The Lamy-Lexel specialist
The Lamy-Lexel specialist
DOING BUSINESS IN FRANCE
With over 65 million residents, France is a leader among European Nations, and the sixth economy in the world.
France is a member of the G-8, the EU, the World Trade Organization and the OECD.
A civil Law country, France has two sets of parallel but independent court systems: an administrative system and a judicial one, plus the Constitutional Council.
To assist a foreign company in doing business in France, a lawyer (“Avocat”) may render legal advice on all matters, draft agreements and contracts, handle business disputes, and plead and defend civil and criminal cases.
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Distributing in France
Companies wishing to use distribution, franchising, and agency agreements need to ensure that the contracts they put into place are in accordance with EU and French Laws.
EU Directive establishes certain minimum standards of protection for commercial agents who sell or purchase goods and services on behalf of their principals, especially concerning the notice to be given to terminate the agency agreement and indemnity provisions.
Foreign companies must also anticipate certain EU and French Competition legislation, and payment delays which are now legally reduced to 30 days, unless parties agree on 60 days (as a maximum).
Intermediaries may take one of these primary forms:
- Distribution
- Agent
- Salaried Representative (employee)
When using direct marketing, companies have to comply with a wide range of EU and French legislation that impacts the direct marketing sector, especially when dealing with private consumers.
The EU has strict Laws governing the protection of personal data and the completeness of the information to provide to consumers prior to purchase.
The e-commerce is a highly regulated sector (e-commerce Directive 2000/31/EC) and a tax prior study of the company activities is recommended (direct corporate taxes, VAT, etc ).
- Like in most countries, product liability and product safety rules establish producer liability for damage caused by a defect in his product, as well as legal warranties and after-sales services requirements,
- Product certification
Protecting your IP/IT
The Laws for the protection of intellectual property are contained in the Intellectual Property Code : Copyrights, trademarks, patents, computer programs, databases may be well protected, keeping in mind that France, like most EU country, has a “first to fill” approach, as compared to the “first to invent” system currently followed in USA.
Trademarks may be protected on a EU wide level, for 10 years (renewable), and Designs for 25 years (renewable).
Patents for inventions have a twenty-year life span, after which they become part of the public domain.
Certificates of utility have a six-year, no-renewable life span.
Software copyrights are valid for 25 years after creation.
In this highly technical sector of IP/IT, the assistance of a specialized Lawyer is of course recommended.
Setting up a Company in France
Whereas you can choose to start your activities in France by entering a simple JV agreement, by contract, you can also easily register a branch, or set up a company, with simplified registration formalities.
Choosing a legal structure will affect the company’s legal status, assets and shareholders liability.
Limited liability companies are most common in France, the most popular forms being SAS, SA and SARL.
You will find, by clicking here, a comparison of these main forms of limited liability companies, the liability of shareholders being limited to their contributions.
French Labor Law
Labor relations are governed by the Labor Code and by industry-specific collective bargaining agreements that reflect the practices of each sector (i.e. services, chemical industry, real estate, etc.).
Labor relations within a company
Labor relations within a given company are based on collective bargaining at specific industry level and at the level of individual companies, with employee and employer representatives playing a key role in ensuring flexibility in the organization of working hours and minimum wages, pay holydays, etc.
A freely negotiated work contract
The most common form of employment contract is an open-ended contract (contrat à durée indéterminée or CDI) that is generally written in French. In principle, parties are free to draft their own contracts and have some liberty with regard to content, which may include clauses specifying targets for compensation, providing for geographical mobility or requiring employees to assume different professional roles, as well as non-compete clauses, clauses covering ownership of inventions and intellectual property rights, etc. Contractual clauses must not be contrary to the French Labor Code or
to the industry-specific collective bargaining agreement that applies to the employer. Please note that non-compete clauses must be financially compensated by the employer.
An employment contract must stipulate the employee’s compensation and job description, along with the working hours and place of work. The contract may also provide for a probationary period, which varies between 2 and 4 months renewable according to the professional category of the employee. Compensation must be at least equal to the minimum wage stipulated by the applicable collective bargaining agreement
Also note that contracts for a fixed term (as opposed to open-ended contract) (“contrat à durée determine or CDD”) are highly regulated and can only be suited for limited purposes.
French labor law allows companies to hire extra staff to meet temporary needs. However, the law restricts the use of temporary employment contracts and temp agency workers to specific situations and generally sets a limit of 18 months on such arrangements. Short-term employment is an effective way for companies to meet their needs, but temporary employment contracts cannot be used on a long-term basis to fill jobs that are related to the company’s regular business.
