Corporate business law: The French perspective
This paper seeks to provide an overview of the legal requirements for business set up in a French market by a foreign Firm partnering with a French firm. The legal guidelines that are applicable to different forms of collaborations between internal firms will also be spelt out. There are a number of law requirements that both the local company and the foreign firm should comply with before commencing business. Registration is a statutory requirement by the French law (Appia, 2010 p.4). Once the registration process is complete and certificate obtained, a licence to operate in a given location should be sought from local authority. The first section of this paper will discuss the information needed by both Finish and French firms in drawing up a concession contract. The second section will look at the possible legal and structural choices and their risks.
Requirements for a concession contract between SXL Company and a Finnish Society
Doing business in France just like all other countries in the world is guided by company laws that require all legal and structural procedures be followed in the formation of a company. It is in this regard that a good understanding of all necessary legal requirements is a paramount before a French company can engage in any form foreign partnership. France does not treat foreign companies differently in formation processes (Appia, 2010 p.4). All processes are therefore similar to all companies apart from few instances which I will recommend SXL Company to consider when negotiating with Finnish firm.
Setting up business in France
SXL should prepare a list of requirements that are necessary for the finish society to enter in France manufacturing industry. SXL will avail information on Seeking business address and premises agreement for the firm’s registered office and acquisition of properties including real estate. The mode of legal business structure that will be settled upon between the two firms should discussed in detail in the first meeting so that subsequent meetings are focused on issues regarding other aspects of company formation as outlined below.
The second most important step will be to draft the company articles which will include definition of business, address, directors among others and registering them at Tax Office (Appia, 2010 p.5). A system of appointing the company officers and employees will be also be drafted. The visiting president of Finish society should be explained the procedures of forming the cooperation agreement. The share capital structure is a very important legal requirement in France and SXL will need to discuss it in detail with the Finnish company before selecting type of business cooperation to adopt. The firm to be formed will need to publish the notification of establishment in a legal gazette (Appia, 2010 p.5).
According to Appia (2010)Documents should be obtained for proper registration such as business creation certificate that allows procedures to continue and finally a registration certificate will be obtained after successful setting up of company. (p. 8) Subsequently, SXL company can then request for legal documents from the Finish company regarding its company articles , address, registration, police clearance among others. Other details of how the company internal affairs will be conducted should be done by a lawyer as spelt out in company law.
French law allows for business partnerships such as creation of a joint venture. However, large concessions may require prior authorization by France with intention to ensure that market dominance by a single company will not interfere with fair competition. (Appia, 2010 p.8) The SXL company should avail all information regarding the purchase of property by an international company which include full ownerships of industrial and commercial land and buildings, singing a property finance lease, construction of commercial and industrial building and acquiring premises by way of a real estate partnership.
The rules relating to manufacturing plants will have to be complied with through proper planning since French law is very clear on the prevention of pollution, hazards and other environmental nuisances. A safety report must be conducted which should identify possible risks and emergency action plans (Appia, 2010 p.12). However, there are other principles such as the “polluter pays” that France applies and it is aimed at ensuring that the polluters bear the cost of their waste and emissions (Appia, 2010 p.24).
French employment laws are designed to protect employees interests while at the same time matching the priorities of firms (Appia, 2010 p.27). The law of August 20, 2008 on “corporate democracy and working hours goes still further, setting out the principle that a company-wide agreement prevails in negotiating working hours.” (Appia, 2010, p. 28). The SXL Company should be guided by the employment relations at industry level where a contract spells out the working conditions and hours, pay place of work and job description. A thorough understanding of the applicable collective agreement and the statutory minimum wage is a must in drafting the employee contracts. Setting up of employee recruitment from both countries should be examined and harmonized because there is a possibility of Finish citizens to work on the firm which would be operating in France. The issue of employee sharing the firm profits needs consideration to incorporate the concerns of employees from Finland. The rule regarding the welfare of employees is another thorny issue which should be harmonized between the requirements of the two countries social security contribution and taxation benefits (Appia, 2010 p.38).
