Bienvenue en France: Compilation to set-up a business

We, at Primexis, are often approached by international companies and groups wanting to expand their business activity and presence into France. They turn to Primexis’ department of International Business Services for advice on navigating the French marketing system and its business environment.

Our years of experience has given us one rule to live by “each company must choose their own path in entering the French market based on their own unique needs and goals…”.  What we can do as a recognized and trusted partner is to fully explain the “pros” and “cons” of each possible option for your company as it begins and grows its business.

In that spirit we have compiled this document for our clients to help them consider how best to set-up their business activities and establish themselves in France.

Whichever legal and organizational model you choose for your company. Primexis is ready to advise, guide and assist your entry into France!

Bienvenue en France!

Legal…

Task number 1: Know the tax treaties that may exist with France    and the country where your company is registered

“When you are a resident of France and receive foreign-source income, you must refer to the tax treaty executed by France with the country in which the income originates, to determine:

• if the income is taxable or exempt in France
• whether the income has to be declared in France or not
• in the event that the income is taxable in France, whether there are arrangements to avoid possible double taxation of this foreign-source income (income taxed in both the source country and France)

 

The tax treaties between France and the rest of the world may be consulted online at www.impots.gouv.fr International section > A savoir.

If there is no tax treaty between France and the country in which you receive the income, then this income is taxed in France as a matter of principle.

Consulting the treaty:

• If the treaty stipulates that the income is tax-exempt in France, it will specify whether the income has be declared in France or not.
  Declaring income that is tax-exempt under the treaty in France will not cause this income to be taxed. This income is nevertheless factored in to calculate the amount of income tax owed on French-source income (taux effectif method).
• If the treaty stipulates that the income is taxable in France, it will specify, based on the type of income, how the double taxation should be eliminated if this income is also taxable in the source country. There are two elimination methods: by applying a tax credit equal to the tax paid abroad or by applying a tax credit equal to the French tax relating to the foreign-source income.

 Administrative

 Task number 2: Getting officially registered as a business in France

You’re working on a business project and you’re asked for your SIRET or SIREN number, e.g. for quotes, for advertising, for partnerships etc. So what is it?

A SIREN number is your unique French business identification number. This 9 digit number will be requested by the French administration when dealing with you, e.g. URSSAF, Net-Entreprises, Impôt, etc. It is proof that you are a fully registered French business, listed on the national business directory – « répertoire national des entreprises ». Your SIREN number will be issued by INSEE (national institute of statistics), when you register your business.

Your SIRET number will be issued once you have registered your business with the Chambre de Commerce (RCS) for trade, « Chambre des Metiers » for crafts and manual work or with URSSAF for intellectual services such as translator or website designer. You will receive an Extrait KBIS usually within two weeks of your registration with your SIRET number. What is the difference between a SIREN number and a SIRET number? A SIRET is a 14 digit number referring to your business location (SIREN + 5 digits).

SIRET Numbers can give you valuable information

Besides officially registering your company with the National Business Directory, SIRET numbers allow you to find out more about other companies operating in your market area.

If you want to find out more about your competitors, you simply write down their SIREN number or name, then have a look at www.societe.com. You will find out when they created their business, number of employees, types of activity. For limited companies, you will also have access to their financial results, e.g. turnover, profit or loss, etc.

 

OK…and now?

 Can we begin without the administrative cost of opening an office? 

The RFO Option « Representative of Foreign Office  »

Perhaps you are just at the stage of exploring the French market opportunities, or the number of employees you are thinking of hiring does not merit opening an office or branch/subsidiary in France.

Are you uncertain you want to get your operations fully up and running immediately?  Without any experience of the French market, are you uncertain how your business will function within it? Is your business a « good fit » for the French market? Will it succeed?  If any of these apply to you the RFO option may be your best choice.

The most preliminary step is having an employee(s) working in France with Representative of a foreign company status (RFE). There is no office or fixed establishment.

Pros

• The RFE status allows a foreign company to recruit local representatives and begin to have a local presence in the French market at its own, and if need be, at a slower pace.
• It’s a good opportunity for the employer to approach the French market in order to understand the strategic economic and cultural factors and conditions.
• This is the ideal solution for becoming more familiar with the French market, testing the business impact of new products while maintaining a smaller budget and avoiding paying certain taxes.
• The RFE must be hired by the mother company and he/she can carry out (primarily) prospecting and advertising activities.

