IP Box: a tax incentive program for intellectual property
Among the many French innovation support programs, there is a tax scheme designed to help you monetize your intellectual property assets:the IP Box.
Previously known as the Patent Box, the new tax regime introduced by the 2019 Finance Act allows innovative companies to benefit from a reduced tax rate on all income generated from the exploitation of patents, industrial designs, or software.
The results of your research and development efforts may qualify for tax benefits! Here’s everything you need to know to take advantage of the IP Box tax credit.
From the Patent Box to the IP Box: Defining a Tax Regime That Supports R&D
Support innovative businesses rather than tax evasion
"Patent boxes" refer to specific tax regimes for intellectual property income. This international tax mechanism has been adopted by many countries, particularly members of the European Union, with the aim of promoting innovation, research, and development within their territories. The term "box" refers to the checkbox on the tax return used to exercise the tax option.
In France, until 2019, the "patent box" took the form of a reduced tax rate of 15% on income associated with a patent application. In line with recommendations from the Organization for Economic Cooperation and Development (OECD), the 2019 tax law amended France’s intellectual property regime to promote the creation of real value within the country and limit tax dumping strategies.
The new IP Box tax regime thus enshrines the so-called “Nexus” approach, which aims to link tax benefits to actual R&D investments. The tax reduction associated with intellectual property income is therefore contingent upon the commitment to incur, within the country, research and development expenses related to the creation of the relevant assets.
To qualify for the IP Box tax benefits, innovative companies must utilize intellectual property assets that are genuinely based on French expertise!
Intellectual property assets covered by the IPBox: a focus on software
This new tax regime for intellectual property has made it possible to establish an even more favorable tax rate, as income from the relevant assets is now taxed at 10% rather than 15%.
In addition, the scope of the Patent Box, which is limited to patents, has been expanded. Eligibility for the IPBox now covers four categories of assets:
- Patents, as well as utility certificates and supplementary protection certificates associated with a patent;
- Plant variety certificates (PVCs), a form of industrial property right that protects any new variety—whether created or discovered—of a plant genus or species;
- Industrial manufacturing processes, covered by patents as essential elements for their implementation;
- Software protected by copyright.
One of the key features of the new intellectual property tax regime is its application to the digital sector and to income derived from the licensing, sublicensing, or sale of software, provided that such software is protected by copyright. Eligible software must therefore be original in nature, meaning it must bear the mark of the intellectual contribution specific to its creators.
Eligible Companies and IP Box Eligibility Criteria
The IP Box is available to all innovative businesses—whether industrial, commercial, agricultural, or professional—regardless of size or industry. This tax regime applies to:
- to businesses subject to income tax that are automatically or by election subject to a cash basis tax system;
- to companies subject tocorporate income tax (CIT).
In addition, to be eligible for the IP Box, companies must:
- hold rights related to one of the four categories of intellectual property listed above: patents, plant variety certificates, industrial manufacturing processes, or copyrighted software;
- generate revenue directly related to these intellectual property assets.
The reduced IP Box tax rate applies to any transfer, licensing, or sublicensing of an eligible asset. To calculate the amount eligible for the IP Box tax regime, R&D expenses related to the creation of a specific intellectual property asset are deducted from the income associated with that asset.
How can you take advantage of tax savings through the IP Box?
An optional plan to choose for each asset
The IP Box regime is referred to as “optional” (rather than automatic) because companies have the choice of whether or not to opt into this advantageous tax regime for each of the assets in question. Taxpayers thus decide whether to apply the IP Box regime to all or part of their intellectual property portfolio.
The selection of this option must be disclosed in the income statement for the fiscal year in which it is chosen. A note attached to the income statement documents the selection of this option, which must, to the extent possible, be specified for each asset. When a single research project has resulted in the creation of multiple intellectual property assets and it is not possible to distinguish the revenue and research expenses associated with each asset, one may opt to group them by product or service, or by product or service family.
What is the Nexus ratio?
The Nexus Ratio is a key component in calculating taxable income subject to a reduced tax rate under the IP Box scheme. It measures the extent to which the company is involved in the development of eligible intellectual property assets.
More specifically, this ratio is calculated by comparing the research and development (R&D) expenses directly related to the creation and development of the eligible asset—whether incurred by the company itself or by unrelated companies—with the total R&D or acquisition expenses associated with that asset.
This ratio thus allows for a correlation between the tax benefit and the company’s actual R&D expenditure for the asset in question. It confirms that the tax benefits are indeed linked to R&D activities carried out within the country, in line with the objectives of the Nexus approach.
BOFIP: Procedures and Required Documents for Qualifying for the IP Box
When a company chooses to apply the IP Box to certain of its assets, it must complete the specific CERFA form and attach it to the income statement for the relevant fiscal year. This form summarizes the details of the calculation of net taxable income at the reduced rate, such as eligible intellectual property assets and their names, net income for the fiscal year before applying the Nexus ratio, and the Nexus ratio itself.
In addition, opting for the IP Box scheme entails certain obligations, including the submission of technical supporting documentation detailing research and development activities, proving the eligibility of assets, and justifying the valuation of intellectual property assets. In the event of an audit, companies that opt for the IP Box must therefore make available to the tax authorities mandatory documentation that substantiates:
- any consolidation of assets and their eligibility for the program;
- the calculation of the net income subject to the reduced rate for each asset and the Nexus ratio;
- R&D activities: these must be explained in a clear, step-by-step manner.
Conclusion: The IP Box—an underutilized driver of competitiveness and economic growth
In France, the IP Box is a little-known tax scheme that is underutilized by companies, which often find it too complex to implement. Indeed, determining which assets are eligible—particularly when it comes to software—can be difficult. Furthermore, it is not easy to quantify the portion of revenue associated with each intellectual property asset and to track the links between that revenue, the various eligible assets, and the associated research and development expenses.
However, the IP Box tax regime effectively values intellectual property assets through corporate tax savings that can be significant. The IP Box provides a tax incentive to invest in research and development, innovation, and the creation and protection of intellectual property rights.
As a driver of competitiveness for innovative companies, the IP Box effectively complements the various tax incentives for R&D and innovation, such as tax exemptions and reductions, including the Research Tax Credit (CIR) and the Innovation Tax Credit (CII).
Dynergie, the firm for your IP Box
Dynergie’s team of experts will guide you every step of the way to help you take full advantage of every tax opportunity arising from your innovation and R&D efforts. Please don’t hesitate to contact us—we believe in your creativity and your ability to drive the innovation ecosystem and the knowledge economy! Let’s work together to define an optimal tax strategy and intellectual property management plan to support your economic growth and the deployment of technological innovations that pave the way for a meaningful future.
Useful links:
> Analysis: Innovative Young Company (IYC) Status
> Green Industries Tax Credit (C3IV): Everything You Need to Know
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Arnaud Germain
With nearly 10 years of experience, Arnaud has specialized in the IPBox, where he has helped his clients save nearly €8 million in corporate income tax.