Employees representation
The employee representation system varies according to the size of the company and concerns three separate institutions:
- In companies with more than 10 employees, staff representatives are elected by the employees to present individual and collective pay claims and to ensure compliance with labor laws.
- A works council must be set up when a company has 50 or more employees. The council is elected for a period of four years by the employees to represent their interests when decisions are made about economic changes in the company (such as company development and changes in work organization) and social and cultural issues.
- Establishments with 50 or more employees must also set up a Joint Safety Committee (CHSCT – Comité d’hygiène, de sécurité et des conditions de travail) to involve the staff in training and other initiatives to prevent occupational risks and improve working conditions.
France has now a favorable environment for international mobility, in terms of residence and work permit, social and tax status.
Company directors
As a general rule, company directors cannot be bound to their company by an employment contract; the articles of incorporation stipulate the terms of their appointment, compensation and termination. However, some directors may sign employment contracts with their companies, subject to certain restrictions (e.g., managing directors of limited companies, chairmen of joint-stock companies and directors holding a minority stake in limited liability companies).
Termination
Termination of employees on economic or personal grounds
Employment contracts can be terminated at the employee’s initiative (resignation) or at the employer’s initiative (dismissal) by usual severance agreement. Employers must provide real and serious reasons for dismissal, and comply with the legally prescribed procedure.
Layoffs enable companies to adapt to market conditions
Layoffs can be individual or collective. Individual employees must be asked to attend a preliminary interview before they are laid off. The head of the company must meet with the works committee and consult with it about collective layoffs.
Individual layoffs and layoffs of two to nine employees can only become effective seven days after the interview date, or 15 days, in the case of an individual layoff of supervisory personnel.
A “job preservation plan” must be drawn up when layoffs of 10 or more employees in a 30-day period have been decides. The plan must explain all action taken to avoid the loss of jobs, such as reorganizing work, job sharing, redeployment of employees inside and outside the company, etc. The plan must also explain the financial terms of the severance package. It is then submitted to the staff representatives and the labor authorities.
The notification period for layoffs under a job preservation plan varies according to the number of employees concerned. Layoffs of up to 100 employees can take place 30 days after the labor authorities have been notified of the layoff plan. The waiting period is 45 days for layoffs of 100 to 249 employees and 60 days for 250 or more employees.
Severance pay is at least one-fifth of the employee’s monthly pay (including bonuses) for each year of service and 2/15 of the employee’s monthly pay for each additional year beyond ten years. This severance pay is awarded to employees who have at least one year of service.
Voluntary departures following job cuts, redeployment or reorganization, and refusals to accept substantial changes to employment contracts are treated as layoffs.
Dismissal on personal grounds
Personal dismissal procedures can be initiated for misconduct on the part of the employee or conduct that is not actually delinquent, but nevertheless harms the company’s interests. A warning is often issued before initiating the dismissal procedure. The employee must be given an opportunity to provide explanations at a preliminary interview, before the dismissal becomes effective. The employer must also comply with the notice period that the employee is entitled to under the law or the relevant collective bargaining agreement. In principle, the notice period is two months for employees with more than two years of service. Employees are not entitled to severance pay in cases of serious misconduct.
Employee profit-sharing
In addition to their wages and salaries, employees and corporate officers may be offered employee profit-sharing and savings schemes that are attractive for workers and provide tax benefits for both employees and employers. The range of schemes available enables companies to set up compensation and benefits systems tailored to their specific needs, including supplementary retirement and family benefits, stock options, corporate and intercompany employees savings programs, etc…
Business Taxes in France
France has signed tax treaties with more than one hundred countries, thus providing foreign investors with outstanding protection against double taxation.
Specific tax incentives s may be offered according to the geographical zone elected in France to set up a business or the business carried on by the Company.
Tax rates on companies
Excluding temporary additional taxes, the following tax rates are applied:
- Standard rate of 33.33%.
- Small businesses pay 15% on the first €38,120 and the standard rate on remaining profits.
- Reduced rate of 15% on total proceeds of industrial property (royalties and capital gains on asset sales), affecting patents, inventions that can be patented and manufacturing processes.
- Capital gains realised on the sale of a qualifying shareholding held for at least two years are 90% tax exempt. As a result such gains are subject to a maximum effective tax rate of 3,33% .
Loss carryforwards
Losses can be carried forward indefinitely under the limit of €1 million plus 60% of the benefit of the year exceeding this threshold, since 2011.. The amount of the losses which exceed this limit can be carried forward indefinitely under the same limit.
