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Brexit & French Research Tax Credit: what impact for British Technology companies and Public Research Institute?

Publié le 17/12/2018 dans Actualités, Fiscalité

Stefan Brouwers, Senior Manager – 17/12/2018

As incongruous as it may seem, this question illustrates the intricated nature of national laws within the European framework. To answer this question, it is necessary to remember what the French General Tax Code says and the reasons why they have changed.

What’s next for the 142 British Research private-owned companies?

Article 244 quater b of the French Tax Code specifies that expenses incurred for the performance of research and development operations, subcontracted by French Companies to Research Organisation and Accredited by the Research Ministry are eligible for the French Research Tax Credit.

This same article also  specifies that these research organisations must however be established in the European Union or in a Member State of the European Economic Area having concluded an administrative assistance agreement with France to combat tax evasion and avoidance. An accreditation by the French Research Ministry is requested as well.

This important part of the article has its origin in case law which states that the principle of the freedom to provide services precludes a regulation of a member state which reserves the benefit of a research tax credit for research operations carried out on its territory only (European Court of Justice – 10 March 2005).

142 British private organisations were already accredited by the French Research Ministry. This allows French companies that entrust part of their R&D work to the latter to also benefit from a research tax credit. This tax credit is equal to 30% of the amount invoiced for R&D services.

What about the 150 British Public Research Institutions?

A part of R&D expenses is incurred by French companies in carrying out R&D operations entrusted to public research organisations, technical institutes, universities and communities of universities and institutions, experimental stations or farms in the field of approved scientific and technical research. In this context, these expenses will be withheld for twice their amount in the Research Tax Credit calculation, when these public research bodies belong to a EU or a EEA member state.

150 British Public Research Institutions are already identified in the French Research Ministry official list. This allows French companies that entrust part of their R&D work to latter to also benefit from a research tax credit. This tax credit is equal to 60% of the amount invoiced for R&D services.

Therefore, according to the Brexit referendum, as the United Kingdom will leave the European Union, British Research Organization will lose their approval in terms of the French Research Tax Credit.

Could the UK become a member of the EEA? This seems to be a solution to make sure that UK Research Organisation will maintain their French Research Tax Credit Accreditation. However, this remains questionable, at least for the moment.

Indeed, the EEA is only an economic union. The EU is certainly an economic union, but it is also a customs union. The successive proposals of Theresa May’s government or of Michel Barnier, the European negotiator, do not correspond at all to either one. The main stumbling blocks between the United Kingdom and the European Union were the free movement of people (as UK wants to regain control of immigration on its territory) and the customs union (as it is necessary to avoid the re-establishment of a border within Ireland, but it is incompatible with the signing of new trade agreements between the UK and the rest of the world).

The very last solution approved on 24/11/2018 by EU leaders, so-called “Backstop” plan, “safety net” plan or “Irish Insurance” consists in defining the exit modalities and booking a transitional period to focus on the negotiation on a new trade agreement and on the future relationship between the two Irelands.

The transitional period should end on 31 December 2020 but could be renewed once, till end of 2022.

It’s now sure that after 29th of March 2019, as UK will no longer be a member of European Union,  their Research organisations will no longer be eligible for the French Research Tax Credit.

Without the 30% refund on R&D services for French Companies, British Research Organisations will be far less competitive on the French Market.

It’s highly probable that, from the beginning of 2021 or 2023, UK will not join the EEA. Indeed, being part of EEA should commit the UK to guarantee the free movement of persons and to recognize the authority of the European Court of Justice. These are the kind of requirements that are not acceptable for pro-brexiters.

What about the transitional period from March 30, 2019 to December 31, 2020 (extendable once till December 31, 2022)?

The transitional period, defined in the “backstop” plan requires to respect, until the end of the period, the four freedoms (including the free traffic of goods and peoples) and the authority of the European Court of Justice in the interpretation of the European Law.

Hence, it could be possible to propose a « temporary » membership of the UK in the EEA. That way, British Research Organisation would have enough time to be prepared to further competition in the R&D services market.