The Innovation Tax Credit (CII): An Overview and Eligibility Requirements
The Innovation Tax Credit (CII) is a tax incentive designed to support French small and medium-sized enterprises in their innovation efforts. This guide explores how the CII helps reduce the costs of developing new products and facilitates investment in prototypes and pilot facilities, while detailing the eligibility criteria and administrative procedures required to qualify for it.
What is the Innovation Tax Credit (CII)?
Definition and Objectives
The Innovation Tax Credit is an extension of the Research Tax Credit designed for small and medium-sized enterprises (SMEs) that bring new products to market that outperform existing products. This program provides a tax credit calculated based on the expenses incurred by these companies for the design and production of prototypes and/or pilot facilities.
The purpose of this tax credit is to encourage businesses that form the backbone of the French economy to remain competitive by innovating and offering new, cutting-edge products.
The measure will remain in effect until December 31, 2024, and could be significantly revised in the next budget bill.
What is innovation?
The standard reference for defining innovation is the Oslo Manual, published by the OECD.
Innovation is defined as bringing new products to market that offer a significant improvement in one of the following areas:
- Ergonomics (easier to use, more comfortable, etc.)
- Technical superiority (a product that is technically superior: lighter, smaller, etc.)
- Features (additional features have been added)
- Eco-design (reducing the product's life-cycle impact)
The tax authorities use these four criteria to assess the innovative nature of the products in the cases they review.
Benefits of the CII for Businesses and the Economy
The CII is a self-assessed tax credit. It therefore allows taxpayers to claim a credit for expenses already incurred. This tax credit can be secured through a tax ruling.
By recognizing the costs incurred in developing new products, this program encourages companies to continue these investments so they can keep bringing cutting-edge, innovative products to market.
CII or CIR (Research Tax Credit)?
What is the CIR?
The Research Tax Credit (CIR) is a tax incentive program that allows companies to claim tax credits based on expenses related to research activities. These research activities must lead to the generation of new knowledge, with the aim of overcome technological or scientific barriers.
Who is eligible for the CIR?
All companies that conduct research are eligible for the CIR, regardless of their industry or size.
Differences between the CIR and the CII
Although the CII is an extension of the CIR, there are a few differences between the main program and its extension.
The reason for these differences is that the CII is market-oriented, whereas the CIR is focused on science and knowledge.
- Unlike the research tax credit, which is available to all businesses, the innovation tax credit is available only to small and medium-sized enterprises.
- The Research Tax Credit requires going beyond the current state of the art (research), while the Innovation Tax Credit requires going beyond the current state of the market. Therefore, research projects will be submitted under the CIR, and product prototypes under the CII.
- All staff members may be recognized under the CII, provided their involvement is justified within the innovation process
- Operating expenses (since 2023), as well as expenses related to technology monitoring and standardization, are not eligible for the innovation tax credit.
Why is the CII essential for businesses?
Fostering innovation
A crucial step in new product development is the transition from a technological concept validated in a laboratory setting to a functional, market-ready product under real-world conditions. This transition is financially costly because it receives little support from public funding (which is intended for laboratory research) or private investment (which tends to focus on profitable companies). The innovation tax credit helps address this gap and thusencourages the market launch of innovative products.
Encourage investment by small and medium-sized enterprises
For small and medium-sized enterprises (SMEs), the innovation tax credit represents a valuable opportunity to boost their capacity to invest in innovation. By offering tax relief on research and development expenses, this program reduces the financial cost associated with innovation, allowing SMEs to devote more resources to exploring new avenues and implementing innovative projects, thereby contributing to their growth and competitiveness in the market.
SMEs that do not pay corporate income tax (CIT) or whose tax credit (CII) exceeds their CIT liability may request an immediate refund of the credit. This allows these companies to benefit from a direct cash infusion, particularly at the start of a project when profits (and thus CIT) are lower and cash flow needs are high.
Who is eligible for the CII?
SMEs as defined by the European Union (fewer than 250 employees as of the balance sheet date, with annual revenue not exceeding €50 million or total assets not exceeding €43 million) that are subject to corporate income tax or income tax (even if they do not pay any) are eligible for the Innovation Tax Credit. They must also not be in financial difficulty. This scheme is in fact consistent with European Union Regulation No. 651/2014, which considers the CII to be state aid for innovation, and such aid cannot be used to enable a company in financial difficulty to overcome its financial challenges.
Expenses eligible for the CII
Eligible expenses are those incurred during a calendar year, regardless of the fiscal year-end, for transactions taking place within the European Union.
- Personnel costs: any person involved in the design or manufacture of prototypes, regardless of their level of qualification.
- Equipment costs: Fixed assets listed in the company’s depreciation schedule, allocated on a pro rata basis according to their use in the design of prototypes and pilot plants.
- Intellectual property expenses: depreciation charges for patents, costs associated with filing and maintaining patents, plant variety certificates, and designs, as well as patent defense costs, are eligible for the CII.