It is also possible to deduct the current year’s losses from taxable profit realised the previous year (“carryback”) to have consequently a credit tax which can be refunded by Treasury (under conditions). The amount which can be deducted is capped to the less higher amount between the profit declared and €1.000.000.
Groups of companies: favorable rules for tax consolidation
Under an optional tax consolidation regime, a French parent company can include the income of
French affiliates of which it controls at least 95% of the capital in its taxable income. In that case the
parent company pays the corporation tax for all the companies in the group; This enable groups of companies to offset income and losses from their consolidated French businesses and eliminate intercompany transactions and thus, tax credit that apply to one company of the group can be transferred to the consolidating company that is subject to corporate tax, and as a consequence be deducted from tax to be paid by the group.
Groups may choose this option for a five-year period. It automatically ceases to apply if ownership conditions are no longer met. For financial years as from 31 December 2009, groups in which the parent company owns at least 95% of a French affiliate through one or more companies based in the European Union, Iceland or Norway may also opt for this tax regime.
Corporate tax principles
Taxation based on realized earnings
Any foreign entity doing business for profit in France is liable to pay French tax on its earnings in France. This rule applies regardless of the types of entities,
- subsidiaries
- branches or
- permanent establishments.
Since each individual tax treaty defines the notion of permanent establishment as a fixed place of business or a dependent agent, a specific legal and tax research must be done before setting up the business.
Moreover, an “advanced ruling” procedure (“rescrit”) may secure the project.
Calculation of taxable earnings
Taxable business income is calculated by deducting eligible expenses from turnover.
Turnover includes total income from the outputs of goods and services, including interest rents, royalties and capital gains. Deductible expenses are those related to the company’s business.
Limits on deductions
There are limits on some deductions. For example, the depreciation allowance and deductible lease payments on company cars are capped.
Intercompany transfers
Management expenses, interest charges and royalties paid to associated companies are deductible if they correspond to actual services rendered and the amounts invoiced are in line with market prices.
Favorable depreciation rules
France’s depreciation rules are particularly favorable. Fixed assets are depreciated on a straight-line basis over their expected useful life. In the case of production assets bought new, acceleration multiples ranging from 1.25 to 2.25 may be applied to the straight-line depreciation rates, depending on the normal useful life of the assets concerned.
Allowable provisions
Provisions for impairment of assets are allowed if they can be justified and if they relate to clearly identified claims, inventories, securities. Allowable provisions include provisions for contingencies, work in progress, price increases and vacation pay.
Distribution of profits
Profits are usually distributed by three different ways:
- Transfer or distribution of net profit from branches and subsidiaries, by dividends ;
- Interest on loans and advances granted by the foreign parent company;
- Royalties or management fees.
Exemptions for dividends transferred through holding companies
When holding companies located in France and holding equity interests in French and foreign companies redistribute dividends from companies in which their interests exceed 5% to their foreign shareholders, for at least two years:
- If the holding company’s parent company is located in a Member State of the European Union, dividends received by a French holing company is 95% exempt from tax. The remaining 5% is deemed to constitue expenses and is taxed at the normal corporate income tax rate,
- If the parent company is not located in the European Union, the only tax liability is the withholding tax at the rate determined by the relevant tax treaty (for example 0 % between France and US under conditions).
- If no tax treaty exists, the withholding tax is 50% or 21% for dividends and distributions paid to individuals resident in an EU country, Iceland or Norway.
For interest and royalties paid to foreign countries, tax treaties set out rates which vary from between 0 to 15%.
The amounts invoiced must be justified and comparable to similar the prices for transactions between independent companies, thus close to the market prices.
Value added tax : a neutral tax
Value added tax (VAT) is a tax that consumers pay on the consumption of goods and services.
A French company collects the VAT on its own sales and deduct the amount of VAT that it has paid on purchases of goods and services. If companies have paid more VAT than they have collected, the difference will be refunded to them, thus ensuring that this VAT impact is neutral.
Exports of goods outside European Union are fully exempt from VAT.
France’s standard VAT rate on sales of goods and services is 19.6% but reduced rates also exist. In particular, the rate on food and certain agricultural products is 5.5%.
According to the amending finances law for 2012 of the 14th of March 2012, standard VAT rate will rise by 1.6 % to 21.6%[1]from October 1st, 2012
[1] This rise could be cancelled by the new Government following the French Presidential elections.
Contact : Aurélie DANTZIKIAN (adantzikian@lamy-lexel.Com) or Jérôme SALEUR (jsaleur@lamy-lexel.com)
Disclaimer: This guide presents basic rules applying to business activities in France, and is not invented to be complete. Please contact us should you need an advice on specific and individual case.