 

Administrative Requirements

The employer must meet several social and tax obligations related to the activity of the RFE in France (non-exhaustive list):

• Registration of the entity in the National Center of the Foreign Firms (Centre National des Firmes Etrangères) ;
• Preliminary statements for the hiring of the employee(s) ;
• The nominative social declaration(s) (ie. Déclaration Sociale Nominative) ;
• Payment of any obligatory social contributions to the relevant French social bodies ;
• Declaration and payment related to withholding tax if applicable to the non-resident employee ;
• The company must not hold a separate accounting for the French activity. Indeed, the expenses related to the activity in France should be integrated within the accounts of the corporations’ country of residence.

Cons

The representative – employee of the foreign firm (RFE) – doesn’t have the right to exercise any commercial activity on behalf of the foreign company (except in specific cases provided for in the international tax convention applicable). For instance, the representative is not legally authorized to sign commercial contracts on behalf of the company.

 

To sum up most succinctly, the representatives of the foreign companies, RFEs, can meet the needs of foreign firms that would like to hire employees in France, while limiting their business activity in France.

 

Any other options?

If you are interested in the idea of expanding into France, but you are not sure about the relevant steps to take, testing the market with a liaison office may also be a good solution to start with. As with the representative of the foreign company, the liaison office exercises prospecting and advertising activities, but offers additional advantages.

Ready to move to a fixed place of work: Liaison Office

Unlike the RFO option, the company with a Liaison Office has the possibility to be identified in France with not only state social bodies, but also other third parties. Being identified towards prospective clients allows for a greater potential of contact with them as well. However, the liaison office does not have a separate legal personality distinct from that of the parent company.

Pros

The Liaison Office has the benefits of a fixed place of work, with prescribed non-commercial business activities, that frees it from financial obligations that incorporated businesses fall under, notably:

• No corporate tax
• No VAT
• No CET (property tax)

In addition :

• Processing payroll could be less complicated as the liaison office might process the payment of social expenses on the company’s behalf.
• The parent company can open accounts at utilities (such an Internet providers, cells phones) to directly pay these expenses incurred by employees in France.
• The parent company can reclaim VAT on French expenses.
• The parent company can sign a lease agreement in France. This may be key if staff need to work in the same location to be efficient.

Cons

 The registration and establishment of the company requires administrative processing.

• The foreign company needs to have an official address at a registered office and to open a bank account in France.
• The foreign company must comply with French labour law.
• The liaison office is subject to local housing-tax. However, it should be noted that the liaison office does not own property in its own right.
• Commercial activities are not allowed in principle. If the French office engages in commercial activity and in the event of a tax inspection, it is likely to be qualified as a permanent establishment by the French tax authorities. Under such circumstances, the French office would be subject to business taxes (VAT, income tax…) under the same conditions as French companies.

To sum up, the liaison office can be an interesting solution for foreign companies that are seeking to establish themselves in France and test the French market. However, the liaison office is not meant to be a lasting situation. After five years of existence, the closing of the liaison office should be considered in order to evolve towards a permanent establishment in France.

How to choose between the two options?

• The RFE option will suit your company if you do not anticipate a significant increase in your business in France, and your employee(s) can work at home.
• The Liaison Office most probably makes sense if your company wants to open a branch in a foreseeable future (converting from a liaison office to a branch is relatively simple).
• Having a liaison office may also increase the likelihood of finding potential clients. This may especially be true with some very large accounts and/or public ones.

Ready for Business : Opening a Branch

Perhaps you are ready to expand into France by opening a permanent establishment, but you don’t want to risk losing control of your marketing policy? The partially independent local Branch may be your choice.

 What does a Branch look like?

• Legal status

From a legal point of view, the branch is not a separate legal entity distinct from that of the parent company, or the individual who owns it. The branch does not own material goods. However, branches do manage business assets distinct from that of their parent company.

Branches must meet several requirements in order to be recognized and approved:

• Statutes have to be made and signed and notarized by all the partners.
• A registration application has be submitted to the Commercial Court registry within which the French branch is located. (application is accompanied by the stipulated supporting documents)

• Tax status

Despite not having an individual legal personality, branches are recognized by French tax authorities. Therefore, they are subjected to all the business taxes (corporate income tax, value added tax…).