- Expenses for subcontracting services provided by accredited firms (engineering and design firms, design agencies, industrial technical centers, etc.). This accreditation is obtained from the Ministry of Industry, or from the Ministry of Higher Education and Research if the accreditation application is submitted in conjunction with an application for CIR accreditation.
- Government grants and subsidies received for projects eligible for the tax credit must be deducted from the tax base.
What are the requirements for obtaining an innovation tax credit?
Key Steps to Claim the Innovation Tax Credit
- Check whether your business is eligible for the CII (SMEs that are not in financial difficulty according to European regulations),
- Determine which projects are eligible,
- Calculate the base for eligible expenses and the corresponding tax credit amount,
- Report these amounts.
Calculation of the tax credit and applicable rates
For small and medium-sized businesses located in mainland France, the credit rate for the innovation tax credit is 20%. This applies to eligible expenses incurred on or after January 1, 2025.
For small and medium-sized enterprises in the overseas departments, this rate is 60%. It is 35% for medium-sized enterprises based in Corsica, and 40% for small Corsican enterprises.
Reimbursement Caps and Limits in France
Thus, in mainland France, CII-eligible expenses are capped at €400,000, resulting in a maximum CII credit of €80,000 (€400,000 × 20%). The calculation is the same for companies in Corsica and the overseas territories, with the only difference being the rates mentioned above.
Eligible businesses may request an immediate refund. If such a request is not made immediately, the portion of the tax credit not offset against corporate income tax is refundable after three years.
Administrative procedures: CERFA 2069-A-SD
The administrative procedures have been simplified. This involves filing the CERFA 2069-A-SD form online, which is the same form used for the CIR. To complete this process online, you must contact your local Corporate Tax Office (SIE) to obtain an access code for the online filing platform.
The request for immediate reimbursement must be submitted using form CERFA 2573-SD.
Case Follow-Up
As with any tax measure, the CII may be subject to audit by the tax authorities.
In the event of an audit, if the innovative nature of the project is called into question, an expert may be appointed by the Directorate General for Enterprise (DGE) to review the supporting documentation for the tax credit application. In the case of a simultaneous application for the CIR and CII, each part of the application will be processed by an expert from the relevant ministry (MESR for the CIR, DGE for the CII).
Option for a ruling
Companies may request a formal ruling from the tax authorities regarding the eligibility of their activities for the innovation tax credit through the tax ruling procedure. The ruling (with a lack of response within three months constituting tacit approval) is binding on the tax authorities and limits their right to reassess the tax liability.
CII Certification
What is CII certification?
The Innovation Tax Credit (CII) is a certification granted by the government to certain companies. It is intended for companies that design and build prototypes or pilot facilities on behalf of their clients.
There are two ways to obtain this certification:
- The company already holds CIR certification or is applying for it at the same time as applying for CII certification. Certification is granted upon submission of an application to the Ministry of Higher Education and Research.
- The company wishes to obtain only CII certification. Certification is granted upon submission of an application to the General Directorate of Enterprises, which is part of the Ministry of Industry.
In both cases, the application must outline the company’s technical staff and describe an innovation project to which the company has contributed.
Obtaining this certification allows the certified company’s clients to include the expenses incurred with the company in the base for their CII.
How do I obtain CII certification?
To obtain CII certification, several steps are required:
- Preparing the application package: It must include a description of your technical staff and a research or innovation project to which your company has contributed over the past two years.
- Submitting the application: You can submit your application for approval online through the appropriate contact person based on your company’s situation. If you are unable to submit the application online, you may submit it by mail (which takes longer).
- Application Follow-Up: Once your application has been submitted, it is important to monitor its progress. If additional information is requested, you must respond promptly to avoid any delays in obtaining approval.
Please note that CII certification is required for your client to claim the innovation tax credit for the innovation-related work they have commissioned from you.
Dynergie, a CII-certified consulting firm
Dynergie is a CIR/CII consulting firm listed with the Business Mediation Service. Our experts will assist you in obtaining your CII through:
- A comprehensive definition of eligible work and expenses
- Improving your internal processes (administrative, technical, financial, etc.)
- Calculating the tax credit
- Gathering all necessary supporting documents while strictly adhering to applicable standards and procedures.
Useful links:
> Spotlight on the 2024 Budget Act: C3IV, JEI, and Other Measures
> CIR Reform: An Analysis of Upcoming Changes
> The reform of the JEI status in the 2024 Finance Act: what remains of the Midy report?
> Analysis: Innovative Young Company (IYC) Status
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Damien Villiers-Moriamé
I assist innovative companies of all sizes in securing public funding (CIR-CII, JEI, bpifrance, CIN, etc.). My technical expertise spans a variety of fields, including IoT, AI, e-learning, embedded systems, and service robotics. My daily work involves supporting entrepreneurs through key and critical stages of their projects (developing a financing plan, creating a business plan, and validating the business model).