The innovation tax credit (CII)
Your SME claimed an innovation tax credit, and the tax authorities are challenging it? The CII supports expenditure incurred in designing prototypes and pilot installations of new products. Distinct from the research tax credit (CIR), it has its own conditions, its own beneficiaries and its own audits. Rejections most often turn on the notion of a new product and on the eligibility of the expenditure. The firm secures the tax base and defends reassessments.
- Scheme
- Tax credit for the innovation expenditure of SMEs (French Tax Code art. 244 quater B, II, k)
- Who
- Reserved for SMEs within the meaning of EU law
- Purpose
- Design of prototypes or pilot installations of new products
- CIR
- Distinct from the research tax credit (upstream scientific research)
- Risk
- Rejection of the tax base, challenge to the product's novelty
What is the innovation tax credit?
The innovation tax credit (French Tax Code art. 244 quater B, II, k) is an extension of the research tax credit reserved for SMEs within the meaning of EU law. It supports expenditure incurred in the design of prototypes or pilot installations of new products, meaning products not yet available on the market that stand apart from existing products through superior performance.
The CII sits downstream of the CIR: it covers the innovation and product-development phase, not upstream scientific research. Its tax base is capped and its rate is set by statute.
Do not confuse the CII with the CIR
The two schemes are close but distinct:
- CIR: fundamental or applied research and experimental development, open to all companies;
- CII: design of prototypes or pilot installations of new products, reserved for SMEs (French Tax Code art. 244 quater B, II, k);
- The same operation may fall under one or the other depending on its stage: the classification determines the applicable regime, rate and cap.
Classifying an expense as research, innovation or mere commercial development is precisely one of the most frequent grounds of dispute.
Frequent audit focus points
The tax authorities verify the beneficiary's SME status, whether the product is genuinely new (and not a mere improvement or commercial adaptation), the eligibility of the expenditure and its connection to the work, as well as the technical substantiation of the project. Subcontracting requires the use of eligible providers. An insufficient technical file or questionable novelty leads to rejection, together with late-payment interest and, where applicable, surcharges.
Securing and defending
Upstream, the firm helps classify the project (innovation as opposed to research or commercial development), assemble the technical and financial file and secure the tax base. During an audit, the defence focuses on the novelty of the product, the eligibility of the expenditure, SME status and subcontracting, as well as on procedure and penalties. The firm conducts the litigation before the tax courts and, where appropriate, brings in technical expertise.
Innovation tax credit: your questions
What is the difference between the CII and the CIR?
The CIR covers research and experimental development, for all companies. The CII (French Tax Code art. 244 quater B, II, k) covers the design of prototypes or pilot installations of new products, and is reserved for SMEs.
Who can benefit from the CII?
SMEs within the meaning of EU law that incur expenditure to design prototypes or pilot installations of new products, meaning products not yet available on the market and outperforming existing ones.
What is a new product for CII purposes?
A product that stands apart from existing products through superior performance, notably technical, functional or environmental. A mere commercial or cosmetic adaptation is not enough, and this is often at the heart of audits.
Why is my CII being challenged?
Most often because the product's novelty is disputed, certain expenditure is held ineligible, the technical file is insufficient, or questions arise over SME status and subcontracting. Each of these points can be argued.
How can the CII be secured?
By rigorously classifying the project, assembling a solid technical and financial file and documenting the product's novelty. Support from the filing stage onwards greatly reduces the risk of rejection.
A CII under challenge?
An initial confidential exchange to classify the project, secure the tax base and defend your innovation tax credit.
This page presents the innovation tax credit for information purposes only; each matter calls for a specific analysis. References to the French Tax Code as in force at the date of writing.