However, depending on the tax treaty that may exist between France and the country where the parent company is located, the foreign law may be applicable.

Salaries of employees residing in France are subject to withholding tax.  Employees not who are not French residents also have their salaries subject to withholding tax,  unless stipulated otherwise in an existing tax treaty.

• Employees

Apart from specific cases, Branch employees are subject to most French social contributions, and are insured under the French social security plan.

Except as otherwise stipulated in the Convention on Social Security that may exist between France and the employees’ countries where they are nationals, employees are subject to French social security contributions. However they remain covered under their home country’s social security scheme.

French employees must be declared to the URSSAF (French Social Security) body through a preliminary statement. In addition, foreign workers working in France must be declared to the French government agency DIRECCTE.

 

• Legal Representative

The parent company has to appoint a French manager that exercises its mandate on its behalf. The French manager is not a legal representative, as the branch does not have its own legal identity.

• The legal representative of the parent company is personally and professionally liable for any wrongful acts committed in the performance of his mandate. He is responsible for the management of the branch and has necessarily delegated authority to allow his local representative to deal with third parties. In practice, the French manager’s personal and professional liability depends on his degree of autonomy in the exercise of his mandate.

• Parent company liability

The parent company assumes the complete responsibility for the risks related to the French Branch (legal, financial, fiscal, commercial…) as the Branch does not have an individual legal personality.

• Accounting requirements

There are no French accounting requirements. The French operations are integrated within the accounts of the parent company.

However, given the taxation in France of the Branch’s revenues, it’s recommended to hold a separate accounting for the Branch.

Moreover, in the event of tax inspection, the Branch shall provide to the tax auditor the FEC (eg. Fichier des Ecritures Comptables), which is a computerized accounting entries file issued by the company’s accounting software in a predefined data format.

« Pros »

• Enhanced market presence
• Better knowledge of the market and customer needs
• Right to engage in trade and sign business contracts
• Limited overheads costs in comparison with the subsidiary model
• Establishment of a trusting relationship with customers and the local authorities
• A way to bypass certain administrative barriers.

But importantly:

• Retaining control of marketing and business policies
• All profits go directly to the parent company

« Cons»

• Fairly high level of administrative red tape
• Heavier financial investment.

And importantly:

• Commercial risks are entirely assumed by the parent company.
• The parent company is liable for all the actions carried out by the Branch on its behalf.

Firstly, what is the main difference between a European Branch and a European Subsidiary?

As we described earlier:

A Branch is a more independent entity that conducts business in its own name but still acts on behalf of the company. A Branch is not legally separate from the foreign parent company and so is also subject to the local laws governing the foreign parent company. Despite not being autonomous, the Branch conducts business independently and so must be listed in the commercial register of the country it resides in. It is a requirement that the business name of the Branch must include the business name of the foreign parent company for identification.

Whereas:

A Subsidiary is an incorporated entity created in France in accordance with one of the national business legal forms (SAS and SARL among others). The capital of the Subsidiary is either fully owned by the foreign parent company (making it a Single Member Company recognized in all EU countries) or controlled by a company in collaboration with minority local partners (therefore making it a Joint Subsidiary).

 

Why would I make the change from a Branch to a Subsidiary?

 Subsidiaries

Pros

• Subsidiaries are legally independent from their foreign parent company. This makes it easier to conduct businesses as the Subsidiary is an independent legal entity.
• As an independent legal entity and a Subsidiary or Limited Liability Company, it usually gives a business more credibility with third parties such as banks, service providers, and partners.
• The Subsidiary offers a somewhat greater measure of flexibility in the sense that, as opposed to the Branch office, it may issue or transfer shares to third parties, i.e. partners, investors, venture capitalists, managers, employees or other group companies within the framework of a reorganization or joint venture. It may also issue bonds or shares to the public and obtain quotation on a stock exchange.
• If you are a multinational company and you have a different legal structure and/or operating culture to France, you can form a subsidiary to better adapt with a management style that is a better fit. (such as linking the pay of the executives to the performance of their company)
• When a company wants to diversify its corporate identity without compromising its main identity, it could form subsidiary – each with its own identity.