The residency of Finish citizens would need to be applied cautiously so that it offers maximum benefits of living and working in a French manufacturing plant. All activities that would be conducted by the foreigners need to be clearly stated and a distinction made between a director and a salaried employee. For instance Appia (2010) in his doing business in France states that;
A Foreign directors who wish to create or take over an existing company and reside in France can, under certain conditions, obtain a ‘Skills and Expertise’ residence permit valid for 3 years, which is also renewable. If the conditions for issuing a “Skills and Expertise” residence permit are not met, they can apply for a “Business Activity” visa, which is valid for one year and can be renewed. (p.42)
Tax is another aspect that needs to be considered since French government attaches a special interest on individual taxation. SXL Company should ensure that it advises the Finish company through its president regarding all tax treaties that France has adopted to avoid double taxation. (Nouel, 2005) when preparing a guide to doing business in France pinpointed the following conventions regarding tax on individuals as follows;
Ø The Convention of November 24, 1978, which aims at preventing double taxation and at circumventing tax evasion with regard to taxes applicable to inheritance and donations;
Ø The Convention of August 31, 1994, which aims at preventing double taxation and at circumventing tax evasion and fraud with regard to Income and wealth tax. (P. 28)
Business structures taxes in France
The advantages and disadvantages associated with various forms of companies materialize when business taxes are applied. Any Potential investor should take into account the corporation tax before setting up a business on French soil. Since all the corporate tax laws cannot be exhausted in this paper I will try to bring out the parts which are of greater concern to the finish society. It is worth noting that the tax administration has undergone restructuring to provide for businesses the introduction of a single office for businesses tax and an online tax return payment and filing. Lets us look at the corporation tax that will be of importance to our outfit.
France, unlike other European Union counterparts assesses corporation tax only on profits obtained by firms operated in France without regarding their citizenship (Appia, 2010 p.56). Consequently, corporation tax does not apply to French companies operated abroad. This therefore means that all foreign companies must pay corporation tax on profits made by all companies they operate inside France. Any profit that is only associated with business conducted in France has to be taxed. It is therefore a requirement of law that companies taxable in France should not report losses incurred by their enterprises operated in a foreign country (Appia, 2010 p.62). This rule therefore applies in spite of the form of the company (a branch, a permanent establishment or a subsidiary). Where a subsidiary has not attained separate legal entity then business tax is calculated from the reconstituted accounts of the foreign company. French has designed a large part of its business tax system to promote business investment, international expansion and regional development. In order to protect foreign investors from double taxation, French government has signed bilateral treaties with countries which it intends to maintain trade associations with. The government is very fair in calculation of tax by deducting eligible expenses (depreciation, provisions rent salaries social security contributions, goods purchased, energy consumption, advertising and financial expenses) from income obtained from provision of services and sale of goods.
There are several ways of repatriation of profits which according to Appia (2010) include the following; distribution or transfer of net profit from branches and subsidiaries; advances granted by the foreign parent company and interest on loans; management fees or royalties.(p.69) Although France does not enforce tax obstacles on the invoicing of royalties, interest or management fess, authorities may demand that the transfer prices be in line with current actual market prices. Dividends that are distributed to a European country do not attract withholding tax if it is has its headquarters in the European Union and has a shareholding of at least 10% in its French subsidiary. Tax treaties that France has signed with industrial countries provide for 5% tax on dividends for which Finish is included in this arrangement. Consequently, where a treaty does not exit, a rate of 15% applies to dividends. (Appia, 2010 p.70)
Value added tax is paid by consumers on consumption of services and goods. It is worth noting that if SXL Company expects to export it products outside the European Union they will be fully exempted from paying the Value added tax (VAT). Starting this year all local business tax (tax professionelle) will be replaced with “contribution économiqu territoriale” which comprises two components: contribution for value added by businesses (cotisation sur la valeur ajoutee des enterprises). This implies that all “productive” investments will no longer be taxed. These include equipment and movable property (equipements et biens mobiliers) (Appia, 2010 p.74).
There are tax credits that France offers to businesses. France has the most generous research tax credit which makes all manufacturing, agricultural, and trading firms that incurs cost on research to be eligible to receive it. The tax credit shall be offset against their corporate tax liability and if no profit is realized then a cash rebate (Appia, 2010 p.76). The cinema and audiovisual tax credit seeks to encourage creativity which is available for projects carried out in France and covers expenditures specified by law. Companies that develop video games that contribute to French cultural creativity are entitled to tax credit for developmental expenses which meet certain criteria.
Contribution Economique Territorial (CET) which is a temporary exemption from paying contributions if a company sets up its operations in designated areas or engages in take over of an ailing business. Another temporary exemption from corporate tax involves formation of new companies (impot sur les societies). “Jeunes Entreprises Innovantes” innovative new companies are entitled to generous tax advantages and exemptions (Appia, 2010 p.82).
French Government offers support for business in various areas such as investment, job creation, training and recruitment, innovation, research and development. There are a range of financial incentives for firms’ investment and job creation. Support is granted for either the cost of job creation arising from the investment over three years (estimated wages and social security contributions over two years) or investment outlays (buildings, land and equipment) over three years(Appia, 2010 p.86). The location of a firm is a determining factor for exploitation of this incentive.
