&D icetives, for example the pharmaceutical ad automotive idustries. ote(s) (1) Law of 24 December 2007 regardig Fiaces for 2008 Articles 69,70

2 2/5 Reform : chages cocerig R&D expeditures icurred i 2008 The Fiacial Law (Loi de Fiaces) aims to reform the research tax credit, makig it more favorable ad simplifyig procedures. Elimiatio of the 16 millio euro research tax credit ceilig. A ew, more favorable limit has bee itroduced: expeditures exceedig 100 millio euros are eligible for a research tax credit at a reduced rate of 5% istead of 30%. Effective Jauary 1 st, 2008, the research tax credit is calculated o the basis of the amout ("volume") of R&D expediture, ad is o loger based o icreases i the level of expediture ("icrease"). Research tax credit rates icreased to 30% from the origial 10% applicable to the volume of the total R&D expediture for the first category up to a limit of 100 millio euros. A "itroductory bous" is available for compaies applyig for research tax credit for the first time, or for those that have ot received the tax credit withi past five years. This bous provides a research tax credit rate of 50% for the first year ad 40% for the secod year. The waitig period for advace approval (rescrit fiscal) by the miistry was reduced to three moths (from the origial six moths) effective March 1 st, Effective Jauary 1 st, 2008, compaies receivig research tax credit ca request that the tax authorities officially cofirm the eligibility of their R&D expeditures. I the evet of ay errors, omissios or aomalies, compaies will be requested to rectify their situatio, but will ot icur ay pealties. R Poit By makig advace approval systematic, ad reducig the delay for advace approval to 90 days, the Frech Govermet is respodig to a key busiess issue for compaies : predictability. Advace approval will eable compaies to avoid systematic tax ispectios after filig their returs. Icreased support The amout of research tax credit has icreased from 1.4 billio euros i 2006 to approximately 3 billio euros i The twofold icrease i the budget for research tax credit take o by the Frech Govermet is a idicatio of its strog support of a kowledge-based ecoomy. ote(s)

3 3/5 Practical example Hypothesis A compay udertakes ew R&D activities i 2008 ad icurs the followig expeditures : > Salaries ad social security cotributios for doctors : e500,000 > Salaries ad social security cotributios for other research staff : e3,000,000 > Costs related to subcotractig : ivoiced by compaies withi the group : e1,000,000 ivoiced by public research orgaizatios : e800,000 > Depreciatio of R&D equipmet : e50,000 > Other costs : e30,000 Total direct R&D expeditures : e5,380, Total R&D expeditures e5,380,000 e5,380,000 e5,380, % of salaries ad social security cotributios for doctors* for a period of 24 moths Salaries ad social security cotributios for other research staff Subcotractig costs ivoiced by compaies withi the group 1,000,000 1,000, ,000 3,000,000 3,000,000 3,000,000 1,000,000 1,000,000 1,000, % of subcotractig costs ivoiced by public research orgaizatios Fixed allowace for overhead expeses : 75 % of eligible staff costs, 200 % of doctorate staff costs for a period of 24 moths 1,600,000 1,600,000 1,600,000 3,250,000 3,250,000 2,625,000 Depreciatio of R & D equipmet 50,000 50,000 50,000 Other costs 30,000 30,000 30,000 Total expeditures eligible for research tax credit e9,930,000 e9,930,000 e8,805,000 Rates 50% 40% 30% Amout of research tax credit e4,965,000 e3,972,000 e2,641,500 *Doctor : Perso possessig a research doctorate (PhD) or the equivalet, who has a first log-term work cotract with a compay that has ot reduced the umber of its employees compared with the previous year. ote(s)

4 4/5 Bechmark Bechmark of R&D tax icetives : Frace offers the most favorable R&D tax icetive i OECD A icreasig umber of coutries are itroducig R&D tax icetives. The type of icetive varies from coutry to coutry, but this ofte takes the form of immediate depreciatio of R&D overhead costs, ad tax reductios or allowaces o taxable icome. The followig map shows the estimated amouts of research tax credit or equivalet tax icetives available to a compay, depedig o the various tax icetives o offer i the differet coutries. This compariso does ot take ito cosideratio fiacial support for R&D, other tha tax icetives i the various coutries. Focus o some OECD coutries i 2008 It is assumed that a major compay with a total of 10 millio i R&D expeditures for 2008, icludig costs for R&D persoel, performace ad subcotractig, has determied its expeditures i compliace with each coutry s specific regulatios. It is also assumed that the compay is subject to a 2M corporate tax i 2008 ad is applyig for Research Tax Credit for the first time. Frace uderstads that a coutry s ecoomic positio is directly related to its capacity to ecourage compaies to develop their R & D activities, which is why it offers the most favorable R&D tax icetives i Europe. ote(s) * I Belgium, the Research Tax Credit equals to 13.5% of ivestmet costs oly. ** I Spai, Research Tax Credit caot exceed 45 % of corporate tax.

5 5/5 Typical profile Typical profile of a compay eligible for research tax credit The majority of compaies receivig research tax credit are ot labour-itesive. eighty-six percet have less tha 250 employees. R&D spedig represets a average of 19% of the total expediture icurred by compaies eligible for the research tax credit; 55% of the total research credit was grated to these smaller compaies. Distributio of compaies receivig research tax credit i 2005 accordig to labour-force size (icludig subsidiaries) 1 to to to to 2,000 over 2,000 This tax icetive is a key factor for our choice of projects ad future R&D ivestmets. The research tax credit remais the most favorable meas of fiacial support for a R & D ceter i Frace. The ew method of calculatio appears more favorable ad above all easier to set up, sice there is ow o requiremet to give a accout of work for years N-1 ad N-2. Stéphae Boudaud, Director of Frace, CSR Telecoms. Source : Report o The Research Tax Credit i 2005, Miistry of Research ad Advaced Educatio, May R Poit The 2008 research tax credit is very favorable for SMEs, sice for a large majority, their total R&D expediture is eligible (up to a limit of 100 millio euros per year). For more iformatio cocerig the research tax credit : IFA iformatio sheet : Research tax credit guide 2008 : CONTACT : Araud Soligac (araud.soligac@ivestifrace.org)