 

Cons

• A subsidiary absolutely represents a higher level of initial investment, both in administrative costs and physical space.
• Subsidiaries must go through the legal registration procedures in France as a normal Limited Liability Company would.
• The parent company may not have full access to the cash flows of the subsidiary, depending on the management structure and on the amount of control it exercises on the subsidiary.
• The parent company may need to guarantee the loans of its subsidiaries, thereby directly exposing itself to the liabilities of its subsidiaries.
• Depending on the chosen legal structure for the Subsidiary, the relevant statutory provisions must be observed: entry in the commercial register, rules on minimum capital, business registration, appointment of a statutory auditor…
• As financial records are maintained separately, so transactions can occur within the corporate family without the knowledge of the « other (s) », since each business is operationally independent.

 

 Ready to Set-up a Subsidiary …How do I begin?

There are several legal ways of engaging in commercial activities with a Subsidiary: setting up a SARL (ie. Limited liabillity company) or SAS (eg.  Simplified joint-stock company) among other possible legal forms (but among the most used in France).

Among the various forms of commercial companies in France, the SARL is one of the most popular types of entities.

Easy to set up and operate, the SARL is mainly used for small to medium sized businesses.

 

Management

SARL is a trade joint-stock company that is managed by one or more managing directors (e.g. Gérant or Gérance). The managing director, who has to be a natural person, can be appointed among or outside the partners of the company,

The managing director is able to cumulate his duties with an employment contract if specific conditions are met (separate functions, subordinate relationship).

The nomination or revocation of the managing director can be made through a decision of the partners representing more than half of the company shares (punitive damages if his revocation is taken without reasonable cause).

 

Share Capital and Contributions

No minimum capital is required to set up the SARL. The amount of share capital is fixed by the partners in the articles of association. At least one-fifth of the share capital has to be paid up at the time of the incorporation (the balance should be paid up within 5 years). Furthermore, there are restrictions for issuing bonds.

Three kind of contributions are possible: contributions in-kind, cash contributions, and industry contribution.

What does Industry contribution mean?

• The future partner gives the company the benefit of his activity, work and working knowledge. Industry contribution does not contribute to the social capital formation, however it gives rise to the allocation of shares (benefit sharing and participation in collective decision-making).

 

Partners

The number of partners should be between 2 and 100 (natural or legal persons). However, a sole partner is possible through the EURL form (e.g. One-person limited liability undertakings).

Partners shall meet at least once each year during an Ordinary General Meeting to approve the annual accounts and audit the contracts.

Partners’ liability is limited to their contributions (except for civil and criminal liability).

Finally, quorums for meetings and blocking minorities of shares are covered under French law.

Statutory auditors

The appointment of a statutory auditor is necessary if at least two of the following three thresholds are exceeded:

• Turnover (excluding tax) of more than 8 M€ ;
• Balance sheet total of more than 4 M€ ;
• Staff of over 50 employees.

Tax regime

SARLs are normally subjected to corporate income tax (CIT). However, the SARL can opt for the personal income tax provided that one of the two following conditions are met:

• The company has been in existence for less than 5 years and employs less than 50 people ;
• Partners are members of the same family (family business).

Moreover, EURL are normally subjected to personal income tax but can opt for the CIT (irrevocable option).

The SAS is also one of the most popular types of legal entities for companies.

The SAS form is mainly used for small to medium sized businesses.

The aim of the Simplified Joint Stock Company (SAS) is to offer investors a structure that combines operational flexibility and great freedom for shareholders in the company’s organisation. Established in the 1990s to remedy the disadvantages of the Société Anonyme (SA), legislators wanted a new corporate form offering investors a form of company organisation, most of whose operating rules would be based on the agreement of the parties, while the SA’s regulations would remain applicable for the rest. This is a form of company that was created in response to investors wishing to create a Joint Stock Company (JSC) but without undergoing the cumbersome formalities required therein.

The major assets of the SAS:

• One-shareholder minimum with no restriction to the maximum number of shareholders;
• Flexible statutory arrangements for the relations between the shareholders, the management, the organization and the transfer of business assets.

 

Management

SAS is a trade joint-stock company that is managed by one or more chairmen (natural or legal persons). The chairman has powers of representation (with regard to third parties) and management.

Moreover, the statutes may provide:

• For an organization presided over by the chairman ;
• That the company is represented by an additional individual person (director-general, deputy director-general…) and/or corporate bodies (board of directors, management committee, supervisory committee…). The powers and rules of operation (quorum, majorities…) of such individual persons and corporate bodies are freely determined by the articles of association.