France has developed a many instruments to provide financial incentives for firms to train employees and create jobs. The funding is in form of exemptions on social security contributions, which is focused in particular regions marked by the government. The incentives depends on the category of employee recruited and are granted automatically. European funding channeled through regions. The European Regional Development Fund and European Social Fund may offset a fraction of operating expenses relating to training and salary expenses for employees participating (Appia, 2010 p.89).
SXL Company should be in a position to exploit the industrial policy adopted by France on support for innovation, research and development of businesses conducted within its borders. Subsidies covers a portion of research and development expenditure which including equipment procurement, payroll expenses, expenses for contracted research, patent rights and intellectual property and overheads. It is administered by local authorities where the business is located (Prime d’Amenagement du Territoire). French government may award grants for investments which seek to exceed the minimum legal environmental requirements. Businesses which Investment in renewable energy sufficient enough to supply an entire community are set to benefit from aid covering up to 50% of the total expenditure (Appia, 2010 p.92).
Technology Transfer Laws should be considered by SXL Company and verified to ensure that the Finish Company. Antitrust Laws in France provides for civil and criminal sanctions against restrictive trade practices such as discriminatory pricing, price fixing and unfair commercial practices. The choice of Law is of paramount importance and in this case I would recommend SXL Company to insist on applying French laws in drafting the agreement. Choice of Language should be considered to include both English and a French version of the final agreement. The final agreement should contain a governing language clause specifying that the French language version governs (Appia, 2010 p.96).
SXL Company will be guided by most if not all of the rules and procedures for formation of a company discussed above in setting up collaboration between it and a French competing firm for distribution of paints products. General corporate law should be followed in all negotiations. I will look at the types of business partnerships and legal risks associated with each of them.
Joint Ventures are organized in three different ways. A joint venture can either take a form of a simple contractual relationship that will not give rise to a common entity or it can be a common entity which will either be in the form of a stock corporation (société de capitaux) or a partnership (société de personnes). The choice depends on the length of the anticipated oprations and the degree to which parties require the autonomy and independence of the common entity.
My advise to both firms would be to request them to study their objectives and reach an agreement about for entering to the partnership. Financial contributions to the joint venture should be discussed since corporate law requirements will apply. There is a need to look at the recruitment of employees and any need for transfer of employees from both sides. Transfer of any assets will require mutual agreement. The choice of how day to day execution of finances, responsibilities and transactions will also be discussed. Since they are in competition I suggest that they form a stock corporation (société de capitaux) to ensure that the profits are shared accordingly.
When they form a new entity the use of confidentiality or non-disclosure agreements will not apply since the parties will disclose sensitive commercial secrets or confidential information after the negotiations are complete. Dispute resolution between the parties will take long to be resolved if parties are involved in a disagreement. The structure should have a clause on how the joint venture can be terminated (Tesler, 1998, p.12).
There are potential risks that are involved in business cooperative arrangement and one such risk is potential financial loss if the project fails along the way without meeting its objective (Child & David 1998 p. 45). Another risk is the disagreements among employees of the partner. The employees of one party may not work well with the other partner’s managers in the initial stages hence low productivity. The is issue of to conflict between the top level and middle level management of both parties might prolong for a longer period due to differences in decision making procedures. This can lead to hostility and a lack of cooperation leading to a strenuous relationship. Decision making process must be reliable and based on mutual goals and strategies which if not well executed can lead to disputes (Bendaniel 1998 p. 66).
For a foreign firm to start negotiations with French company with a goal of attaining a concession license, it is recommended that all legal aspect in company formation be well understood. There are several laws that govern companies in France which should be adhered to when writing a cooperation agreement proposal. The laws may include, French employment law, tax laws, rules regarding appropriation of profits and rule on how to obtain tax incentives. For a collaboration to take effect SXL company and the competing firm will need to do the following; Indicate generally their aims and goals they expect from the transaction, define what both firms are ready to give in the transaction, including rights to be granted to either parties, consider the risk of a financial loss if it collapses and finally the issues of management of the joint venture.
Appia,D. (2010) .Doing Business in France. Retrieved july 7, 2010. From http://www.invest-in- france.org/Medias/Publications/862/DOING%20BUSINESS%20may2010_en.pdf
Bendaniel, D. J. (1998) International M&A, Joint Ventures, and Beyond: Doing the Deal. Englewood Cliffs, NJ: Prentice Hall.
Child, J., and David F.(1998). Strategies of Cooperation: Managing Alliances, Networks, and Joint Ventures. Oxford, U.K.: Oxford University Press.
Nouel, G. L. (2005). Guide to Doing Business in France. Hoboken, NJ: John Wiley.
Tesler, G (1998). Joint Ventures of Labor and Capital. Ann Arbor, MI: University of Michigan Press.