Furthermore, the chairman is able to cumulate his duties with an employment contract if specific conditions are met (separate functions, subordinate relationship).

The rules concerning the nomination or revocation of the chairman are freely determined by applicable statutes.

 

Share Capital and Contributions

No minimum capital is required to set up the SAS. The amount of share capital is fixed by the shareholders in the articles of association. Moreover, at least half of the share capital has to be paid up at the time of the incorporation (the balance should be paid up within 5 years). Furthermore, there are restrictions for issuing bonds.

Three kind of contributions are possible: contributions in-kind, cash contributions, and industry contribution.

Shareholders

The SAS can have just one shareholder, natural or legal person: SASU. Moreover, there are no restrictions to the maximum number of shareholders. Shareholders’ liability is limited to their contributions (except for the civil and criminal liability).

Furthermore, the French Commercial Code requires that certain decisions must necessarily be taken at the General Meeting of the shareholders:

• Approval of the annual accounts and allocation of profits ;
• Mergers, spin-offs and partial transfer of assets governed by the legal regime for spin-offs ;
• Change in share capital (increase, reduction, amortization) ;
• Approval of regulated agreements;
• Dissolution of the company ;
• Transformation of the company into another legal structure ;
• Decisions for which the French law requires that they be taken unanimously by the shareholders.

Apart from the cases cited above, a General Meeting of the shareholders is not required for decision-making.

Finally, rules concerning quorums for meetings and blocking minorities of shares are freely determined by applicable statutes.

Transfer of business assets

The registration fees relating to transfer of business assets are equal to 0.1% of the transfer price and shall be paid by the purchaser.

Statutory auditors

The appointment of a statutory auditor is necessary if at least two of the following three thresholds are exceeded:

• Turnover (excluding tax) of more than 8 M€ ;
• Balance sheet total of more than 4 M€ ;
• Staff of over 50 employees.

Moreover, the appointment of a statutory auditor is also necessary if the SAS controls or is controlled by one or more corporations within the meaning of the article L.233-16 of the French Commercial Code.

Tax regime

SASs are normally subjected to corporate income tax (CIT). However, the SAS can opt for the personal income tax provided that the company has been in existence for less than 5 years and employs less than 50 people.

Here’s a quick side by side comparison on key points:

Company Director(s):

S.A.R.L.: is managed by one or more managing directors (natural persons).
S.A.S.: is managed by a President (natural or legal person). Depending on statutory requirements, the President can be assisted by other persons assuming management duties.

 

Corporate Governance:

S.A.R.L.: is governed by the managing director and the partners. The

partners shall meet at least once each year during an Ordinary General Meeting to approve the annual accounts and audit the contracts. Quorums for meetings and blocking minorities of shares are covered under French law.

S.A.S.: can be governed by the President and several entities that are defined in accordance with statutory requirements such as a management board, a supervisory committee, managing directors…

Moreover, certain decisions must necessarily be taken by the shareholders.

Statutory auditor:

S.A.R.L. and S.A.S: when two of three thresholds are met at the end of a fiscal year (€4.000.000 of total assets, €8.000.000 of turnover, 50 employees), an auditor must be appointed.

Moreover, the appointment of a statutory auditor is also necessary if the SAS controls or is controlled by one or more companies.

Capital shares payment:

S.A.R.L.: requires 20% of the incorporation capital (the starting capital), the other 80% can be paid during the following 5 years.
S.A.S.: requires 50% of the incorporation capital (the starting capital), the other 50% can be paid during the following 5 years.

 

Corporate finance:

S.A.R.L.: can issue bonds only when reaching the above thresholds and issued three balance sheets approved by the shareholders. The S.A.R.L. cannot issue preferred shares, warrants or convertible bonds.
S.A.S.: can issue bonds and a commissioner needs to verify its assets and liabilities before two balance sheets have been approved by the shareholders. The S.A.S. can also issue preferred shares, warrants, convertible bonds.

Shareholders rights and obligations:

S.A.R.L.: shareholders relationship is more regulated and mandatory with low room for customization.
S.A.S.: based on mandatory provisions, can be freely determined in the by-laws.

Transfer of shares:
S.A.R.L.: mandatory approval by the remaining shareholders via a super-majority vote as per law.
S.A.S.: the by-laws can state whether the shares can be freely transferred or require approval by the President, the shareholders or any relevant corporate body.